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

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FORM 10-K

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2002

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

Commission File No. 0-23928

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PDS Gaming Corporation(Exact name of registrant as specified in its Charter)

Minnesota(State or other Jurisdiction of
Incorporation or Organization)

41-1605970(I.R.S. Employer
Identification No.)


6171 McLeod Drive, Las Vegas, Nevada 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)

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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 ý    No o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes o    No ý

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. o

As
of June 30, 2002, the last business day of the Registrant's most recently completed second fiscal quarter, the approximate market value of stock held by
non-affiliates was $3,250,000 based upon 2,621,314 shares held by such persons and the closing price on June 28, 2002 (the last day of trading in the month) of $1.24.

The
number of shares outstanding of the Registrant's $0.01 par value common stock at March 5, 2003 was 3,801,939.

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PART I

ITEM 1. BUSINESS

PDS Gaming Corporation (the "Company" or "PDS") was incorporated under the laws of the State of Minnesota in 1988. The shareholders approved the change of the
Company's name from PDS Financial Corporation to PDS Gaming Corporation at the Annual Meeting of Shareholders held on May 11, 2001. The Company's corporate offices and its equipment remarketing
facilities are located in approximately 60,000 square feet of leased space at 6171 McLeod Drive, Las Vegas, Nevada 89120-4048.

The
Company was originally founded as a leasing company, specializing in vehicle and general equipment leasing transactions. The Company began providing equipment financing for new
Native American gaming facilities in the Upper Midwest in early 1991. Since 1992, substantially all of the Company's gross financing 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 office in 1997.

The
gaming equipment financed by the Company mainly consists of slot machines, video gaming machines, table games and other gaming devices. In addition, the Company finances furniture,
fixtures and other gaming related equipment, including restaurant and hotel furniture, vehicles, security and surveillance equipment, computers and other office equipment for casino operations. The
Company generally targets established medium-sized casino operators that are opening new gaming facilities or expanding existing gaming facilities, as well as new domestic and Native American casinos
that the Company believes have acceptable credit quality.

In
order to offer financing and gaming products to the gaming industry, the Company must be licensed 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
the states of Nevada (Manufacturer, Distributor, Slot Route Operator and Operator), New Jersey, California, Colorado, Illinois, Indiana, Iowa, Minnesota, Mississippi, New Mexico and Washington and
with numerous Native
American jurisdictions. A significant percentage of the installed base of gaming devices in the United States is located in these jurisdictions. The Company believes its gaming licenses, coupled with
its ability to remarket used gaming devices, provide a competitive advantage, enabling the Company to offer financing and leasing services that meet the needs of this industry more effectively than
traditional financing.

The
Company entered into casino operations on January 25, 2001 when the Nevada Gaming Commission issued its final approval for the Company's acquisition of The Gambler casino. The
Gambler, now known as Rocky's Casino and Sports Bar ("Rocky's"), is located on North Virginia Street in downtown Reno, Nevada. Rocky's is a nonrestricted licensed casino with an installed base of 187
gaming devices.

Recent Developments

On February 24, 2003, the Company announced that it had entered into a letter of intent with respect to a proposal submitted by a management group
consisting of Johan P. Finley, the Company's Chairman and Chief Executive Officer, Lona M.B. Finley, the Company's Executive Vice President, Secretary and Chief Administrative Officer, and Peter D.
Cleary, the Company's President, Chief Operating Officer and Treasurer (collectively, the "Management Group"), to acquire all of the approximately 69% of the outstanding shares of the Company's common
stock not already owned by the Management Group for $1.25 per share in cash and an additional $1.50 per share in deferred cash payment rights. The deferred payment rights represent the right to
receive three equal installments of

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$.50 per share of common stock on, respectively, the first, second and third anniversaries of the closing of the transaction. After the final deferred payment of $.50 is made on the third
anniversary, total cash payments per share will total $2.75. The holders of such deferred payment rights will have no rights as shareholders of the Company, and the rights themselves will not be
transferable except pursuant to testamentary disposition or by operation of law.

