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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                ----------------
                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1999

    [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
         EXCHANGE ACT OF 1934

                           Commission File No. 0-23928

                            PDS FINANCIAL CORPORATION
                 ----------------------------------------------
                 (Name of Small Business Issuer in its Charter)

                Minnesota                              41-1605970
     ------------------------------                 ----------------
    (State or other Jurisdiction of                 (I.R.S. Employer
    Incorporation or Organization)                 Identification No.)

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

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

         Securities registered under Section 12(b) of the Exchange Act:
                                      None

         Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $.01 Par Value
                          ----------------------------

                         Common Stock Purchase Warrants
                         ------------------------------
                                (Title of Class)

Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past twelve 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 by check mark whether the Registrant (1) has 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K or any amendment to this Form 10-K.   X
                                               ---

The approximate market value of stock held by non-affiliates was $3,147,000
based upon 2,398,000 shares held by such persons and the closing price on March
21, 2000 of $1.3125. The number of shares outstanding of the Registrant's $0.01
par value common stock at March 21, 2000 was 3,711,710.

Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement for its 2000 Annual Meeting of Shareholders (the "Proxy Statement"),
are incorporated by reference in Part III.

Page 1 of 19 Pages                             Exhibit Index Begins on Page 17

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                                     PART I

ITEM 1.           DESCRIPTION OF BUSINESS.

         PDS Financial Corporation and subsidiaries (the "Registrant", the
"Company" or "PDS"), was incorporated under the laws of the State of Minnesota
in 1988.

         The Company engages in the business of financing and leasing gaming
equipment and supplying reconditioned gaming machines 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. In 1996, the Company introduced
SlotLease, a specialized operating lease program for slot machines and other
electronic gaming devices. In 1997, the Company established PDS Slot Source, a
reconditioned gaming machine sales and distribution division, to complement its
leasing and financing activities.

         In order to offer its SlotLease program and PDS Slot Source, the
Company must be licensed to own and distribute gaming devices in each
jurisdiction in which it conducts business. As part of the licensing process,
each gaming jurisdiction performs a thorough investigation of each applicant and
certain of its directors, officers, key employees and significant shareholders.
The Company currently is licensed in Nevada, New Jersey, Colorado, Illinois,
Iowa, Minnesota, Mississippi, Indiana and New Mexico. The Company also has a
license application pending in Washington and a route operator's license
application pending in Nevada. The Company believes its gaming licenses, as well
as its experience in the gaming industry, provide a significant competitive
advantage, enabling the Company to offer financing packages and services that
meet the needs of this industry more effectively than traditional financing.

         The Company was founded in 1988 as a leasing company, specializing in
vehicle and general equipment leasing transactions. The Company began providing
equipment financing for new Indian gaming facilities in the Upper Midwest in
early 1991. Since 1994, all of the Company's gross originations have resulted
from transactions in the gaming industry. In 1996, the Company established a
sales office in Las Vegas, Nevada, which became the Company's principal
executive office in 1997.

         The Company generally targets established medium-sized casino operators
that are opening new gaming facilities or expanding existing gaming facilities,
as well as new casinos that the Company believes have acceptable credit quality.
The Company also provides financing directly to gaming equipment manufacturers.
The Company is currently focusing its efforts on the traditional gaming market
of Nevada and the other jurisdictions in which it is licensed.

GAMING INDUSTRY

         The casino industry in the United States, and the gaming industry in
general, have experienced substantial growth in recent years. Prior to 1979,
high stakes gaming activities were limited to Nevada. In 1979, casino gaming was
legalized in New Jersey. Between 1979 and 1988, gaming activities by various
Indian tribes developed, leading to the federal enactment of the Indian Gaming
Regulatory Act of 1988. The growth of Indian gaming served as a catalyst for
certain jurisdictions to consider non-Indian casino gaming because of its
potential as a source of government revenue. Since 1989, various forms of casino
gaming have been legalized in Colorado, Illinois, Indiana, Iowa, Louisiana,
Michigan, Mississippi, Missouri and South Dakota. In addition, gaming facilities
operate on cruise ships sailing out of California, Florida, Georgia, Hawaii and
Puerto Rico. Several other states have approved or are considering approval of
some form of casino gaming. No assurance can be given as to whether any
additional states will adopt legislation permitting casino gaming in the future
or the nature, timing and extent of casino development in any state.

         According to data compiled from gaming commission reports and gaming
industry analysts, in 1998 there were approximately 400,000 total gaming
machines installed in the United States, compared with approximately 237,000
total gaming machines installed in the United States in 1993 and approximately
156,000 total gaming machines installed in the United States in 1990. According
to data compiled from gaming commission reports and gaming industry analysts, in
1997 there were approximately 74,000 gaming machines shipped in the United
States, compared with approximately 58,000 gaming machines shipped in the United
States in 1993 and approximately 16,000 gaming machines shipped in 1990, all of
which represent machines shipped to replace older machines and new installations
of machines.

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COMPANY STRATEGY

         The Company believes that the gaming industry in general has entered
into a gaming equipment replacement cycle, which provides increased
opportunities for the Company's products and services. The Company believes
its ability to offer casino operators gaming devices under operating lease
structures provides a competitive advantage over non-licensed financial
institutions. The Company's strategy is to increase its recurring revenues
and cash flows by increasing its portfolio of assets under lease and its
reconditioned gaming device sales by expanding the types of games it offers
and by expanding into the direct operations of casinos. In 1999, the Company
completed its move to Las Vegas, Nevada. The Company intends to further
expand its presence in Nevada and the other jurisdictions in which it is
licensed.

         Because it is licensed to own and distribute gaming machines in key
states, the Company believes it is able to offer a wider variety of gaming
equipment financing structures, such as operating leases, which are especially
important for small to medium-sized casino operators that may be subject to
financing covenants that restrict indebtedness. While gaming equipment
manufacturers and distributors may offer financing to a casino operator, this
financing may not be on the most favorable terms, and the manufacturers and
distributors generally do not offer sufficient financing for other necessary
furniture, fixtures and equipment. The Company believes its experience in and
knowledge of the industry, as well as its licenses, allow it to offer financing
packages and services that meet the needs of the industry in a more effective
manner than traditional financing and leasing sources and equipment
manufacturers and distributors.

THE SLOTLEASE PROGRAM

         The Company believes SlotLease, its operating lease program, has been
well received by casino operators since its introduction in 1996 because it
offers lower monthly payments and off-balance sheet financing. The Company
believes that the SlotLease program promotes its strategic objective of
increasing recurring revenues. The Company retains ownership of the gaming
equipment under operating lease, and at the end of the applicable lease term the
Company offers the customer an option to purchase the gaming equipment at its
then determined fair market value or extend the lease term. The Company receives
rental income under a non-cancelable lease, which ranges from 6 to 48 months and
typically has a term of 36 months. The casino operator incurs rental expense,
and avoids reflecting an asset and related liability on its balance sheet.
Returned machines are inventoried for lease or resale by the Company through PDS
Slot Source.

PDS SLOT SOURCE

         In May 1997, the Company introduced PDS Slot Source, its reconditioned
gaming machine sales and distribution division. The Company believes that the
secondary market for gaming machines is fragmented and underdeveloped and Slot
Source is now one of the leading providers of reconditioned gaming devices. The
Company obtains used gaming machines in the market from distributors, brokers or
operators, or from its customers at the end of an applicable lease term. These
gaming machines are reconditioned by the Company prior to resale or occasionally
are sold "as is" to customers. The Company believes its ability to recondition
and distribute used gaming machines enhances the market value of gaming machines
at the end of an operating lease and facilitates additional financing
transactions.

         During 1999, the Company expanded its focus beyond providing
reconditioned slot and video gaming devices to include new types of games
through the acquisition of intellectual property associated with "Digital 21",
an automated computerized version of the traditional casino table game of
"Blackjack". See discussion of the DigiDeal Technology Agreement below. The
Company intends to continue to expand its gaming equipment offerings in the
future through on-going development or acquisition of additional types of casino
games.


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DIGIDEAL

         In June 1999, the Company acquired the intellectual property rights
for gaming devices using the Digital Card System ("DCS") from DigiDeal
Corporation as part of an agreement covering patent and technology rights
including technology transfer, manufacture, distribution and affecting
patents trademarks and copyrights (the Technology Agreement). Products built
on the DCS platform use virtual playing cards, which are displayed with high
quality graphics on screens for each player and the dealer. The first product
introduced on the DCS platform is Digital 21-TM-, which is undergoing its
first live trial in New Mexico and is presently being reviewed by the State
of Nevada Gaming Control Board. There can be no assurance that the State of
Nevada Gaming Control Board will approve Digital 21-TM- on a timely basis or
at all. The Company's strategy is to place games utilizing the DCS with its
casino customers in order to generate recurring monthly revenues and cash
flows.

GAMING OPERATIONS

         The Company intends to expand its business strategy to include
owning and operating gaming facilities. In this regard, the Company on March
6, 2000, signed a nonbinding letter of intent with Elsinore Corporation to
acquire the capital stock of Four Queens, Inc., a Nevada corporation doing
business as the Four Queens Hotel & Casino for a purchase price of $30
million, subject to adjustment. Consummation of the acquisition is subject to
a number of conditions, including negotiation and execution of a definitive
purchase agreement, receipt of required regulatory approvals, including
approval of the Nevada Gaming Commission, other gaming approvals, and, if
necessary, approval under the Hart-Scott-Rodino Antitrust Act, and receipt by
PDS of satisfactory purchase financing. There can be no assurance that a
definitive agreement can be reached, the other conditions to the acquisition
will be satisfied or that the acquisition will be consummated.

         The Four Queens Hotel & Casino consists of a 690-room hotel and
32,000 square foot casino, located in the Fremont Street Experience in
downtown Las Vegas, Nevada. The casino has approximately 1,075 slot machines
and 26 table games. No material changes in the operations of the hotel and
casino or personnel are anticipated.

STRUCTURE OF EQUIPMENT FINANCING TRANSACTIONS

         In addition to offering operating leases through its SlotLease program,
the Company also provides financing to its customers in the form of capital
leases or collateralized loans. Such financing transactions are either
originated directly by the Company with the casino operator or are structured
jointly with the gaming equipment manufacturer or distributor. Under both of
these types of transactions substantially all of the benefits and risks of
ownership are borne by the lessee/borrower. Under a capital lease, the lessee is
required to pay the Company the purchase price of the gaming equipment either
throughout the term of the lease or, if the lease payments are not sufficient to
cover the purchase price of the gaming equipment, the lessee is required to pay
the Company a balloon payment at the end of the lease term. Most of the
Company's equipment financing transactions range from $500,000 to $2.5 million.
The Company generally obtains the funds necessary for its capital leases or
collateralized loans by selling all or a portion of its interest in the payment
stream to one or more institutional investors, often simultaneously with its
origination of financing transactions.

COMPETITION

         The finance industry is highly competitive. In the gaming equipment
financing market, the Company competes primarily with equipment manufacturers,
and to a lesser extent with leasing companies, commercial banks and other
financial institutions. Certain of the Company's competitors are significantly
larger and have substantially greater resources than the Company. The Company
sometimes jointly markets its financing services with gaming equipment
manufacturers who may be competitors of the Company. The Company believes its
ability to offer casino operators gaming devices under operating lease
structures provides a competitive advantage over non-licensed financial
institutions.

         The Company competes on the basis of offering flexibility in
structuring leases and other financial transactions, commitment to prompt
attention to customer needs, creative solutions to non-traditional financing
requests and immediate reactions to changes in the financial marketplace. In
addition to financing gaming equipment, the Company finances substantially all
other types of furniture, fixture and equipment used in a casino operation.

         With respect to the sales of reconditioned gaming machines, the Company
competes primarily against equipment manufacturers and smaller distributors. It
is possible that new competitors may engage in gaming equipment financing or the
distribution of reconditioned gaming machines, some of which may have licenses
to own or sell gaming equipment and have greater financial resources than the
Company.

                                       4
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PRINCIPAL CUSTOMERS

         Historically, the Company has experienced significant nonrecurring
revenues in connection with the completion of large gaming equipment
financing transactions. During 1999, no customer accounted for more than 10%
of total revenue. Revenues from the Company's five largest customers, as a
percentage of 1998 revenues were 20%, 19%, 16%, 9% and 8%, and of 1997
revenues, were 0%, 11%, 0%, 0% and 0%, respectively. Due to the non-recurring
nature of its large gaming equipment financing transactions, the Company
cannot estimate the potential significance of total revenues that may be
derived from one or several customers in 2000.