The
proposal is subject to, among other things, the execution of a definitive agreement, approval by a committee of the Company's independent directors and by a majority of the Company's
shares not owned by the Management Group, the procuring of all necessary consents of the Company's commercial lenders and the trustees under the indentures covering the Company's outstanding debt
securities (the "Indentures"), the securing of required approvals from all gaming regulatory agencies, the obtaining of the necessary financing, and the receipt by the Company of a favorable fairness
opinion from an investment bank. The Management Group intends, pursuant to the terms of the Indentures, to maintain the Company's status as a public reporting company under the Securities Exchange Act
of 1934 until July 1, 2004. The Management Group further intends to keep the Company's operations intact and maintain its headquarters at its present location.

Discontinued Operations

In 1997, the Company established a sales and distribution division for gaming devices, then known as Casino Slot Exchange (formerly PDS Slot Source). During 2000,
the Company acquired a website to better promote these activities worldwide and to expand its distribution activities beyond an outlet for its used gaming devices. As an additional distribution
alternative, in June 2001, the Company acquired three retail locations that sold gaming collectibles, including home-use gaming devices. Two locations were subsequently closed, and
the remaining one is located inside the Aladdin Resort on the Las Vegas Strip and is operated under a lease that expires in August 2010.

The
Company acquired the patent rights to a digital table games system and technology in 1999, and distributed these games to casinos. These activities were conducted under the Company's
Table Games Division.

At
the end of the first quarter 2002, the Company discontinued operations of its Table Games Division, with the exception of servicing games currently under lease and selling or leasing
games in inventory, and certain components of its Casino Slot Exchange Division. The Company has retained its ability to repair and remarket gaming devices which come off lease. The Company no longer
purchases used gaming devices and reconditions them on a custom basis. This decision was made due to unacceptable operating results from, among other things, slower than anticipated customer
installations, inadequate profit margins and the continuing costs of maintaining exclusive rights to certain intellectual property. Accordingly, the Company has reclassified these activities as
discontinued operations in accordance with Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assets. As a result of these decisions and actions, the Company recognized a disposal loss of $2.4 million in 2002 primarily related to the write-off of its
investment in certain intangibles and other assets of the Table Games and Casino Slot Exchange Divisions. Pre-tax operating losses for the discontinued operations were $2.5 million,
$2.4 million and $2.2 million in 2002, 2001 and 2000, respectively. Additional information on Discontinued Operations is contained in Note 7 to the Company's Consolidated
Financial Statements included in Part IV, Item 15.

Gaming Industry

The casino industry in the United States, and the gaming industry in general, have experienced substantial growth in the last decade. 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 Native American tribes developed, leading to the
federal enactment of the Indian Gaming

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Regulatory Act. The growth of Native American gaming served as a catalyst for many jurisdictions to consider non-Native American casino gaming and lotteries because of their potential as
a source of government revenue. Since 1989, various forms of casino gaming have been legalized in numerous states, and many states either conduct lotteries or participate in multi-state lotteries. In
addition, gaming facilities operate on cruise ships sailing out of other states such as Florida and Texas. Several
other jurisdictions (including, for this purpose, Native American tribes) have approved or are considering approval of some form of legalized gaming. No assurance can be given as to the extent that
additional jurisdictions will adopt legislation or ordinances permitting casino or other legalized gaming in the future, or the nature, timing and extent of legalized gaming development in any
jurisdiction.

The
Company is licensed to serve customers in 11 states and in certain Native American jurisdictions in California, Iowa, Minnesota, New Mexico and North Carolina. Most of the casino
operators that purchase, finance or lease gaming equipment from the Company cater to customers that live nearby or who drive to their facilities, and most of these operators are not heavily dependent
upon convention events or airline travel to support their customer base. Those distinctions may lessen any negative economic impact the Company might suffer, as compared to other gaming companies,
from economic downturns in the convention and airline travel industries.

Finance and Lease Operations

The Company believes that the gaming industry in general has entered into a gaming equipment replacement and casino development cycle, which provides increased
opportunities for the Company's financing and leasing services. The Company's ability to offer casino operators innovative financing structures provides a competitive advantage over
non-licensed financial institutions. For example, a customer that is interested in acquiring additional gaming machines may be subject to certain debt covenants that restrict the
acquisition of new machines with debt. As an alternative to purchasing additional machines through conventional financing and possibly violating its debt covenants, the customer can elect to lease new
equipment from the Company. Overall, the Company believes its experience in and knowledge of the industry and its ability to remarket used equipment, 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.

The
Company provides financing to its customers in the form of direct finance leases, sales-type leases and 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 these types of transactions, substantially all of the
benefits and risks of ownership are borne by the lessee/borrower. Under a direct finance and sales-type lease, the lessee is required to pay the Company the purchase price of the gaming
equipment plus interest over the term of the lease; 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
direct finance leases or collateralized loans by pledging those assets against recourse or non-recourse borrowings or by selling all or a portion of its interest in the payment stream,
often simultaneously with its origination of financing transactions.

The
Company also offers its customers operating leases, which afford the customer lower monthly payments and off-balance sheet financing. The Company believes that its
operating lease program promotes its strategic objective of increasing recurring revenues. The Company appropriately retains ownership of the gaming equipment under operating leases, 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, to extend the lease term or return the equipment. The Company receives
rental income under a non-cancelable operating lease, which ranges from 6 to 48 months and has a typical

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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 held for lease or resale by the
Company.

In
2001, the Company began originating certain operating leases on a participation basis. Under a typical participation lease, the Company receives a fixed percentage of the net win from
each game, subject to certain minimums and maximums calculated on a per-machine, monthly basis. The Company has achieved increasing revenues and profits from this program, and intends to
expand its originations of participation leases.

Casino Operations

The Company's entry into casino operations was formalized on January 25, 2001, when the Nevada Gaming Commission issued its final approval for the
Company's acquisition of The Gambler in Reno, Nevada. In February 2002, the property was renamed Rocky's Casino and Sports Bar after extensive renovation and retheming. Rocky's is a
nonrestricted licensed casino with an installed base of 187 gaming devices.

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, fixtures and equipment used in a casino operation.

Principal Customers

Historically, the Company has experienced significant nonrecurring revenues in connection with the completion of large gaming equipment financing transactions.
During 2002, revenues from the Company's three largest customers, as a percentage of total revenue, were 24%, 24% and 9%. Revenues from the Company's three largest customers, as a percentage of 2001
revenue, were 29%, 8% and 7%. Revenues from the Company's three largest customers, as a percentage of 2000 revenue, were 23%, 13% and 11%. Due to the non-recurring nature of its large
gaming equipment financing transactions, the Company cannot estimate the relative level of revenues that may be derived from one or several customers during 2003.

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
(i) provide financing, (ii) own gaming devices to lease, (iii) distribute gaming devices, gaming equipment and/or table games and/or (iv) operate casinos, the Company must
be properly licensed in each jurisdiction where it conducts business. As part of the licensing process, each gaming jurisdiction (including Native American gaming jurisdictions) performs a thorough
investigation of each corporate applicant, its officers and directors and in some cases, significant shareholders and certain of its key employees. The Company, either

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directly or through one of its wholly owned subsidiaries, currently holds the following gaming licenses issued by state gaming regulatory authorities:

Jurisdiction

Type of LicenseCalifornia

Registered Manufacturer/DistributorColorado

Manufacturer/DistributorIllinois

SupplierIndiana

SupplierIowa

DistributorMinnesota

Manufacturer/DistributorMississippi

Manufacturer/DistributorNevada

Manufacturer, Distributor, Slot Route Operator, Casino OperatorNew Jersey

Casino Service IndustryNew Mexico

Manufacturer/DistributorWashington

Supplier, Manufacturer and Distributor


The
Company's licenses were renewed in New Mexico and Minnesota, and its license as a Supplier in Illinois was renewed in December 2002 as a one-year, conditioned
license. The Company also renewed its Washington Supplier's license and was granted a Washington Distributor's license in 2002. It has filed renewal applications in Colorado and Iowa, and will be
filing a renewal application in New Jersey in 2003. The Company believes all of its pending applications will be approved by the applicable gaming regulatory authorities.

The
Company is also licensed as a gaming Vendor or Supplier with several Native American tribes in California, including Barona, Cabazon, Campo, Dry Creek Rancheria, Middletown
Rancheria, Pala Band and Paskenta, and has been licensed by other tribal gaming commissions in Iowa, Minnesota,
New Mexico and North Carolina. The Company applies to renew those licenses and files applications for new licenses as business dictates.