GOVERNMENT REGULATION

         Gaming is a highly regulated industry. The Company's gaming equipment
financing activities are subject to federal and state regulation and oversight.
In order to offer its SlotLease program and PDS Slot Source, the Company must be
licensed to own and distribute gaming devices in each jurisdiction where it
conducts business. As part of the licensing process, each gaming jurisdiction
performs a thorough investigation of each applicant, its directors and certain
of its officers, key employees and significant shareholders. The Company
currently is licensed as a gaming equipment distributor under Nevada, New
Jersey, Colorado, Illinois, Iowa, Mississippi, Minnesota, Indiana and New Mexico
gaming laws. The Company has license applications pending in Washington and a
slot route operator's license application pending in Nevada. Expansion of the
Company's activities may be hindered by delays in obtaining requisite state
licenses or other approvals. No assurance can be given as to the term for which
the Company's license will be renewed in a particular jurisdiction or to what
license conditions, if any, may be imposed by such jurisdiction in connection
with any future renewals. The Company cannot predict the effect that such
adoption of and changes in gaming laws, rules and regulations might have on its
future operations.

         Any person who acquires a controlling interest in the Company would
have to meet the requirements of all applicable governmental bodies that
regulate the Company's operations. A change in the make-up of the Company's
board of directors and management would require the various gaming authorities
to examine the qualifications of the new board members and management.

         Gaming on Indian land is further regulated by tribal governments.
Changes in federal, state or tribal laws or regulations may limit or otherwise
materially affect the types of gaming that may be conducted on Indian land. In
addition, numerous lawsuits nationwide seek to limit or expand Indian gaming
activities. The outcome of such litigation cannot be predicted.

         The following references to material statutes and regulations affecting
the Company are brief summaries thereof and do not purport to be complete, and
are qualified in their entirety by reference to such statutes and regulations.
Any change in applicable law or regulation may have a material effect on the
business of the Company.

         NEVADA. The manufacture, ownership, operation, sale and distribution of
gaming devices in Nevada is subject to the Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Nevada Act") and various
local regulations. Generally, gaming activities (including the manufacture, sale
and lease of gaming devices) may not be conducted in Nevada unless licenses are
obtained from the Nevada Gaming Commission (the "Nevada Commission") and
appropriate county and city licensing agencies. The Nevada Commission, the
Nevada State Gaming Control Board (the "Nevada Board") and the various county
and city licensing agencies are collectively referred to as the "Nevada Gaming
Authorities."

         The laws, regulations, and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
through taxation and licensing fees. Change in such laws, regulations, and
procedures could have an adverse effect on the Company's operations.

         PDS Financial Corporation-Nevada, a Nevada corporation and wholly owned
subsidiary of the Company ("PDS Nevada"), is required to be licensed as a
distributor by the Nevada Gaming Authorities. The gaming license requires the
periodic payment of fees and taxes and is not transferable. The Company is
registered by the Nevada Commission as a publicly traded corporation
("Registered Corporation") and as such, it is required periodically to submit
detailed financial and operating

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reports to the Nevada Commission and furnish any other information which the
Nevada Commission may require. No person may become a stockholder of, or receive
any percentage of profits from, PDS Nevada without first obtaining licenses and
approvals from the Nevada Gaming Authorities. The Company and PDS Nevada have
obtained from the Nevada Gaming Authorities the various registrations,
approvals, permits, and licenses required in order to engage in the distribution
of gaming devices and to act as a manufacturer of gaming devises in Nevada. The
Company also has an application pending with the Nevada Gaming Authorities for a
slot route operator's license.

         The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or PDS
Nevada in order to determine whether such individual is suitable or should be
licensed as a business associate of a gaming licensee. Officers, directors and
certain key employees of PDS Nevada must file applications with the Nevada
Gaming Authorities and may be required to be licensed or found suitable by the
Nevada Gaming Authorities. Officers, directors, and key employees of the Company
who are actively and directly involved in gaming activities of PDS Nevada may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing for any cause
which they deem reasonable. A finding of suitability is comparable to licensing,
and both require submission of detailed personal and financial information
followed by a thorough investigation. The applicant for licensing or a finding
of suitability must pay all the costs of the investigation incurred by the
Nevada Gaming Authorities. Changes in licensed positions must be reported to the
Nevada Gaming Authorities and in addition to their authority to deny an
application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in corporate position.

         If the Nevada Gaming Authorities were to find an officer, director, or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or PDS Nevada, the company involved would have to
sever all relationships with such person. In addition, the Nevada Commission may
require the Company or PDS Nevada to terminate the employment of any person who
refuses to file appropriate applications. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial review in Nevada.

         The Company and PDS Nevada are required to submit detailed financial
and operating reports to the Nevada Commission. Substantially all material
loans, leases, sales of securities, and similar financial transactions by PDS
Nevada must be reported to, or approved by, the Nevada Commission.

         If it were determined that the Nevada Act was violated by PDS Nevada,
the gaming licenses it holds could be limited, conditioned, suspended, or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, PDS Nevada, the Company, and the persons involved could be subject
to substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Limitation, conditioning, or suspension of
any gaming license could (and revocation of any gaming license would) materially
adversely affect the Company's operations.

         Any beneficial holder of the Company's voting securities, regardless of
the number of shares owned, may be required to file an application, be
investigated, and have his suitability as a beneficial holder of the Company's
voting securities determined if the Nevada Commission has reason to believe that
such ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.

         The Nevada Act requires any person who acquires more than five percent
of the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires the beneficial owners of more than 10
percent of the Company's voting securities apply to the Nevada Commission for a
finding of suitability within 30 days after the chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
10 percent, but not more than 15 percent, of the Company's voting securities may
apply to the Nevada Commission for a waiver of such finding of suitability if
such institutional investor holds the voting securities for investment purposes
only. An institutional investor shall not be deemed to hold voting securities
for investment purposes unless the voting securities were acquired and are held
in the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies, or operations of the Company,
or any of its gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies, or
operations; and (iii) such other activities as the Nevada Commission may

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determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is a corporation, partnership,
or trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of the
investigation incurred by the Nevada Gaming Authorities.

         Any person who fails or refuses to apply for a finding of suitability
or a license within 30 days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. A
record owner may also be found unsuitable if the record owner fails to identify
the beneficial owner within 30 days of a request by the Nevada Commission or
Chairman of the Nevada Board. Any stockholder found unsuitable and who holds,
directly or indirectly, any beneficial ownership of the common stock of a
Registered Corporation beyond such period of time as may be prescribed by the
Nevada Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or PDS
Nevada, the Company (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities for cash at fair market value.

         The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be investigated,
and be found suitable to own the debt security of a Registered Corporation. If
the Nevada Commission determines that a person is unsuitable to own such
security, then pursuant to the Nevada Act, the Registered Corporation can be
sanctioned, including the loss of its approvals, if without the prior approval
of the Nevada Commission, it: (i)pays to the unsuitable person any dividend,
interest, or any distribution whatsoever; (ii)recognizes any voting right by
such unsuitable person in connection with such securities; (iii)pays the
unsuitable person remuneration in any form; or (iv)makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.

         The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable.

         The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require the Company's stock certificates to bear a legend indicating
that the securities are subject to the Nevada Act. However, to date, the Nevada
Commission has not imposed such a requirement on the Company.

         The Company may not make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or proceeds
therefrom are intended to be used to construct, acquire, or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. "Gaming facilities" has been interpreted by the Nevada Gaming
Authorities to include the acquisition or financing of gaming devices in Nevada.
Furthermore, any such approval, if granted, does not constitute a finding,
recommendation, or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. Any representation to the contrary is unlawful.

         Changes in control of the Company through merger, consolidation, stock
or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors, and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.

         The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i)assure the
financial stability of corporate gaming operators and their affiliates;
(ii)preserve the beneficial aspects of conducting business in the corporate
form; and (iii)promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Nevada Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of

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recapitalization proposed by the Company's Board of Directors in response to a
tender offer made directly to the Registered Corporation's stockholders for the
purposes of acquiring control of the Registered Corporation.

         License fees and taxes, computed in various ways depending on the type
of gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly, or annually. Nevada licensees that
hold a license as an operator of a slot route, or a manufacturer's or
distributor's license, also pay certain fees and taxes to the State of Nevada.

         Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons
(collectively, "Licensees"), and who proposes to become involved in a gaming
venture outside of Nevada is required to submit a notification statement to the
Nevada Board which provides detailed information regarding the foreign gaming
operation and to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. A Licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.

         NEW JERSEY. The Company and certain of its officers and directors, are
currently required to be licensed under the New Jersey Casino Control Act (the
"New Jersey Act") as a casino service industry qualified to sell its products to
casinos in New Jersey. The sale and distribution of gaming equipment to casinos
in New Jersey is also subject to the New Jersey Act and the regulations
promulgated thereunder by the New Jersey Commission. The New Jersey Commission
has broad discretion in promulgating and interpreting regulations under the New
Jersey Act. Amendments and supplements to the New Jersey Act, if any, may be of
a material nature, and accordingly may adversely affect the ability of the
Company or its employees to obtain any required licenses, permits and approvals
from the New Jersey Commission, or any renewals thereof.

         The current regulations govern licensing requirements, standards for
qualification, persons required to be qualified, disqualification criteria,
competition, investigation of supplementary information, duration of licenses,
record keeping, causes for suspension, standards for renewals or revocation of
licenses, equal employment opportunity requirements, fees and exemptions. In
deciding to grant a license, the New Jersey Commission may consider, among other
things, the financial stability, integrity, responsibility, good character,
reputation for honesty, business ability and experience of the Company and its
directors, officers, management and supervisory personnel, principal employees
and stockholders as well as the adequacy of the financial resources of the
Company.

         New Jersey licenses are granted for a period of one or two years,
depending on the length of time a company has been licensed, and are renewable.
The New Jersey Commission may impose such conditions upon licensing, as it deems
appropriate. These include the ability of the New Jersey Commission to require
the Company to report the names of all of its stockholders as well as the
ability to require any stockholders whom the New Jersey Commission finds not
qualified to dispose of the stock, not receive dividends, not exercise any
rights conferred by the shares, nor receive any remuneration from the Company
for services rendered or otherwise. Failure of such stockholder to dispose of
such stockholder's stock could result in the loss of the Company's license.
Licenses are also subject to suspension, revocation or refusal for sufficient
cause, including the violation of any law. In addition, licensees are also
subject to monetary penalties for violations of the New Jersey Act or the
regulations of the New Jersey Commission.

         OTHER JURISDICTIONS. In addition to Nevada and New Jersey, the
Company currently is licensed to operate at various levels in Colorado,
Illinois, Indiana, Iowa, Minnesota, Mississippi and New Mexico and has
license applications pending in Washington. Although the regulations in these
jurisdictions are not identical to the states of Nevada or New Jersey, their
material attributes are substantially similar, as summarized below.

         The manufacture, sale and distribution of gaming devices and the
ownership and operation of gaming facilities in each jurisdiction are subject to
various state, county and/or municipal laws, regulations and ordinances, which
are administered by the relevant regulatory agency or agencies in that
jurisdiction (the "Gaming Regulators"). These laws, regulations and ordinances
primarily concern the responsibility, financial stability and character of
gaming equipment owners, distributors,

                                       8
<PAGE>

sellers and operators, as well as persons financially interested or involved in
gaming or liquor operations.

         In many jurisdictions, selling or distributing gaming equipment may not
be conducted unless proper licenses are obtained. An application for a license
may be denied for any cause which the Gaming Regulators deem reasonable. In
order to ensure the integrity of manufacturers and suppliers of gaming supplies,
most jurisdictions have the authority to conduct background investigations of
the Company, its key personnel and significant stockholders. The Gaming
Regulators may at any time revoke, suspend, condition, limit or restrict a
license for any cause deemed reasonable by the Gaming Regulators. Fines for
violation of gaming laws or regulations may be levied against the holder of a
license and persons involved. The Company and its key personnel have obtained
all licenses necessary for the conduct of the Company's business in the
jurisdictions in which it sells, distributes and finances gaming equipment.
Suspension or revocation of such licenses could have a material adverse effect
on the Company's operations.