While
not anticipated, expansion of the Company's activities may be hindered by the inability to obtain, or delays in obtaining, requisite state licenses or other approvals. No assurance
can be given as to the term for which the Company's licenses will be renewed in a particular jurisdiction or as to the license conditions, if any, that may be imposed by such jurisdiction in
connection with future renewals. The Company cannot predict the effect that the 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.

Class III
gaming on Native American land is further regulated by tribal governments in accordance with each tribe's State/Tribal Compact. Class II gaming on Native American
land is regulated by the tribal governments and the federal government under the Indian Gaming Regulatory Act. Changes in federal, state or tribal laws or ordinances may limit or otherwise materially
affect the types of gaming that may be conducted on Native American land. In addition, numerous lawsuits nationwide seek to limit or expand Native American gaming activities. The outcome of such
litigation cannot be predicted.

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As
described above under "Recent Developments," the Company has announced a proposed transaction where the Company will be "taken private." Such a transaction will require certain
approvals from many of the gaming regulatory jurisdictions to which the Company is subject. The definitive proxy materials to be submitted to the Company's stockholders will discuss the regulatory
approvals required for such transaction.

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 materially adverse effect on the business of the Company.

Nevada.The manufacture, ownership, operation, sale and distribution of gaming devices in Nevada and the operation of casinos
in the state are all 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) providing a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures
could have a materially adverse effect on the Company's operations.

The
Company 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 also holds a manufacturer, slot route operator and an operator's license in Nevada. The Company is registered by the Nevada Commission as a publicly traded corporation ("Registered
Corporation"), and as such, is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may
require. No person may become a five percent or greater stockholder of, or receive any percentage of profits from, the Company without first reporting the acquisition to the Nevada Gaming Authorities
and obtaining all required licenses and approvals. The Company has 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 devices in Nevada, operate a slot route or operate gaming establishments.

The
Nevada Gaming Authorities may investigate any individual who has a material relationship or involvement with the Company 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 the Company must file applications with the Nevada Gaming Authorities and may be
required to become licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in the Company's gaming
activities 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

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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, the Company
would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company 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 is required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities, financial
transactions, gaming revenues and gaming expenditures by the Company must be reported to, or approved by, the Nevada Commission.

If
it were determined that the Nevada Act was violated by the Company, the gaming licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with
certain statutory and regulatory procedures. In addition, 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, suspension or revocation of any gaming license could have a materially adverse effect on 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 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

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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 himself or herself as a 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, 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

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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 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 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 at 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 grounds of personal unsuitability.

In
addition to gaming-related licensing and compliance, the sale of alcoholic beverages at gaming establishments is subject to licensing, control and regulation by applicable regulatory
agencies. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could
(and revocation would) have a materially adverse effect on the operations of such gaming establishments.

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

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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.The Company currently is also licensed to operate (in addition to Nevada and New Jersey) at various
levels in California (tribal), Colorado, Illinois, Indiana, Iowa, Minnesota, Mississippi, New Mexico, North Carolina (tribal), and Washington. Although the regulations in these jurisdictions are not
identical to the States of Nevada and New Jersey, their material attributes are substantially similar, as described 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, 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 materially adverse
effect on the Company's operations.

Intellectual Property

The Company does not rely on any patents, trademarks, licenses or franchises with respect to its finance and lease operations. Previously, in conjunction with its
discontinued operations, the Company entered into agreements with third parties to secure various intellectual property rights with respect to

11

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certain table games and related technology. As part of its decision to discontinue certain operations, the Company either terminated said agreements or entered into mutual termination agreements with
respect to said agreements.

Employees

As of December 31, 2002, the Company employed 79 persons, including 4 in direct sales and marketing, 6 in retail store sales, 12 in equipment remarketing,
16 in general and administrative functions (including accounting, credit, legal, compliance and human resources) and 41 in casino operations.

ITEM 2. DESCRIPTION OF PROPERTIES

The Company's corporate offices and its equipment remarketing facilities are located in approximately 60,000 square feet of leased space in Las Vegas, Nevada. The
Company pays monthly rent of approximately $47,000 pursuant to leases expiring through December 31, 2004. The Company considers the facilities as adequate and suitable for the purposes they
serve.

In
addition, the Company owns a 6,500 square foot building situated on approximately .15 acres located in downtown Reno, Nevada where it operates Rocky's Casino and Sports Bar. This land
and building collateralize a $3 million line of credit that bears interest at the rate of prime plus 1.5% and matures in October 2003. As of December 31, 2002, the outstanding
balance on this line of credit was $388,000.

ITEM 3. LEGAL PROCEEDINGS

In May 2002, the Company received notification that Tekbilt, Inc. ("Claimant") had submitted a Demand for Arbitration to the American Arbitration
Association alleging breach of a Distributor Agreement (the "Agreement") with Claimant in connection with the Company's discontinued operations. In the notification, Claimant alleged that such breach
has caused Claimant to sustain substantial damages. The monetary damages sought by claimant are unspecified. The Company timely filed its Answering Statement and has asserted a Counterclaim against
Claimant. The Company seeks the dismissal of Claimant's claims in their entirety, an award of monetary damages and reimbursement of all costs and expenses incurred by the Company as a result of the
case, including attorneys fees. Neither party has specified its alleged damages. The case is in a preliminary stage, and the hearing before the American Arbitration Association panel is expected to
occur in 2003. Although unable to predict the outcome of this matter, management believes the Claimant's claim to be without merit and will vigorously pursue all legal defenses available to it.
Management, further, does not believe that the outcome of such arbitration is likely to have a material adverse effect on the Company. Accordingly, no accounting recognition has been provided for
losses, if any.

On
March 7, 2003, the Company announced that it had been named as a defendant in a purported class action lawsuit filed by a shareholder in District Court, Clark County, Nevada.
The complaint alleges that the members of the Company's Board of Directors violated their fiduciary duties in approving a letter of intent with respect to the proposal submitted by a management group
to acquire shares of
common stock of the Company. The complaint seeks to enjoin the management group from acquiring the shares. The Company believes the allegations are without merit and intends to vigorously defend the
lawsuit.

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

During the quarter ended December 31, 2002, no matter was submitted to a vote of security holders.

12

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock has traded on the Nasdaq SmallCap market since the approval by Nasdaq of the Company's application for listing on March 8, 2000,
and trades under the symbol PDSG. The following table sets forth the high and low bid information 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:

Price Range of Common Stock2002

2001High

Low

High

LowFirst Quarter

$
4.92

$
3.00

$
2.37

$
1.22Second Quarter


4.15


0.90


5.29


1.94Third Quarter


1.50


0.43


5.29


1.58Fourth Quarter


1.77


0.81


3.65


2.32


As
of March 5, 2003, the Company's common stock was held by 49 holders of record and an estimated 800 additional beneficial owners.

No
dividends were paid during the years ended December 31, 2002 and 2001. 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. For additional information on restrictions on the payment of dividends, see Note 4 to the Company's
Consolidated Financial Statements included in Part IV, Item 15.

Equity Compensation Plan Information

With respect to the equity compensation plans, the Company has adopted the 1993 Stock Option Plan and the 2002 Stock Option Plan that are authorized to issue up
to 1,600,000 shares and 800,000 shares, respectively, of the Company's common stock. The Company has not issued any stock options or other equity compensation other than through the 1993 Stock Option
Plan, and has yet to issue any stock options or other equity compensation through the 2002 Stock Option Plan. The following table summarizes the Company's equity compensation plan that has been
approved by stockholders and has not been approved by stockholders.

|Plan category                                          |  | (a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights |  | (b)
Weighted-average
exercise price of
outstanding options,
warrants and rights |      | (c)
Number of securities remaining available
for future issuance under equity
compensation plans (excluding securities
reflected in column (a))
|------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by stockholders     |  | 735,000                                                                                         |  | $                                                                               | 3.53 |                                                                                                                                                
|Equity compensation plans not approved by stockholders |  | 0                                                                                               |  |                                                                                 | 0    |                                                                                                                                                
|                                                       |  |                                                                                                 |  |                                                                                 |      |                                                                                                                                                
|                                                       |  | 735,000                                                                                         |  | $                                                                               | 3.53 |                                                                                                                                                
|                                                       |  |                                                                                                 |  |                                                                                 |      |                                                                                                                                                

Unregistered Issuances of Securities

During the year ended December 31, 2002, the Company did not issue any unregistered securities.