EMPLOYEES

         As of December 31, 1999, the Company employed 52 persons, including 7
in direct sales and marketing, 28 in Slot Source and 17 in general and
administrative functions. All of these persons are full-time employees.

ITEM 2.           DESCRIPTION OF PROPERTY

         The Company's corporate offices and its reconditioning facilities are
located in approximately 58,000 square feet of leased space in Las Vegas,
Nevada. The Company pays monthly rent of approximately $40,000 pursuant to a
lease expiring on December 31, 2004. The Company considers the facilities as
adequate and suitable for the purposes they serve.

ITEM 3.           LEGAL PROCEEDINGS

         The Company is not a party to any material litigation and is not aware
of any threatened litigation that would have a material adverse effect on its
business.

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

         During the quarter ended December 31, 1999, no matter was submitted to
a vote of security holders.

                                     PART II

ITEM 5.           MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
                  MATTERS

         The Common Stock is traded on the NASDAQ SmallCap Market under the
symbol: PDSF. The following table sets forth the high and low sales price for
the Common Stock as reported by NASDAQ for the periods indicated. These prices
reflect inter-dealer prices, without retail mark-up or markdown or commissions,
and do not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                 Price Range of Common Stock
                                                 ---------------------------
                                                     High           Low
                                                     ----           ---
<S>                                                  <C>           <C>
2000
----
First quarter (through March 21, 2000)               $2.19         $1.00

1999
----
First quarter                                        $3.38         $2.13
Second quarter                                        4.94          1.81
Third quarter                                         4.94          2.06
Fourth quarter                                        2.31          1.25

1998
----
First quarter                                        $7.94         $5.44
Second quarter                                       10.50          7.38
Third quarter                                         9.50          4.75
Fourth quarter                                        5.88          2.00

</TABLE>

                                       9
<PAGE>

         On March 21, 2000, the most recent available trading date, the
closing sales price of the Company's common stock was $1.3125. As of March
21, 2000, the Company's common stock was held by approximately 42 holders of
record and an estimated 700 additional beneficial owners.

         No dividends were paid during the periods indicated. The Company does
not anticipate that it will pay cash dividends on its common stock in the
foreseeable future. Certain of the Company's financing agreements restrict the
payment of dividends.

         In December, 1999 NASDAQ informed the Company that it was not in
compliance with the $5 million market value of public float requirement for
continued listing of its Common Stock on the NASDAQ National Market.
Subsequently, the Company applied for listing on the NASDAQ SmallCap Market.
By letter dated March 8, 2000, NASDAQ informed the Company that its
application for listing on the NASDAQ SmallCap Market had been approved.

ITEM 6.           SELECTED FINANCIAL DATA

         The table below sets forth-selected consolidated financial data for the
periods indicated derived from the Company's consolidated financial statements.
The data should be read in conjunction with Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, and the Company's
consolidated financial statements and notes to the financial statements
appearing elsewhere.

<TABLE>
<CAPTION>

INCOME STATEMENT DATA
(IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF SHARES DATA)

                                                                         Years Ended December 31,
                                          ---------------------------------------------------------------------------------------
                                             1999              1998              1997               1996               1995
                                          ------------     -------------    ----------------    --------------     --------------
<S>                                        <C>               <C>                <C>                <C>                <C>
Revenues:
  Equipment sales                             $ 6,146           $20,522             $17,482
  Revenue from sales-type leases                7,699             3,964              14,480
  Rental revenue on operating leases           12,426             6,750              11,406            $2,938             $1,640
  Finance income                                5,511             3,033               1,575               936              1,837
  Fee income                                    3,697             1,746               2,670             2,486              1,212
                                          ------------     -------------    ----------------    --------------     --------------
                                               35,479            36,015              47,613             6,360              4,689
                                          ------------     -------------    ----------------    --------------     --------------

Cost and expenses:
  Equipment sales                               6,740            17,257              15,123
  Sales-type leases                             6,622             3,386              13,654
  Depreciation on leased equipment              8,773             4,931               8,589             2,203              1,208
  Interest                                      8,133             5,062               4,260             1,354              1,253
  Selling, general and administrative           4,810             4,681               3,840             2,149              2,524
  Provision for losses                          1,395               123                 628               170              6,908
                                          ------------     -------------    ----------------    --------------     --------------
                                               36,473            35,440              46,094             5,876             11,893
                                          ------------     -------------    ----------------    --------------     --------------

Income (loss) before income taxes                (994)              575               1,519               484             (7,204)
Income tax expense (benefit)                     (260)              219                 577               179             (2,590)
                                          ------------     -------------    ----------------    --------------     --------------
Net income (loss)                               $(734)             $356                $942              $305            $(4,614)
                                          ============     =============    ================    ==============     ==============

Earnings per common share:
          Basic                                 $(.20)             $.10                $.30              $.10             $(1.49)
          Diluted                                (.20)              .09                 .28               .10              (1.49)

Weighted average number of common
  shares outstanding:
           Basic                            3,684,000         3,611,000           3,184,000         3,126,848          3,092,876
           Diluted                          3,684,000         3,784,000           3,620,000         3,126,848          3,092,876

BALANCE SHEET DATA
(in thousands)

Total assets                                 $108,033           $79,629             $39,964           $40,562            $16,389
Notes payable and subordinated debt            79,872            50,670              27,536            25,641              9,243

</TABLE>

                                       10
<PAGE>

ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS OVERVIEW:

         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 primarily 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. In 1996, the
Company introduced SlotLease, a specialized operating lease program for slot
machines and other electronic gaming devices. The Company believes it is
currently the only independent leasing company licensed in the states of Nevada,
New Jersey, Colorado, Illinois, Iowa, Indiana, Mississippi, Minnesota and New
Mexico to provide this financing alternative. In 1997, the Company established
PDS Slot Source, a reconditioned gaming device sales and distribution division,
to complement its leasing and financing activities and to generate equipment
sales to casino operators.

         The Company's strategy is to increase its portfolio of assets under
lease and reconditioned gaming device sales, and thereby increase revenues and
cash flows. In addition to its leasing activities, the Company also originates
note transactions, which it generally sells to institutional investors 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. In the last
three years, the Company has significantly increased the amount of leases and
collateralized equipment loans ("financing transactions") held in its own
portfolio (in thousands):

<TABLE>
<CAPTION>
                                                   1999              1998             1997
                                                   ----              ----             ----
<S>                                             <C>                <C>             <C>
Financing transactions originated and
   sold to third parties for fee income         $22,400            $8,900          $74,500

Financing transactions originated
   for the Company's portfolio                   58,400            51,400            9,900
                                                -------          --------          -------

                                                $80,800           $60,300          $84,400
                                                =======           =======          =======
</TABLE>

RESULTS OF OPERATIONS:

         During 1999, 1998, and 1997 the Company reported net (loss) income of
         ($734,000), $356,000 and $942,000, respectively.

         The results of operations for 1999 and 1998 reflect:

-        Costs associated with growing the business activities of the PDS Slot
         Source division, which was established in 1997. During 1999, the
         Company incurred a loss of $669,000, as a result of liquidating certain
         used gaming devices held in inventory by Slot Source.

-        The costs associated with growing the portfolio of financing
         transactions retained on its balance sheet. Such costs include:

                  -        Higher interest expense associated with the debt
                           incurred to finance the portfolio, and

                  -        The opportunity cost resulting from foregone fee
                           income which could have been realized had the
                           financing transactions been sold to third parties,
                           compared to the leasing or finance margin actually
                           realized from holding the financing transactions in
                           the Company's portfolio. While the aggregate leasing
                           and finance margin is expected to be greater over the
                           life of the transaction, it is significantly less
                           than fee income would have been in the year of
                           origination.

         Results for 1997 reflect sales-type lease profit arising from the
Company's ability to buy new gaming devices from the manufacturer at a discount.
After 1997, no such transactions were completed.

         The Company's operating results are subject to quarterly fluctuations
resulting from a variety of factors, including variations in the mix of
financing transactions between operating leases, direct finance leases, and
notes receivable, changes in the gaming industry which effect the demand for
reconditioned gaming devices sold by the Company's Slot Source division,

                                       11
<PAGE>

economic conditions, in which a detrimental change can cause customers to delay
new investments and increase the Company's bad debt experience, and the level of
fee income obtained through the sale of leases or financing transactions.

         The Company's quarterly operating results, including net income
(loss), 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 stages 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. The Company believes
that growth of its portfolio of notes and lease receivables and equipment
under operating lease will lead to increased recurring revenues, which will
tend to lessen the fluctuations of its operating results.

         Presented below are schedules showing condensed income statement
categories and analysis of changes in those condensed categories derived from
the Consolidated Statements of Income appearing on page F-3 of this report on
Form 10-K, prepared solely to facilitate the discussion of results of operations
that follows (in thousands):

<TABLE>
<CAPTION>
                                      Condensed                                            Condensed
                                    Consolidated                                         Consolidated
                                 Statement of Income                                 Statement of Income
                                    for the Years              the Effect On             for the Years           the Effect On
                                 Ended December 31,             Net Income            Ended December 31,          Net Income
                                 ------------------             of Changes            ------------------          of Changes
                                   1999      1998              Between Years          1998       1997            Between Years
                                   ----      ----              -------------          ----       ----            -------------
<S>                             <C>       <C>                  <C>                 <C>        <C>                <C>
Equipment sales and
  sales-type lease margin          $483    $3,843                $(3,360)           $3,843     $3,185                $658
Leasing & finance margin          9,164     4,852                   4,312            4,852      4,392                 460
Fee income                        3,697     1,746                   1,951            1,746      2,670               (924)
Selling, general, &
  administrative expense        (4,810)   (4,681)                   (129)          (4,681)    (3,840)               (841)
Interest expense                (8,133)   (5,062)                 (3,071)          (5,062)    (4,260)               (802)
Provision for losses            (1,395)     (123)                 (1,272)            (123)      (628)                 505
                                -------   -------                 -------          -------    -------             -------
Income before income taxes       $(994)      $575                $(1,569)             $575     $1,519              $(944)
                                 ======      ====                ========             ====     ======              ======
</TABLE>

EQUIPMENT SALES AND SALES-TYPE LEASE MARGIN

Equipment sales and sales-type margin consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                 -------------------------------
                                                    1999        1998        1997
                                                    ----        ----        ----
<S>                                              <C>         <C>         <C>
Slot Source division:
   Equipment sales revenue                       $ 6,146     $ 13,114     $ 2,160
   Cost of equipment sales                        (6,071)     (10,709)     (1,825)
                                                 -------     --------     -------
                                                      75        2,405         335
   Loss on liquidation of obsolete equipment        (669)
                                                 -------     --------    --------
      Slot Source sales margin                   $  (594)    $  2,405    $    335
                                                 -------     --------    --------

   Sales-type lease revenue                        7,699        3,964
   Cost of sales-type leases                      (6,622)      (3,386)
                                                 -------     --------    --------
      Sales-type lease margin                      1,077          578
                                                 -------     --------    --------
        Slot Source margin                           483        2,983         335
                                                 -------     --------    --------
Finance division:
   Sale of leases at termination                                7,408      15,322
   Cost of sale of leases at termination                       (6,548)    (13,298)
                                                 -------     --------    --------
        Finance division sales margin                             860       2,024
                                                 -------     --------    --------
Equipment sales and sales-type
   lease margin                                  $   483     $  3,843    $  2,359
                                                 =======     ========    ========
</TABLE>

                                       12
<PAGE>

Slot Source Division

         Slot Source revenues represent the sale, or financing under a
sales-type lease to an end-user, of reconditioned gaming equipment. During 1998,
the Company significantly expanded its efforts in this area resulting in
significantly increased sales compared to 1997, primarily related to sales of
reconditioned gaming devices with a feature known as a "bill acceptor" (a device
which enables a machine to accept paper currency in addition to coins) for which
there was strong market demand. The market demand for such gaming devices was
significantly satisfied during 1998. Additionally, demand for "reel-type" slot
machines declined in 1999. Consequently, revenues and sales margin declined in
1999. In response to these trends, the Company has significantly narrowed its
product line and managed Slot Source inventory levels downward (from $10 million
to $6.6 million at December 31, 1998 and 1999, respectively) by liquidating at a
loss of $669,000 gaming devices for which market demand had declined, and by
establishing more stringent guidelines for acquiring used gaming devices for
inventory.