13

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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.

|                                                                                    |                                                 | Years Ended December 31 |       
|----------------------------------------------------------------------------------- | ----------------------------------------------- | ----------------------- | ------
|
|
|Income Statement Data                                                               |                                                 |                         |       
|Revenues:                                                                           |                                                 |                         |       
|                                                                                    | Equipment sales and sales-type leases           |                         | $     
|                                                                                    | Operating leases rentals                        |                         |       
|                                                                                    | Finance income                                  |                         |       
|                                                                                    | Fee income                                      |                         |       
|                                                                                    | Casino                                          |                         |       
|                                                                                    |                                                 |                         |       
|                                                                                    |                                                 |                         | 40,327
|                                                                                    |                                                 |                         |       
|Costs and expenses:                                                                 |                                                 |                         |       
|                                                                                    | Equipment sales and sales-type leases           |                         |       
|                                                                                    | Depreciation on operating leases                |                         |       
|                                                                                    | Interest                                        |                         |       
|                                                                                    | Casino                                          |                         |       
|                                                                                    | Selling, general and administrative             |                         |       
|                                                                                    | Depreciation and amortization on other property |                         |       
|                                                                                    | Collection and asset impairment provisions      |                         |       
|                                                                                    |                                                 |                         |       
|                                                                                    |                                                 |                         | 41,965
|                                                                                    |                                                 |                         |       
|Income (loss) from continuing operations before income taxes and extraordinary item |                                                 |                         | (1,638
|Income taxes (benefit)                                                              |                                                 |                         | (528  
|                                                                                    |                                                 |                         |       
|Income (loss) from continuing operations before extraordinary item                  |                                                 |                         | (1,110
|Income (loss) from discontinued operations, net of income taxes                     |                                                 |                         | (3,269
|Extraordinary gain on early extinguishment of debt, net of income tax               |                                                 |                         |       
|                                                                                    |                                                 |                         |       
|Net income (loss)                                                                   |                                                 | $                       | (4,379
|                                                                                    |                                                 |                         |       
|Net income (loss) per common share:                                                 |                                                 |                         |       
|                                                                                    | Basic                                           |                         | $     
|                                                                                    | Diluted                                         |                         |       
|Weighted average shares outstanding                                                 |                                                 |                         |       
|                                                                                    | Basic                                           |                         |       
|                                                                                    | Diluted                                         |                         |       
|
|(in thousands)                                                                      |                                                 |                         |       
|Total assets                                                                        |                                                 | $                       | 97,838
|Notes payable and subordinated debt                                                 |                                                 |                         | 69,031

14

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

OVERVIEW

The Company is engaged in the business of leasing and other financing of gaming equipment and remarketing previously leased gaming devices to casino operators.
The gaming equipment financed by the Company consists mainly of slot machines, video gaming machines and other gaming devices. In addition, the Company finances furniture, fixtures and other
gaming-related equipment, including gaming tables and chairs, restaurant and hotel furniture, vehicles, security and surveillance equipment, computers and other office equipment. The Company believes
it is currently the only independent leasing company licensed in the states of Nevada, New Jersey, California, Colorado, Illinois, Indiana, Iowa, Minnesota, Mississippi, New Mexico and Washington to
provide this financing alternative. In early 2001 the Company received a nonrestricted gaming license to operate The Gambler, now known as Rocky's Casino and Sports Bar, in Reno, Nevada.

STRATEGY

The Company's strategy is to increase recurring revenues and cash flows through originations of leases. In addition to its leasing activities, the Company also
originates note transactions which it generally sells to third parties. 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 remarket used gaming devices enhances the gaming devices' values at the end of an operating lease and facilitates
additional financing transactions. The following schedule shows the amount of leases and collateralized equipment loans ("financing transactions") originated (in thousands):

2002

2001

2000Financing transactions originated and sold to third parties

$
5,400

$
1,000

$
14,500Financing transactions originated for the Company's portfolio


46,400


43,088


13,900$
51,800

$
44,088

$
28,400


ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and
assumptions that affect reported amounts and disclosures, some of which may require revision in future periods. The most significant estimates are those involving residual values, collectibility of
notes, accounts and leases receivable and valuation of equipment held for sale or lease.