Finance Division

         The Company realizes gains upon lease termination in two ways:

         -        The Company's operating lease agreements generally provide the
                  lessee with the option to purchase the leased equipment upon
                  lease expiration at its then fair market value. The Company
                  realizes a gain where the lessee acquires the equipment for
                  fair market value in excess of the Company's residual carrying
                  value, or

         -        An existing lessee chooses to terminate a lease prior to its
                  scheduled expiration. The lessee is generally required to pay
                  the Company an amount in excess of its carrying value in such
                  situations. Sales revenue in 1998 primarily reflects early
                  termination transactions. There were no such transactions
                  during 1999.

         The Company believes that, due to increasing lease maturities in the
future, it will realize gains on termination of leases in calendar year 2000.

         Sales-type lease revenue from third party gaming devices and
associated equipment was $14.5 million and cost of sales-type leases was
$13.7 million in 1997. The Company completed no such transactions in 1999 and
1998. Such amounts were excluded from the Equipment Sales and Sales-type
Lease Margin table above due to their non-recurring nature.

LEASING AND FINANCE MARGIN

Leasing and finance margin consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                          Years Ended December 31
                                                          -----------------------
                                                 1999              1998             1997
                                                -----              ----             ----
<S>                                            <C>               <C>              <C>
Finance income                                 $5,511            $3,033           $1,575
Rental revenue on
  operating leases                             12,426             6,750           11,406
Depreciation on
 leased equipment                              (8,773)           (4,931)          (8,589)

                                              -------           -------          -------
                                               $9,164            $4,852           $4,392
                                               ======            ======           ======
</TABLE>

         Leasing and finance margin and it's components have increased in 1999
and in 1998, and are expected to increase in the future due to increases in the
Company's portfolio of operating leases, direct finance leases, and
collateralized equipment loans as summarized below (in thousands):

<TABLE>
<CAPTION>
                                                 1999              1998             1997
                                                 ----              ----             ----
<S>                                           <C>               <C>               <C>
Notes receivable, net                         $22,614           $21,878           $3,141
Investment in direct financing leases          17,172             9,668            5,976
Leveraged lease, net                            3,528
Equipment under operating leases, net          41,287            27,751           18,328
                                              -------           -------          -------
                                              $84,601           $59,297          $27,445
                                              =======           =======          =======
</TABLE>

                                       13
<PAGE>

         Leasing and finance margin has not increased as quickly as the lease
and finance portfolio because of:

         -        Changes in the mix of leases and financing transactions
                  originated during 1999 and 1998. An increase in the mix of
                  operating leases compared to direct financing leases and
                  collateralized loans moderated the growth in the related
                  margin. Operating lease margin (rental revenue less
                  depreciation) is recognized on a constant basis over the life
                  of a lease. Finance income is recognized as a fixed percentage
                  of the underlying balance of the note receivable or direct
                  finance lease. Consequently, the margin inherent in an
                  operating lease tends to be recognized later in the life of
                  the lease when compared to a note receivable or a direct
                  finance lease. Therefore, as the portfolio has grown to
                  include a greater percentage of operating leases, leasing
                  margin has not grown to the same extent or as quickly.

         -        The timing of the completion of significant lease and finance
                  originations and terminations. A significant customer
                  terminated their leases in late 1997. Thus, the Company
                  recognized lease margin throughout most of 1997, but the asset
                  was sold at year end. The gain on termination of leases was
                  reflected in equipment sales and sales-type lease margin in
                  1997.

FEE INCOME

         Fee income includes gross profit form the sale to third parties of
the Company's interest in notes receivable and direct finance leases. Upon
sale, the Company records fee income equal to the difference between the sale
price and the carrying value of the related asset. Fee income also includes
commissions earned for arranging financing between unrelated parties. Fee
income has historically fluctuated due to the timing of completion of large
financing transactions, as well as the timing of the subsequent sale of notes
receivable and direct finance leases. Fee income decreased $924,000 in 1998
compared to 1997, primarily due to the Company's strategy of holding more
transactions for its own account and consequently fewer transactions were
sold for fee income. The strategy of holding more transactions continued in
1999, however, fee income increased due to transactions with one customer
which resulted in approximately 45% of the year's fee income.

INTEREST EXPENSE

         Consistent with the Company's plan to grow its lease portfolio, it has
incurred higher levels of borrowing, and consequently incurred an increase in
interest expense, to finance the investment in leases and notes receivable.

SELLING, GENERAL & ADMINISTRATIVE, EXPENSES

         The increases in selling, general & administrative expenses in 1999 and
1998 primarily reflect higher payroll and occupancy costs associated with the
growth in the Slot Source reconditioned gaming device division, and legal fees
associated with obtaining licensing in the states of Mississippi and Illinois in
1999, and Colorado in 1998, and legal fees in connection with the work out of
three accounts which defaulted in 1999.

PROVISION FOR LOSSES

         The provision for losses represents the Company's estimate of the
amount expected to be lost related to specific accounts, including estimated
losses on future non-cancelable lease rentals and notes receivable. The 1999
provision for loss reflects three customers that defaulted under their financing
agreements.

INCOME TAXES

         The Company's effective tax rate was approximately 26% for 1999, and
lower than the federal statutory rate of 34% due to the non-deductible
amortization of costs related to the acquisition of the DigiDeal Technology
Agreement and the reversal of temporary differences at other than the
originally expected effective rate.

         The Company's effective income tax rate was approximately 38% in both
1997 and 1998. Effective rates for 1998 and 1997 are higher than the federal
statutory rate of 34%, due primarily to state income taxes.

LIQUIDITY AND CAPITAL RESOURCES:

         The Company's unrestricted cash and cash equivalents totaled $2.9
million at December 31, 1999, compared to $1.3 million at December 31, 1998. Net
cash provided by operations activities amounted to $2.3 million in 1999,
compared to net cash used in operating activities of $16.8 million in 1998. The
increase in cash provided by operating activities in 1999 resulted primarily the
cash flow arising from the increase in the Company's portfolio of leases and
notes receivable.

                                       14
<PAGE>

         The Company's strategy to increase its financing activities involve a
higher level of investment in notes receivable and equipment under operating
leases. The funds necessary to support the Company's activities have been
provided by cash flows generated primarily from the operating activities
described above and various forms of recourse and non-recourse borrowings from
banks, financial institutions, and financial intermediaries. Payments under the
Company's borrowings and the maturities of its borrowings are typically
structured to match the payments under the leases and notes collateralizing the
borrowings.

         See Note 4 to Notes to Financial statements for a description of the
Company's debt financing.

         The Company's current financial resources, including estimated cash
flows from operations, the revolving credit and working capital and other
facilities which total $71 million (of which $31 million is available as of
December 31, 1999) are expected to be sufficient to fund the Company's
anticipated working capital needs. In addition to the borrowing activities
described above, the Company has developed a network of financial
institutions to which it sells financial transactions on a regular basis. The
Company manages its portfolio to optimize concentration among customers or
geographic markets. To achieve this goal, it will from time to time, sell or
externally finance transactions originated including those 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.

         The Company has entered into a letter of intent to acquire the
capital stock of Four Queens, Inc., which is contingent upon the Company
obtaining satisfactory purchase financing. There can be no assurance that the
Company will be able to obtain such financing on terms acceptable to the
Company.

         Inflation has not had a significant impact on the Company's operations.

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 express or implied by such forward-looking statements. Such factors
include, among other things, the following: strict regulation by gaming
authorities; competition the Company faces or may face in the future;
uncertainty of market acceptance of the SlotLease program and PDS Slot Source;
the ability of the Company to continue to obtain adequate financing; 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 with respect to the
Company's 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 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET 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. In addition, a changing interest rate
environment will not 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.

ITEM 8.           FINANCIAL STATEMENTS.

         The company's Consolidated Financial statements, including notes
thereto, are listed in Part IV, Item 14, of this report and are included after
the signature page beginning on page F-1.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE.

         On October 23, 1999 the Company determined to solicit proposals from
qualified firms to act as the Company's independent auditors for the 1999
calendar year. On November 8, 1999, PricewaterhouseCoopers resigned as the
independent accountants of the Company. There were no disagreements with
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers,
would have caused them to make a reference to their report on financial
statements for such years.

                                       15
<PAGE>

         On January 5, 2000, the Company engaged new independent accountants,
Piercy, Bowler, Tayler & Kern Certified Public Accountants & Business Advisors A
Professional Corporation ("Piercy Bowler") to audit the Company's financial
statements as of, and for the year ended, December 31, 1999. The decision to
appoint Piercy Bowler was approved by the Audit Committee of the Board of
Directors.

                                    PART III

ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS

         The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
Company's fiscal year end.

ITEM 11.         EXECUTIVE COMPENSATION.

         The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
company's fiscal year end.

ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
company's fiscal year end.

ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
company's fiscal year end.

                                   PART IV

ITEM 14.         EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                 FORM 8-K

(a)              Financial Statements

         The financial statements listed on the accompanying Index of
Financial Statements (page F-1) are filed as part of this annual report.

(b)              Reports on Form 8-K

         During the quarter ended December 31, 1999, the Company filed a Form
8-K regarding the resignation of PricewaterhouseCoopers LLP as the Company's
accountants, as discussed under ITEM 9 above.

(c)              Exhibits

         Included as Exhibits are the items listed in The Exhibit Index. The
Company will furnish to its shareholders of record as of the record date for
its 1999 Annual Meeting of Stockholders, a copy of any of the exhibits listed
below upon payment of $.25 per page.


                                       16

<PAGE>

                                EXHIBIT INDEX

<TABLE>
<CAPTION>


EXHIBIT
  NO.             DESCRIPTION
--------          -----------
<S>               <C>
   3.1            Amended and Restated Articles of Incorporation(4)
   3.2            Articles of Amendment to Articles of Incorporation(4)
   3.3            Articles of Amendment to Articles of Incorporation(4)
   3.4            Articles of Amendment of Amended and Restated Articles of
                  Incorporation (4)
   3.5            Bylaws of the Registrant (1)
   4.1            Specimen of Common Stock Certificate (1)
   4.3            Form of Warrant to Purchase  25,000  Shares of Common  Stock,
                  dated  December 15,  1994,  issued to Miller & Schroeder
                  Investments Corporation(2)
   4.4            Form of Warrant to Purchase 145,000 Shares of Common Stock,
                  dated May 24, 1994 (2)
   10.1           Industrial Real Estate Lease dated April 29, 1997, between the
                  Registrant, as Tenant, and Patrick Commerce Center, LLC, as
                  Landlord (4)
   10.2           1993 Stock Option Plan, as amended (1)
   10.3           Form of Incentive Stock Option Agreement (1)
   10.4           Form of Non-Qualified Stock Option Agreement (1)
   10.5           Employment Agreement between the Registrant and Johan P.
                  Finley (1)
   10.7           Employment Agreement between the Registrant and Peter D.
                  Cleary (3)
   10.8           Employment Agreement between the Registrant and Lona M. B.
                  Finley (1)
   10.9           Employment Agreement between the Registrant and Steven M. Des
                  Champs (6)
   10.10          Form of Tax Indemnification Agreement between the Registrant
                  and Johan P. Finley (1)
   10.11          Revolving Credit and Security Agreement, dated April 9, 1997
                  between BNY Financial Corporation as Lender and as Agent and
                  the Registrant and PDS Financial Corporation-Nevada as
                  Borrowers (4)
   10.12          Loan and Security Agreement, dated October 29, 1998 between
                  Heller Financial, Inc., as Lender and the Registrant as
                  Borrower (5)
   10.13          Loan and Security Agreement, dated October 29, 1998 between
                  Heller Financial, Inc., as Lender and PDS Financial
                  Corporation-Nevada, as Borrower (5)
   10.14          Master Loan Agreement by and among the Registrant, PDS
                  Financial Corporation - Nevada and Miller & Schroeder
                  Investments Corporation, date May 26, 1998 (5)
   10.15          Master Loan Agreement by and among the Registrant, PDS
                  Financial Corporation - Nevada and Miller & Schroeder
                  Investments Corporation, date December 15, 1998 (6)
   10.16          Loan Agreement, dated October 11, 1999 between U.S. Bank, as
                  Lender and the Registrant as Borrower
   10.17          Loan and Security Agreement, dated April 28, 1999 between
                  SunWest Bank as Lender and PDS Financial Corporation -
                  Nevada as Borrower
   10.18          Master Revolving Line of Credit-Promissory Note by and
                  among the Registrant, PDS Financial Corporation - Nevada and
                  Nevada State Bank, dated April 22, 1999

                                       17
<PAGE>

   10.19          Master Loan Agreement by and among the Registrant, PDS
                  Financial Corporation - Nevada, PDS Financial
                  Corporation - Mississippi and Miller & Schroeder Investments
                  Corporation, dated October 28, 1999
   10.20          Master Loan Agreement by and among the Registrant, PDS
                  Financial Corporation - Nevada and Miller & Schroeder
                  Investments Corporation, dated October 28, 1999
   10.21          Agreement for Technology Transfer, Manufacture,
                  Distribution and Affecting Patent, Trademark and Copyrights
                  by and among the Registrant and Digideal Corporation dated
                  June 16, 1999 (7)
   10.22          Agreement For Technology Transfer, Manufacture,
                  Distribution and Affecting Patent, Trademark and Copyrights
                  (Sovereign Nations) dated June 16, 1999 (7)
   10.23          First Modification of Agreement For Technology Transfer,
                  Manufacture, Distribution and Affecting Patent, Trademark
                  and Copyrights dated June 16, 1999 (7)
   10.24          Warrant to Purchase Common Stock of PDS Financial
                  Corporation issued to Digideal Corporation in connection
                  with the Agreement for Technology, Transfer, Manufacture,
                  Distribution and Affecting Patent, Trademark and Copyrights,
                  dated June 16, 1999
   10.25          Warrant to Purchase Common Stock of PDS Financial
                  Corporation issued to Digideal Corporation in connection
                  with the Agreement for Technology, Transfer, Manufacture,
                  Distribution and Affecting Patent, Trademark and Copyrights,
                  dated June 16, 1999
   21.1           Subsidiaries of the Registrant
   23.1           Consent of Independent Accountants
   23.2           Consent of Independent Accountants
   27.1           Financial Data Schedule for the year ended December 31, 1999
   99.1           Cautionary Statements
</TABLE>
   ---------------
   (1)            Incorporated by reference to the Registrant's  previously
                  filed Form SB-2 Registration Statement No. 33-76948C
   (2)            Incorporated by reference to the Registrant's  previously
                  filed Form SB-2 Registration Statement No. 33-88692
   (3)            Incorporated  by  reference  to the  Registrant's  previously
                  filed Form  10-KSB for the year ended December 31, 1995
   (4)            Incorporated by reference to the Registrant's previously filed
                  Form 10-KSB for the year ended December 31, 1997
   (5)            Incorporated by reference to the Registrant's previously filed
                  Form 10-QSB for the quarter ended June 30, 1998
   (6)            Incorporated by reference to the Registrant's previously filed
                  post effective amendment on Form S-3 to Form SB-2
                  Registration Statement No. 333-49199
   (7)            Incorporated by reference to the Registrant's previously
                  filed Form 10-Q for the quarter ended September 30, 1999

                                       18
<PAGE>

SIGNATURES

         In accordance with Section 13 or 15(d) 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 Financial Corporation

         By:  /s/  Johan P. Finley                  Date:  March 29, 2000
            -------------------------------------
              Johan P. Finley, Chief Executive
              Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has also been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29, 2000.

    Name                                            Title
    ----                                            -----

By /s/ Johan P. Finley                      Chairman of the Board,
  --------------------------                Chief Executive Officer,
   Johan P. Finley                          President and Director
                                            (Principal Executive Officer)


By  /s/ Peter D. Cleary                     Director,
  --------------------------                President,
   Peter D. Cleary                          Chief Operating Officer
                                            Interim Chief Financial Officer


By /s/ Joel M. Koonce                       Director
  --------------------------
   Joel M. Koonce

By /s/ James L. Morrell                     Director
  --------------------------
   James L. Morrell

By /s/ Lona M. Finley                       Director
  --------------------------
   Lona M.Finley


                                       19
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>

(a)      Documents filed as part of this report:                                                            Page
                                                                                                            ----
<S>                                                                                                         <C>
1.       Consolidated Financial Statements:

         Reports of Independent Accountants                                                                  F-2

         Consolidated Balance Sheets as of December 31, 1999 and 1998                                        F-3

         Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
              for the Years Ended December 31, 1999, 1998 and 1997                                           F-4

         Consolidated Statement of Stockholders' Equity for the Years Ended
              December 31, 1999, 1998 and 1997                                                               F-5

         Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,                        F-6
              1998 and 1997
         Notes to Consolidated Financial Statements                                                   F-7 - F-16

</TABLE>


                                       F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

         To the Board of Directors and Stockholders of PDS Financial
Corporation:

         We have audited the accompanying consolidated balance sheet of PDS
Financial Corporation and subsidiaries as of December 31, 1999 and related
consolidated statements of income (loss) and comprehensive income (loss), and
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

         We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PDS Financial Corporation and subsidiaries as of December 31, 1999, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.


PIERCY BOWLER TAYLOR & KERN
Certified Public Accountants and Business Advisors,
A Professional Corporation

Las Vegas, Nevada
March 8, 2000

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of PDS Financial Corporation:

         In our opinion, the accompanying balance sheet as of December 31,
1998 and the related consolidated statements of income and comprehensive
income, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1998 present fairly, in all material respects, the
financial position, results of operations and cash flows of PDS Financial
Corporation and subsidiaries (the "Company") at December 31, 1998 and for
each of the two years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of PDS
Financial Corporation and subsidiaries for any period subsequent to December
31, 1998.

PricewaterhouseCoopers LLP

Las Vegas, Nevada
February 23, 1999

                                      F-2
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>

ASSETS                                                                                    1999               1998
                                                                                    --------------       -------------
<S>                                                                                 <C>                  <C>

Cash and cash equivalents,                                                          $   2,860,000        $   1,269,000
Restricted cash                                                                         2,831,000            3,166,000
Notes, accounts, and leases receivable, net                                            48,616,000           32,881,000
Equipment under operating leases, net                                                  41,287,000           27,751,000
Equipment held for sale or lease                                                        6,616,000           10,002,000
Refundable income tax deposits                                                            403,000              522,000
Deferred income taxes                                                                     976,000              583,000
Other assets, net                                                                       4,444,000            3,455,000
                                                                                    --------------       -------------
                                                                                    $ 108,033,000        $  79,629,000
                                                                                    ==============       =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable:
    Equipment vendors                                                               $   6,363,000        $  13,427,000
    Other                                                                                 717,000            1,117,000
Customer deposits                                                                       7,141,000            1,357,000
Notes payable                                                                          66,549,000           37,505,000
Subordinated debt                                                                      13,323,000           13,165,000
Accrued expenses and other                                                              3,836,000            2,524,000
                                                                                    --------------       -------------
                                                                                       97,929,000           69,095,000
                                                                                    --------------       -------------
Stockholders' equity:
    Common stock, $.01 par value, 20,000,000 shares authorized, 3,683,753 and
     3,648,211 shares issued and outstanding
     at December 31, 1999 and 1998                                                         37,000               36,000
    Additional paid-in capital                                                         11,546,000           11,268,000
    Accumulated other comprehensive loss                                                                       (25,000)
    Deficit                                                                            (1,479,000)            (745,000)
                                                                                    --------------       -------------
                                                                                       10,104,000           10,534,000
                                                                                    --------------       -------------
                                                                                    $ 108,033,000        $  79,629,000
                                                                                    ==============       =============
</TABLE>

                See notes to consolidated financial statements.

                                      F-3
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)
                         AND COMPREHENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                        1999              1998             1997
                                                                   -------------     ------------      -------------
<S>                                                                  <C>              <C>               <C>
REVENUES:
   Equipment sales                                                   $ 6,146,000      $20,522,000       $17,482,000
   Revenue from sales-type leases                                      7,699,000        3,964,000        14,480,000
   Operating lease rentals                                            12,426,000        6,750,000        11,406,000
   Finance income                                                      5,511,000        3,033,000         1,575,000
   Fee income                                                          3,697,000        1,746,000         2,670,000
                                                                   -------------     ------------      ------------
                                                                      35,479,000       36,015,000        47,613,000
                                                                   -------------     ------------      ------------

COSTS AND EXPENSES:
   Equipment sales                                                     6,740,000       17,257,000        15,123,000
   Sales-type leases                                                   6,622,000        3,386,000        13,654,000
   Depreciation on leased equipment                                    8,773,000        4,931,000         8,589,000
   Interest                                                            8,133,000        5,062,000         4,260,000
   Selling, general and administrative                                 4,810,000        4,681,000         3,840,000
   Collection and asset impairment provisions                          1,395,000          123,000           628,000
                                                                   -------------     ------------      ------------
                                                                      36,473,000       35,440,000        46,094,000
                                                                   -------------     ------------      ------------

INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)                             (994,000)         575,000         1,519,000
INCOME TAXES (BENEFIT)                                                  (260,000)         219,000           577,000
                                                                   --------------    ------------      ------------

NET INCOME (LOSS)                                                       (734,000)         356,000           942,000

OTHER COMPREHENSIVE INCOME, NET OF TAX                                    25,000           12,000            45,000
                                                                   -------------     ------------      ------------

COMPREHENSIVE INCOME (LOSS)                                          $  (709,000)     $   368,000       $   987,000
                                                                   ==============    ============      ============

NET INCOME (LOSS) PER SHARE:
     Basic                                                               ($0.20)            $0.10             $0.30
     Diluted                                                             ($0.20)            $0.09             $0.28

WEIGHTED AVERAGE SHARES OUTSTANDING:
     Basic                                                             3,684,000        3,611,000         3,184,000
     Diluted                                                           3,684,000        3,784,000         3,620,000

</TABLE>

              See notes to the consolidated financial statements.

                                      F-4
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>

                                                                                        ACCUMULATED
                                                  COMMON STOCK             ADDITIONAL       OTHER
                                           ---------------------------       PAID-IN    COMPREHENSIVE
                                              SHARES         PAR VALUE       CAPITAL    INCOME (LOSS)      DEFICIT          TOTAL
                                           ----------        ---------     -----------  -------------    -----------    ----------
<S>                                         <C>              <C>           <C>          <C>             <C>             <C>
BALANCES, JANUARY 1, 1997                   3,119,816         $31,000       $7,952,000    $(203,000)    $(2,043,000)    $5,737,000

Conversion of subordinated debentures         240,220           2,400        1,018,000                                   1,020,400

Exercise of stock options, including tax
    benefit of $296,600                       163,936           1,600          762,000                                     763,600

Unrealized holding gains on securities
    net of income taxes                                                                      45,000                         45,000

Reclassification from net income                                                            121,000                        121,000

Net income                                                                                                   942,000       942,000
                                           ----------        ---------     -----------   ----------      -----------    ----------

BALANCES, DECEMBER 31, 1997                 3,523,972          35,000        9,732,000      (37,000)      (1,101,000)    8,629,000

Conversion of subordinated debentures          11,810                           50,000                                      50,000

Exercise of warrants                           45,747             400           14,600                                      15,000

Exercise of stock options, including tax
    benefit of $61,000                         66,682             600          368,000                                     368,600

Issuance of stock purchase warrants                                          1,103,400                                   1,103,400

Unrealized holding gains on securities
    net of income taxes                                                                      12,000                         12,000

Net income                                                                                                   356,000       356,000
                                           ----------        --------     ------------    ---------     ------------   -----------

BALANCES, DECEMBER 31, 1998                 3,648,211          36,000       11,268,000      (25,000)       (745,000)    10,534,000

Exercise of stock options, including tax

    benefit of $28,000                         34,896             700          175,000                                     175,700

Issued pursuant to Employee
    Stock Purchase Plan                           646             300            3,000                                       3,300

Issuance of stock purchase warrants                                            100,000                                     100,000

Unrealized holding gains on securities
    net of income taxes                                                                      25,000                         25,000

Net loss                                                                                                   (734,000)     (734,000)
                                           ----------        --------     ------------      -------      -----------  ------------

BALANCES, DECEMBER 31, 1999                 3,683,753         $37,000      $11,546,000                  $(1,479,000)   $10,104,000
                                            =========         =======      ===========    =========     ============   ===========
</TABLE>

See notes to the consolidated financial statements.