The
following is a summary of what management believes are the critical accounting policies related to the Company. The application of these policies, in some cases, requires the
Company's management to make subjective judgments regarding the effect of matters that are inherently uncertain. See Note 1, "Summary of Significant Accounting Policies," to the Company's
Consolidated Financial Statements included in Part IV, Item 15 for a more detailed discussion of the Company's accounting policies.

Revenue and Cost Recognition.The Company records revenue, primarily, in accordance with SFAS
No. 13, Accounting for Leases, and SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, along with other related guidance under generally

15

---

accepted accounting principles and other regulatory guidance related to revenue recognition applicable to its other business segments.

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. The issues specific to operating, direct finance, sales-type and leveraged leases are as follows:



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
held for sale or lease, consisting primarily of gaming devices, 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 used gaming devices or upon the exercise of a purchase option under an operating lease.

Reserves For Losses.An allowance for losses is maintained at levels determined by the Company's management to adequately
provide for collection losses and any other-than-temporary declines in other asset values. In determining losses, the Company's management considers economic conditions, the
activity in used equipment markets, the effect of actions by equipment manufacturers, the financial condition of customers, the expected courses of 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. 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 net realizable value of the asset. Asset charge-offs are recorded upon the disposition of the underlying assets. Management reviews the Company's assets on a quarterly
basis to determine the adequacy of the allowances for losses.

RESULTS OF OPERATIONS

During 2002, 2001 and 2000, the Company had net income (loss) of $(4,379,000), $1,430,000 and $728,000, respectively, on revenues of $40.3 million in 2002,
$39.1 million in 2001 and $51.4 million in 2000.

The
Company's operating results are subject to quarterly and annual 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 affect the demand for remarketed gaming devices, economic conditions in which a detrimental change
can cause customers to

16

---

delay new investments or 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, 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. 2002 and 2001 are no exception. Transactions, including individually significant ones, can be in the negotiation and documentation stages
for several months, and recognition of the resulting revenue and 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 that may be expected for any other period.

The
following information is derived from the Company's Consolidated Statements of Net Income (Loss) appearing on page F-4 of Part IV, Item 15, and is presented solely
to facilitate the discussion of results of continuing operations that follows (in thousands):

|                                                                                              |  | Condensed
Consolidated
Statements of Income
For the Years
Ended December 31, |        |   |   | Condensed
Consolidated
Statements of Income
For the Years
Ended December 31, |   |   |       
|--------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- | ------ | - | - | ---------------------------------------------------------------------------- | - | - | ------
|
|
|Equipment sales and sales-type leases gross margin                                            |  | $                                                                            | 1,597  |   | $ | 1,214                                                                        |   | $ | 383   
|Finance and lease gross margin                                                                |  |                                                                              | 9,214  |   |   | 14,412                                                                       |   |   | (5,198
|Fee income                                                                                    |  |                                                                              | 1,104  |   |   | 4,750                                                                        |   |   | (3,646
|Interest expense                                                                              |  |                                                                              | (7,832 | ) |   | (9,704                                                                       | ) |   | 1,872 
|Casino gross margin                                                                           |  |                                                                              | (841   | ) |   | 86                                                                           |   |   | (927  
|Selling, general and administrative                                                           |  |                                                                              | (3,985 | ) |   | (5,619                                                                       | ) |   | 1,634 
|Depreciation and amortization on other property                                               |  |                                                                              | (754   | ) |   | (868                                                                         | ) |   | 114   
|Collection and asset impairment provisions                                                    |  |                                                                              | (141   | ) |   | (147                                                                         | ) |   | 6     
|                                                                                              |  |                                                                              |        |   |   |                                                                              |   |   |       
|Income (loss) from continuing operations before income taxes (benefit) and extraordinary item |  | $                                                                            | (1,638 | ) | $ | 4,124                                                                        |   | $ | (5,762
|                                                                                              |  |                                                                              |        |   |   |                                                                              |   |   |       