                                      F-5
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                         1999             1998             1997
                                                                   --------------    -------------     ------------
<S>                                                                <C>               <C>               <C>
OPERATING ACTIVITIES
   Net cash provided by (used in) operating activities                $2,321,000     $(16,789,000)      $12,810,000
                                                                   -------------     -------------     -------------
INVESTING ACTIVITIES
   Purchases of equipment for leasing                                   (129,000)      (7,226,000)      (11,041,000)
   Proceeds from sale of equipment under operating leases                               3,701,000        14,717,000
   Other                                                                (922,000)        (260,000)         (119,000)
                                                                   --------------    -------------     -------------

   Net cash provided by (used in) investing activities                (1,051,000)      (3,785,000)        3,557,000
                                                                   --------------    -------------     ------------

FINANCING ACTIVITIES
   Proceeds from discounting operating lease rentals                                      692,000         4,700,000
   Proceeds from borrowings                                           26,541,000       42,253,000        10,511,000
   Payment of debt issue costs                                                         (1,560,000)
   Repayment of borrowings                                           (26,499,000)     (21,700,000)      (32,940,000)
   Proceeds from exercise of stock options and warrants                  279,000          293,000           467,000
                                                                   -------------     ------------      ------------

   Net cash provided by (used in) financing activities                   321,000       19,978,000       (17,262,000)
                                                                   --------------    ------------       ------------

CHANGE IN CASH AND CASH EQUIVALENTS
   Net increase (decrease) during the year                             1,591,000         (596,000)         (895,000)

   Balance, beginning of year                                          1,269,000        1,865,000         2,760,000
                                                                   -------------      -----------      ------------

   Balance, end of year                                            $   2,860,000     $  1,269,000      $  1,865,000
                                                                   =============     ============      ============
</TABLE>

See notes to the consolidated financial statements.

                                      F-6
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS DESCRIPTION. PDS Financial Corporation and subsidiaries (the "Company")
engages principally in the leasing and financing of gaming equipment. Beginning
in 1997, the Company began reconditioning for disposition gaming equipment that
it acquired at the end of the lease or through open market purchases. This
reconditioning process and related sales and distribution effort (known as PDS
Slot Source, an operating division) is viewed by management as an integral part
of the Company's leasing and financing activities. The Company's specialized
operating lease program for slot machines and other electronic gaming devices
has been known as SlotLease since 1996. The Company conducts its leasing and
financing and sales activities in substantially all domestic United States
gaming jurisdictions and, to a lesser extent, certain other countries and could
be affected by adverse changes in economic conditions in those areas.

USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenue and expenses during the reporting
period. For the Company, these are principally the estimates of residual values,
collectibility of notes, accounts, and leases receivable and valuation of
equipment held for sale or lease. Actual results could differ from these
estimates.

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of PDS Financial Corporation and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.

REVENUE AND COST RECOGNITION. The Company's leasing activities include
operating, direct finance, sales-type, and leveraged leases. For all types of
leases, the determination of profit considers the estimated value of equipment
at lease termination, referred to as the residual value. For operating leases,
revenue and depreciation on the leased equipment are recorded on the
straight-line method over the term of the lease. Direct finance and sales-type
leases are similar in that substantially all of the benefits and risks of
ownership of the leased equipment are transferred to the lessee, and interest
income is recognized at a constant percentage return on the asset carrying
value. The carrying value consists of the present value of the future lease
payments plus any unguaranteed residual, sometimes referred to herein as the
lease receivable. A dealer's profit or loss on the subject equipment is
recognized at the inception of a sales-type lease. Investment in leveraged
leases consists of rentals receivable (net of principal and interest on
nonrecourse debt), plus the estimated residual values of the equipment, and
minus unearned income which is recognized at a constant percentage return on the
investment over the lease term. After the inception of a lease, the Company may
discount or sell notes and future lease payments to reduce or recover its
investment in the asset.

Initial direct costs related to leases and notes receivable are capitalized as
part of the related asset and amortized over the term of the agreement using the
interest method, except for operating leases, for which the straight line method
is used.

Equipment, consisting primarily of gaming devices, held for lease or sale is
valued at the lower of average unit cost or net realizable value. Revenue is
recognized when title transfers to the customer upon shipment of reconditioned
gaming devices or upon the exercise of a purchase option under an operating
lease.

FEE INCOME. The difference between the sale price and the carrying value of the
notes and lease receivables sold is included in fee income. Fee income also
includes commissions earned for arranging financing between unrelated parties.

CASH EQUIVALENTS. The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Cash equivalents consist of investments in money market
accounts. Excluded from cash equivalents at December 31, 1999 and 1998 is
restricted cash consisting of proceeds from borrowings legally restricted for
certain transactions and expected to be completed within three months or less
of such dates.

OTHER ASSETS, NET. Property and equipment is included in this classification and
consists primarily of furniture, equipment and leasehold improvements stated at
cost less depreciation and amortization calculated using the straight-line
method over the estimated useful lives. Also included are direct costs incurred
in obtaining debt that are being amortized over the term of the underlying
financing agreement using the interest method and costs to obtain licenses to
own and distribute gaming devices and associated equipment that are amortized
over three years on a straight-line basis.

ALLOWANCE FOR LOSSES. An allowance for losses is maintained at levels determined
by management to adequately provide for any other-than-temporary declines in
asset values. In determining losses, economic conditions, the activity in used
equipment markets, the effect of actions by equipment manufacturers, the
financial condition of customers, the expected courses of

                                      F-7
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

action by lessees with regard to leased equipment at termination of the initial
lease term, changes in technology and other factors which management believes
are relevant, are considered. Recoverability of an asset value is measured by a
comparison of the carrying amount of the asset to future net cash flows expected
to be generated by the asset. If a loss is indicated, the loss to be recognized
is measured by the amount by which the carrying amount of the asset exceeds the
fair valued of the asset. Asset charge-offs are recorded upon the disposition of
the underlying assets. Assets are reviewed quarterly to determine the adequacy
of the allowance for losses.

NET INCOME (LOSS) PER SHARE. The Company calculated basic and diluted net income
(loss) per share as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                                          1999            1998             1997
                                                                       --------     -------------    -------------
<S>                                                                  <C>               <C>               <C>
Net income (loss), basic                                              ($734,000)         $356,000          $942,000
Interest expense on
     subordinated debt, net of tax                                                                           86,000
                                                                     -----------       ----------        ----------
Net income (loss), diluted                                           ($ 734,000)       $  356,000        $1,028,000
                                                                     ===========       ==========        ==========

Per share amounts:
     Basic                                                               ($0.20)            $0.10             $0.30
     Diluted                                                             ($0.20)            $0.09             $0.28
Weighted average shares outstanding:
     Basic (weighted average shares outstanding)                       3,684,000        3,611,000         3,184,000
     Effect of dilutive options                                                           155,000           137,000
     Effect of dilutive warrants                                                           18,000
     Effect of subordinated debt                                                                            299,000
                                                                     -----------       ----------        ----------
     Diluted                                                           3,684,000        3,784,000         3,620,000
                                                                     ===========       ==========        ==========
</TABLE>

Options to purchase 802,000 shares of common stock, and warrants to purchase
1,290,000 shares of common stock were not included in the computation of diluted
earnings per share for 1999 because the effect would be anti-dilutive. In
addition, the exercise price was greater than the average market price of the
common stock for the year. The weighted average exercise price for these options
and warrants was $4.71 and $9.44 as of December 31, 1999. These options and
warrants expire at various dates through 2009. Weighted-average exercise prices
($11.28 in 1998 and $5.60 in 1997) in excess of average market prices caused
options and warrants to purchase common shares (984,500 in 1998 and 337,200 in
1997) to be excluded from the computation of diluted earnings in those years.

STOCK COMPENSATION. The Company accounts for stock based employee compensation
(Note 7) using the intrinsic value method in Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.

RECLASSIFICATIONS. Certain items in the consolidated financial statements have
been reclassified to conform to the current year presentation.

2.  NOTES, ACCOUNTS, AND LEASES RECEIVABLE:

Notes, accounts, and leases receivable consist of the following as of December
31:

<TABLE>
<CAPTION>
                                                             1999                1998
                                                         ------------        ------------
<S>                                                      <C>                 <C>
Notes receivable bearing interest at 8.5% to 15.3%       $ 23,449,000        $ 23,535,000
Minimum direct finance lease payments                      20,679,000          11,497,000
Leveraged leases, net                                       7,121,000
Unsecured revolving line bearing interest at 13%            1,734,000
                                                         ------------        ------------
                                                           52,983,000          35,032,000
Unearned lease income, direct finance leases               (3,407,000)         (1,814,000)
Unearned income, leveraged leases                          (3,593,000)
Unamortized discounts                                        (331,000)           (312,000)
                                                         ------------        ------------
                                                           45,652,000          32,906,000
Accounts and other                                          5,302,000           1,335,000
Allowance for uncollectible accounts                       (2,338,000)         (1,360,000)
                                                         ------------        ------------
                                                         $ 48,616,000        $ 32,881,000
                                                         ============        ============
</TABLE>

                                      F-8
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  NOTES, ACCOUNTS, AND LEASES RECEIVABLE (CONTINUED):

Notes and direct finance lease receivables are due in monthly installments,
generally collateralized by casino-related equipment and furnishings. The
Company is also committed to fund up to $5,000,000 under an unsecured revolving
line of credit receivable in monthly installments of principal and interest of
approximately $86,000. Leveraged leases net includes estimated residuals of
$6,557,000 and deferred tax liabilities associated with these leases are not
material.

At December 31, 1999, future minimum payments receivable on notes and leases
(both direct finance leases and the leveraged leases) are as follows:

<TABLE>
<CAPTION>

YEAR ENDING DECEMBER 31,                                NOTES               LEASES           TOTAL
------------------------                             ------------       ------------     ------------
<S>                                                  <C>                <C>              <C>
     2000                                            $ 11,196,000       $  7,312,000     $ 18,508,000
     2001                                               6,201,000          6,303,000       12,504,000
     2002                                               7,731,000          9,822,000       17,553,000
     2003                                                  55,000          3,116,000        3,171,000
     2004                                                                    688,000          688,000
     Other                                                                   559,000          559,000
                                                     ------------       ------------     ------------
                                                     $ 25,183,000       $ 27,800,000     $ 52,983,000
                                                     ============       ============     ============
</TABLE>

Included in the preceding table are notes and leases receivable from two
customers totaling $4,053,000 (all in 2000) upon which no payments are currently
being received. At December 31, 1999, specific allowances for doubtful
collection provided for these and receivables from two other customers totaled
$2,337,000. The maximum losses that the Company would incur if these customers
failed to completely perform and the collateral were unavailable or of no value
would be $1,716,000 after allowances provided. At December 31, 1998, specific
allowances relating to one of these customers totaled $1,200,000. Interest
income earned (and received) on impaired notes receivable for 1999, 1998 and
1997 was not material.

Changes in the allowance for uncollectible receivables are as follows:

<TABLE>
<CAPTION>
                                                                    1999                      1998
                                                                 ----------                ----------
<S>                                                              <C>                       <C>
Balance, beginning of year                                       $1,360,000                $1,283,000
                                                                 ----------                ----------
   Charge-offs
   Recoveries                                                        17,000                    46,000
                                                                 ----------                ----------
Net recoveries (charge-offs)                                         17,000                    46,000
   Collection provision                                             995,000                   123,000
                                                                 ----------                ----------
Balance, end of year                                             $2,338,000                $1,360,000
                                                                 ==========                ==========
</TABLE>

The estimated fair value of notes and direct finance leases receivable
approximates their carrying value. The fair value is estimated using discounted
cash flow analysis and interest rates currently offered by the Company for
obligations with similar terms and credit risk.

3. EQUIPMENT UNDER OPERATING LEASES AND DISCOUNTED LEASE OBLIGATIONS:

Equipment under operating leases consists of gaming equipment and casino hotel
related equipment leased for periods ranging from 6 to 48 months as follows:

<TABLE>
<CAPTION>
                                                                     1999                      1998
                                                                     ----                      ----
<S>                                                             <C>                       <C>
Gaming and related                                              $55,653,000               $34,482,000
Impairment allowance                                               (400,000)
Less accumulated depreciation                                   (13,966,000)               (6,731,000)
                                                                -----------               -----------
                                                                $41,287,000               $27,751,000
                                                                ===========               ===========
</TABLE>

Lessees generally have the future right to purchase the equipment for fair value
at the termination of the lease.

At December 31, 1999, future minimum lease payments to be received by the
Company on non-discounted operating leases for the years ending December 31,
2000 through 2003 are approximately $14,086,000, $11,817,000, $8,361,000, and
$2,712,000 respectively.

On occasion, the Company collateralizes borrowings from financial
institutions with operating lease rentals and the related equipment. The
borrowings at December 31, 1999 and 1998 are not material and are classified
as notes payable in the accompanying consolidated balance sheet.


                                      F-9
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.  EQUIPMENT UNDER OPERATING LEASES AND DISCOUNTED LEASE OBLIGATIONS
(CONTINUED):

Interest expense on discounted lease obligations totaled $43,000, $274,000, and
$1,976,000 in 1999, 1998 and 1997, respectively. At December 31, 1999, the
effective interest rates on discounted lease rentals ranged from 8.7% to 10.5%.

4.  NOTES PAYABLE AND SUBORDINATED NOTES:

Recourse and non-recourse obligations consist of the following:

<TABLE>
<CAPTION>
                                                                                       1999                       1998
                                                                                    ------------             -------------
<S>                                                                                  <C>                      <C>
    Lines of credit with a maximum aggregate balance of $46,000,000
    bearing interest at rates from 7.3% to 10.3%, secured by related
    investment in leases and equipment held for sale or lease                        $26,351,000              $14,908,000

    Equipment notes bearing interest at rates from 8.0%
    to 15%, secured by related investment in leases:

       Recourse                                                                       18,472,000               17,234,000
       Non-recourse                                                                   23,244,000                6,737,000
                                                                                    ------------             ------------
                                                                                      68,067,000               38,879,000
    Unamortized loan discounts                                                       (1,518,000)              (1,374,000)
                                                                                    ------------             ------------
                                                                                     $66,549,000              $37,505,000
                                                                                    ============             ============
</TABLE>

Principal and interest payments on the recourse and nonrecourse notes payable
are generally due monthly in amounts that are approximately equal to the total
payments due from the lessee under the leases that collateralize the notes
payable. Under recourse financing, in the event of a default by a lessee, the
lender has recourse against the lessee, the equipment serving as collateral, and
the borrower. Under nonrecourse financing, in the event of a default by a
lessee, the lender generally only has recourse against the lessee, and the
equipment serving as collateral, but not against the borrower.

Certain of the Company's lines of credit restrict the payment of dividends. The
also contain certain covenants regarding minimum consolidated tangible net
worth, maximum recourse debt to worth ratio, cash flow coverage, and minimum
interest expense coverage ratio.

Recourse equipment notes include borrowings of $2.8 million at December 31,
1999, which have been funded by the lending source into escrow. The funding
amounts are classified as restricted cash. Such amounts will be released from
escrow and utilized to pay for equipment under lease as lease schedules are
originated.

In May 1998, the Company issued $13,800,000 of 10% senior subordinated notes due
on July 1, 2004 that included 690,000 detachable stock purchase warrants with an
exercise price of $12.25 valued at $690,000 ($477,000 unamortized as of December
31, 1999). Interest is payable quarterly. Pursuant to the terms of the
indenture, beginning July 1, 2000, a total of $2.1 million of the subordinated
notes will be randomly selected each year for mandatory redemption. In addition
to mandatory redemptions, the Company may also redeem the subordinated notes, in
part or in full, at any time at par plus accrued interest and any premium, if
applicable. The entire unpaid principal balance and unpaid interest thereon, is
due and payable on July 1, 2004.

In 1993, the Company issued unsecured subordinated debentures convertible into
shares of common stock of the Company using a per share conversion price of
$4.25. During 1998 and 1997, approximately $50,000 and $1,020,400 of debentures
were converted into 11,810 and 240,220 shares of common stock.

                                      F-10
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Recourse and nonrecourse notes payable and subordinated notes as of December 31,
1999, mature as follows:

<TABLE>
<CAPTION>
                                                                   Recourse Notes        Nonrecourse           Subordinated
                                                                       Payable          Notes Payable              Notes
                                                                   --------------       -------------         -------------
<S>                                                                <C>                  <C>                    <C>
            Year ending December 31, 2000                             $17,958,000          $8,629,000            $2,070,000
                                     2001                              16,340,000           8,988,000             2,070,000
                                     2002                               6,875,000           4,168,000             2,070,000
                                     2003                               3,650,000           1,459,000             2,070,000
                                     2004 and thereafter                                                          5,520,000
                                                                   --------------       -------------         -------------
                                                                      $44,823,000         $23,244,000           $13,800,000
                                                                   ==============       =============         =============
</TABLE>

The Company estimates that the fair value of its borrowings approximates the
carrying value based on terms currently available.

5.  INCOME TAXES

The following summarizes the components of deferred income taxes included in
the Company's consolidated balance sheets at December 31:

<TABLE>
<CAPTION>
                                                            1999                       1998
                                                         -----------             -------------
          <S>                                             <C>                       <C>
          Deferred tax assets:
               Net operating loss carry forward           $2,185,000                $1,502,000
               Asset valuation allowances                    723,000                   279,000
               Customer deposits and prepaid rent          1,130,000
               Other                                         266,000                   119,000
                                                         -----------             -------------
          Total deferred tax assets                        4,304,000                 1,900,000
                                                         -----------             -------------

          Deferred tax liabilities:
               Lease transactions                         (2,956,000)               (1,197,000)
               Initial direct costs                         (372,000)                 (120,000)
                                                         ------------            --------------
          Total deferred tax liabilities                  (3,328,000)               (1,317,000)
                                                         ------------            --------------

          Net deferred tax assets                         $  976,000                $   583,000
                                                         ===========             ==============
</TABLE>

Net operating loss carryforwards of approximately $6,100,000 will be an
available deduction from future taxable income, expiring approximately 45% in
2010 and prior, and approximately 55% in 2018 and after. Realization of the
net operating loss carryforwards is dependent on generating sufficient
taxable income prior to expiration of the loss carryforward. Although
realization is not assured, the Company believes it is more likely than not
that all of the deferred tax asset will be realized and therefore no
valuation allowance is deemed necessary.

The provision (benefit) for income taxes is comprised as follows:

<TABLE>
<CAPTION>
                                                                              1999             1998            1997
                                                                           ----------        ---------        --------
<S>                                                                        <C>                <C>              <C>
Current                                                                                      ($22,000)        $130,000
Deferred                                                                   ($260,000)         241,000          447,000
                                                                           ----------        ---------        --------
                                                                           ($260,000)        $219,000         $577,000
                                                                           ==========        =========        ========
</TABLE>

The difference between the normal federal statutory tax rate of 34% applied to
income before income taxes and the Company's effective tax rate is:

<TABLE>
<CAPTION>
                                                                            1999               1998           1997
                                                                           ----------        ---------        --------
<S>                                                                        <C>               <C>              <C>
Income taxes at federal statutory rate                                     ($338,000)        $196,000         $517,000
State income taxes, net of federal effect                                    (10,000)          12,000           31,000
Non-deductible amortization of asset acquisition costs                        57,000
Reversal of temporary differences at other than
  expected effective rate                                                     34,000

Other, net                                                                    (3,000)          11,000           29,000
                                                                           ----------        ---------        --------
                                                                           ($260,000)        $219,000         $577,000
                                                                           ==========        =========        ========
</TABLE>

                                      F-11
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY

STOCK OPTION PLAN. The Company established the 1993 Stock Option Plan (the Plan)
to encourage stock ownership by employees, officers, directors and other
individuals as determined by the Board of Directors or a committee appointed by
the Board of Directors (the Committee). The Plan provides that options granted
thereunder may be either incentive stock options (ISOs) or nonqualified stock
options. At December 31, 1999, the maximum number of shares of common stock
available for grant under the Plan was 1,350,000.

Options may have a maximum term of up to ten years. The exercise price of ISOs
granted under the Plan must be at least equal to the fair value of the common
stock on the date of grant. The exercise price of nonqualified options must be
at least equal to 85% of the fair value of the common stock on the date of
grant. If an option expires, terminates or is canceled, the shares not purchased
thereunder become available for additional option awards under the Plan. The
Plan expires on April 1, 2003. Newly elected non-employee directors of the
Company receive an initial grant of non-qualified options to purchase 5,000
shares of common stock upon election to the Board.

Option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                   OPTIONS                                        WEIGHTED
                                                AVAILABLE FOR              OPTIONS             EXERCISE PRICE
                                                    GRANT                OUTSTANDING              PER SHARE
                                                    -----                -----------              ---------
<S>                                             <C>                      <C>                   <C>
Balances, December 31, 1996                        438,000                 547,000                  $3.22
                                                   -------                 -------                  -----
     Granted                                      (178,500)                178,500                   3.66
     Exercised                                                            (163,500)                  2.86
     Cancelled                                       9,500                  (9,500)                  3.08
                                                   -------                 -------                  -----
Balances, December 31, 1997                        269,000                 552,500                   3.47
     Increase in number of shares available        250,000
     Granted                                      (341,000)                341,000                   7.65
     Exercised                                                             (71,500)                  3.96
     Cancelled                                      53,000                 (53,000)                  5.20
                                                   -------                 -------                  -----
Balances, December 31, 1998                        231,000                 769,000                   5.16
     Granted                                      (258,000)                258,000                   3.26
     Exercised                                                             (56,000)                  2.60
     Cancelled                                     169,000                (169,000)                  5.28
                                                   -------                 -------                  -----
Balances, December 31, 1999                        142,000                 802,000                  $4.80
                                                   =======                 =======                  =====

Options exercisable at December 31, 1999                                   284,000                  $3.86
                                                                           =======                  =====
</TABLE>

 The following table summarizes stock options outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                                   Options Outstanding                         Options Exercisable
                                                   -------------------                   -----------------------------
                                             Number of    Weighted Average                Number of   Weighted Average
                                             Options         Remaining                     Options        Remaining
     Range of Exercise Prices               Outstanding    Contractual Life              Outstanding  Contractual Life
     ------------------------               -----------    ----------------              -----------  ----------------
<S>                                         <C>           <C>                            <C>          <C>
            $1.50 - $2.50                     148,000              7.5                      65,000           5.8
            $2.51 - $5.00                     418,000              7.4                     171,000           4.1
            $5.01 - $7.50                      75,000              8.3                      15,000           8.0
            $7.50 - $10.05                    161,000              8.4                      33,000           8.3
                                              -------                                     --------
                                              802,000                                      284,000
                                              =======                                     ========
</TABLE>

                                      F-12
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)

At December 31, 1999, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $1.50 - $10.05, and 7.0
years, respectively. Had the Company used the fair value-based method of
accounting and recognized compensation expense over the vesting period as
provided for in Financial Accounting Standards Board Statement No. 123, STOCK
BASED COMPENSATION, net income and net income per share for 1999, 1998 and 1997
would have been as follows:

<TABLE>
<CAPTION>
                                                                           1999              1998              1997
                                                                           ----              ----              ----
<S>                                                                 <C>                    <C>             <C>
Pro forma net income (loss):
     Basic                                                          $(1,137,000)           $4,000          $879,000
     Diluted                                                         (1,137,000)            4,000           964,000
Pro forma net income (loss) per share:
     Basic                                                               $(0.31)            $0.00             $0.28
     Diluted                                                             $(0.31)             0.00              0.27
</TABLE>

The pro forma information above only includes stock options granted after
December 31, 1994. Pro forma compensation expense under the fair value-based
method of accounting will generally increase over the next few years as
additional stock option grants are considered.

The weighted-average grant-date fair value of options granted was $0.86, $2.57,
and $2.35 per option for 1999, 1998 and 1997, respectively. The weighted-average
grant-date fair value of options was determined by using the fair value of each
option grant on the date of grant, utilizing the "Black-Scholes" option-pricing
model and the following key assumptions:

<TABLE>
<CAPTION>
                                                                       1999              1998             1997
                                                                       ----              ----             ----
<S>                                                                 <C>               <C>               <C>
Risk-free interest rate                                                6.3%              5.2%             6.2%
Expected life                                                       5 years           5 years           5 years
Expected volatility                                                     60%               60%              70%
Expected dividends                                                        0                 0                0

</TABLE>

PREFERRED STOCK. The Company's Articles of Incorporation, as amended, authorize
the issuance of 2,000,000 shares of preferred stock, par value $0.01 per share.
The rights, preferences and privileges of the authorized preferred shares (none
of which have been issued) may be established by the Board of Directors without
further action by the holders of the Company's common stock.

WARRANTS. In June 1999, the Company issued a warrant to purchase
approximately 5% of the Company's common stock, or 184,000 shares of common
stock to DigiDeal Corporation ("DigiDeal") as part of its purchase of certain
intellectual property rights from DigiDeal covered by an agreement for
technology transfer, manufacture, distribution and affecting patent trademark
and copyrights (the Technology Agreement). These warrants have an exercise
price of $3.75 per share, expire in 2004 and are exercisable only upon the
achievement of certain levels of revenues from Designated Products, as
defined. An additional warrant was granted to DigiDeal Corporation for the
right to purchase an additional 184,000 shares of common stock of the Company
once revenues from Designated Products reach certain levels (2.5% upon
achievement of each of two goals). The Company valued these warrants at a
total of $500,000, which was treated as an asset, with a corresponding entry
to additional paid in capital, and will be amortized over the life of the
Technology Agreement. The Company has reciprocal rights to purchase up to 10%
of the common shares of DigiDeal at $1.35 per share.

In 1998, the Company issued 690,000 detachable stock purchase warrants as
part of the Subordinated Notes offering. These warrants have an exercise
price of $12.25 per share and expire in 2003, are exercisable beginning on
May 4,1999. The Company also issued a warrant to purchase 50,000 shares of
common stock to the underwriter for the Subordinated Notes offering, and such
warrants have the same terms as the warrants described in the preceding
sentence, except that such warrants are exercisable beginning on May 4, 2000.
The Company valued these warrants at a total of $740,000, of which $690,000
was treated as a debt discount, and $50,000 as deferred debt issue costs,
with a corresponding entry to additional paid in capital. Also in 1998, the
Company issued warrants to purchase 181,700 shares of common stock to a
financial institution in partial consideration for the approval of a $25
million revolving line of credit. These warrants have an exercise price of
$4.66 per share, expire in 2003 and were exercisable as of October 1998.

                                      F-13
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)

The Company valued these warrants at a total of $363,400, which was treated as
deferred debt issue costs, with a corresponding entry to additional paid in
capital.

In 1994, the Company issued warrants (the "IPO Warrants") to purchase up to
170,000 shares of its common stock to the underwriter in connection with the
initial public offering of its common stock and a certain lender in connection
with bridge note financing. The warrants are exercisable into common stock at
$6.00 per share had a cash-less exercise provision and expired in 1999. During
1998, a total of 121,500 warrants were surrendered to the Company resulting in
proceeds to the Company of $15,000 and issuance of approximately 45,700 shares
of common stock. There were no warrants surrendered in 1999.

7.  EMPLOYEE MATTERS

BENEFIT PLANS. The Company maintains a contributory defined contribution plan
that qualifies under Section 401(k) of the Internal Revenue Code (IRC) and
covers eligible employees. Company contributions are at the discretion of the
Board of Directors up to 5% of the individual employee earnings. The Company's
contributions to the plan in 1999, 1998 and 1997 were not material.

EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements with
its three officers for periods ranging from one to five years. Each of the
agreements contain noncompete clauses which continue from one to two years
following termination of employment. The agreements, among other things, provide
for initial base salaries, benefits and payment of both performance and
discretionary bonuses. The agreements are automatically extended for additional
one-year periods unless notice of nonextension is given.

8.  SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT

During 1999, no customer accounted for more than 10% of revenues. During 1998,
three customers accounted for 20%, 19%, and 16% of revenue, respectively, and in
1997, one of these customers and two others accounted for 37%, 18%, and 11% of
revenues, respectively.

During 1999, one customer accounted for 54% of fee income. During 1998 and 1997,
no customer accounted for more than 10% of fee income.

As of December 31, 1999, the Company's five largest customers represented 11%,
8%, 6%, 6%, and 4% of the total note and lease portfolio of $84,601,000. No
other customer represented more than 2% of the note and lease portfolio.

Based on the carrying value of the underlying notes and leases, 97% of the
Company's portfolio is located in the United States, with 60%, 14%, and 13% in
the states of Nevada, Colorado, and Mississippi.

9.  COMMITMENTS AND CONTINGENCIES:

The Company leases office and space for its reconditioning activities under
terms of various noncancelable operating leases expiring through 2004. The lease
agreements require the Company to pay monthly base rent in varying amounts plus
its pro rata share of the operating expenses. Rent expense was approximately
$494,000, $470,000 and $305,000 in 1999, 1998, and 1997.

Future minimum lease payments under these leases are as follows:

<TABLE>
<CAPTION>

Year Ending December 31,
------------------------
<S>                                                            <C>
     2000                                                      $476,000
     2001                                                       488,000
     2002                                                       525,000
     2003                                                       540,000
     2004                                                       554,000
                                                            -----------
                                                             $2,583,000
</TABLE>

                                      F-14
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.  SEGMENT INFORMATION:

The Company conducts business with external customers through the operations of
its PDS Slot Source ("Slot Source") and PDS Finance ("Finance") segments. In
addition, employees of the Company provide certain legal, accounting and
compliance, personnel and other administrative support services on behalf of
Slot Source and Finance. The costs associated with these activities (SG & A) are
not separately allocated to each business unit. Prior to 1999, the activities
of Slot Source and Finance were conducted as one reporting segment.

The accounting policies of each business unit are the same as those described in
Note 1 of Notes to Consolidated Financial Statements. The Company evaluates the
performance of its operating segments based on earnings before income taxes.
Financial performance measurements for Slot Source, Finance, and SG & A are set
forth below for the year ended December 31, 1999.

<TABLE>
<CAPTION>
                                                        Slot Source        Finance          SG & A               Total
                                                        -----------      -----------      ------------        -----------
<S>                                                     <C>              <C>              <C>                 <C>
Revenues                                                $13,845,000      $21,634,000                          $35,479,000
Income (loss) before income taxes                           483,000        3,333,000      ($4,810,000)           (994,000)
Identifiable assets                                       7,789,000       95,569,000        4,675,000         108,033,000

</TABLE>

11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments
was made in accordance with Statements of Financial Standards No. 107 ("SFAS No.
107"), Disclosures about Fair Value of Financial Instruments. SFAS No. 107
specifically excludes certain items from its disclosure requirements such as the
company's investment in equipment under operating lease, net, and equipment held
for sale or lease. Accordingly, the aggregate fair value amounts presented are
not intended to represent the underlying value of the net assets of the Company

The carrying amounts at December 31, 1999 for cash and cash equivalents, notes,
accounts, and leases receivable, net equipment purchases payable, accounts
payable notes payable and subordinated debt approximate their fair values due to
the short maturity of these instruments, or because the related interest rates
approximate current market rates.

12. SUPPLEMENTAL CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
                                                                         1999              1998            1997
                                                                   -------------     -------------      -----------
<S>                                                                <C>               <C>                <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
     Net income (loss)                                                 ($734,000)        $356,000          $942,000
     Depreciation and amortization                                     8,773,000        4,931,000         8,589,000
     Provision for uncollectible receivables                           1,395,000          123,000           628,000
     Deferred income taxes                                              (260,000)        (241,000)          447,000
     Originations of notes and direct finance leases receivables     (36,388,000)     (28,325,000)      (37,239,000)
     Proceeds from:
       Sale or discounting of notes and leases receivables            17,245,000        5,886,000        42,671,000
       Collections on notes and direct finance leases receivables     12,301,000        5,093,000         5,901,000
     Gain on sale of financial assets                                 (1,550,000)      (2,283,000)       (4,214,000)
     Changes in operating assets and liabilities:
       Accounts receivable                                            (4,018,000)         295,000        (1,735,000)
       Equipment held for sale or lease                                 (319,000)      (5,098,000)       (2,712,000)
       Income taxes receivable                                           119,000         (503,000)          (19,000)
       Accounts payable                                                  912,000           22,000           678,000
       Customer Deposit                                                5,784,000        1,952,000        (1,463,000)
     Other, net                                                         (939,000)       1,003,000           336,000
                                                                   -------------     -------------      -----------
       Net cash provided by (used in) operating activities         $   2,321,000     $(16,789,000)      $12,810,000
                                                                   =============     =============      ===========
CASH PAID DURING THE YEAR FOR:
     Interest                                                         $6,228,000       $4,260,000        $4,394,000
     Income taxes, net of refunds received                                                446,000            24,000

</TABLE>

                                      F-15
<PAGE>

                   PDS FINANCIAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED):

<TABLE>
<CAPTION>
                                                                         1999              1998            1997
                                                                   -------------     -------------      -----------
<S>                                                                <C>               <C>                <C>
SIGNIFICANT NON-CASH FINANCING AND INVESTING ACTIVITIES:
     Increase (decrease) in equipment purchases payable              (7,064,000)       13,427,000           775,000
     Increase in notes payable for purchase of
         equipment for leasing                                        29,337,000          207,000         7,636,000
     Increase (decrease) in notes payable for cash deposited
         into (withdrawn from) escrow                                   (335,000)       3,166,000
     Leases of equipment previously held for sale or lease
         equipment under operating or direct finance
         leases                                                        3,705,000        1,568,000
     Increase in notes payable for purchase of
         notes receivable                                                                 103,000        12,197,000
     Operating leases converted to direct finance
         leases upon exercise of purchase options                      2,011,000          456,000         2,676,000
     Exchange of notes receivable and purchased
         residuals for equipment for leasing and
         the assumption of discounted lease rentals                                                       5,745,000
     Exchange of notes receivable, direct finance
         leases and related discounted lease rentals
         for inventory for sale or lease                                                                  5,332,000
     Conversion of subordinated debentures into
         common stock                                                                      50,000         1,020,000
     Origination of  notes receivable for sale of equipment
         and direct finance receivables                                                 5,056,000
</TABLE>

13. SUBSEQUENT EVENT

On March 6, 2000, the Company signed a non-binding letter of intent with
Elsinore Corporation to acquire the capital stock of Four Queens, Inc., a Nevada
corporation doing business as the Four Queens Hotel & Casino for a purchase
price of $30 million, subject to adjustment. Consummation of the acquisition is
subject to a number of conditions, including negotiation and approvals,
including approval of the Nevada Gaming Commission, other gaming approvals, and,
if necessary, approval under the Hart-Scott-Rodino Antitrust Act, and receipt by
the Company of satisfactory purchase financing. There can be no assurance that a
definitive agreement can be reached, the other conditions to the acquisition
will be satisfied or that the acquisition will be consummated.

14. QUARTERLY RESULTS (UNAUDITED)

The following table sets forth selected historical operating results for each
quarter of 1999 and 1998. The quarterly information is unaudited but, in
management's opinion, reflects all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods presented:

<TABLE>
<CAPTION>
                                                                  1999 Quarter Ended
                                             ---------------------------------------------------------------
                                             March 31         June 30         September 30      December. 31
                                             --------      -------------      ------------      ------------
<S>                                        <C>              <C>               <C>               <C>
Total revenues                             $6,856,000       $10,512,000       $9,766,000        $8,345,000
Income taxes (benefit)                         82,000         (105,000)        (255,000)            18,000
Net income (loss)                             134,000         (171,000)        (414,000)         (283,000)
Net income (loss) per share:
   Basic                                          .04             (.05)            (.11)             (.08)
   Diluted                                        .04             (.05)            (.11)             (.08)
Total originations                          8,600,000        55,300,000        3,500,000        13,400,000

</TABLE>

<TABLE>
<CAPTION>
                                                                 1998 Quarter Ended
                                            --------------------------------------------------------------
                                            March 31          June 30        September 30      December 31
                                           ----------       -----------      ------------      -----------
<S>                                        <C>              <C>               <C>               <C>
Total revenues                             $9,450,000       $14,278,000       $6,755,000        $5,532,000
Income taxes (benefit)                        275,000           178,000           27,000         (261,000)
Net income (loss)                             449,000           291,000           42,000         (426,000)
Net income (loss) per share:
   Basic                                          .13               .08              .01             (.12)
   Diluted                                        .12               .08              .01             (.12)
Total originations                         11,600,000        20,600,000       11,500,000        16,600,000

</TABLE>

         The summation of quarterly per share amounts may not equal the
calculation for the full year, as each quarterly calculation is performed
discretely.

                                      F-16