17

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EQUIPMENT SALES AND SALES-TYPE LEASES

The table below summarizes the results of equipment sales and sales-type leases:

Years Ended December 31,2002

2001

2000(in thousands)Revenues:Sales-type leases

$
4,523

$
1,019

$
23,038Equipment sales


3,725


5,002


4,073Sale of equipment at lease termination


10,659


4,957


4,17718,907


10,978


31,288Cost of goods sold:Sales-type leases


3,878


807


19,359Equipment sales


3,047


4,488


2,837Sale of equipment at lease termination


10,385


4,469


3,90617,310


9,764


26,102Gross margin

$
1,597

$
1,214

$
5,186


The
Company realizes equipment sales and sales-type lease gross margin when a lessee purchases leased equipment (1) for which the Company is paid cash or receives a
promissory note (reported as "equipment sales revenue") and (2) that the Company finances via a sales-type lease (reported as "sales-type leases revenue"). Gains
generally arise upon lease termination in two ways:



Revenue
from equipment sales and sales-type leases varies, in part, on a yearly basis as a result of lessees' decisions about continued use of the equipment after lease end.
Should a lessee decide to continue to use the equipment, the Company will typically sell the equipment to the lessee (for cash, for a promissory note, or under a sales-type lease) for a
profit. Similarly, a lessee may choose to terminate a lease early and buy the equipment, usually resulting in a gain for the Company. Therefore in originating leases, the Company attempts to identify
situations where the lessee would tend to keep the equipment beyond the lease period. Such situations increase the chance that the lessee will buy the equipment at the end of the lease term or
terminate the lease early and buy the equipment. Revenue from equipment sales and sales-type leases is also dependent, to a large extent, upon the number of leases maturing in a particular
period, since a greater number of leases increases the number of opportunities to sell equipment to the lessee at a gain.

Sales-type
lease revenue in 2000 reflects a higher number of sales-type leases than in the most recent two years. In 2000, a large number of lessees early
terminated leases and financed the acquisition of the equipment through a sales-type lease. In 2002, one large finance lease was early terminated and the lessee purchased the equipment for
cash. The resulting transaction was reported as a sale of equipment at lease termination.

18

---

FINANCE AND LEASE GROSS MARGIN

Finance and lease gross margin consists of the following (in thousands):

Years Ended December 31,2002

2001

2000Operating lease rentals

$
13,691

$
11,142

$
10,497Finance income


4,911


10,912


7,509Depreciation on operating leases


(9,388
)

(7,642
)

(8,217
)$
9,214

$
14,412

$
9,789


Finance
and lease gross margin declined in 2002 primarily as a result of non-recurring income recognized in 2001 related to the workout and settlement of claims related to
the Company's then largest customer ("the Customer"). Equipment under operating leases, net was $42.5 million and $22.6 million at December 31, 2002 and 2001, respectively. Notes
and leases receivable amounted to $32.0 million and $43.5 million at December 31, 2002 and 2001, respectively. The changes reflect the Company's increased emphasis on originating
a greater proportion of operating leases than notes and finance leases. The Company expects that it will continue to originate a greater proportion of operating leases to hold in its portfolio.
Consequently, the portfolio of notes, accounts and leases receivable is expected to continue to decline in 2003.

For
notes and finance leases, finance income less interest cost associated with financing the underlying transaction is recognized as a constant percentage of the investment in the
transaction over its life. Because the Company's investment in the transaction declines as monthly payments are received, a greater proportion of the inherent transaction profit is recognized early in
its life. Because the portfolio of notes and finance leases is declining in size as it, on average, matures, finance income less interest cost will continue to decline.

Operating
lease margin (rent less depreciation) is constant over the life of the lease. However, because the interest cost associated with financing the operating lease is greater in the
early term of the lease and declines as the lease matures, leasing margin, less interest cost, from an operating lease will be lower at the lease inception and increase over the life of the lease.
Because the Company has originated an increasing number of operating leases, leasing margin, less interest expense, has increased at a lesser rate than the increase in the size of the underlying
operating lease portfolio. This trend is expected to continue as the Company continues to originate a greater amount of operating leases than notes and finance leases.

Finance
and lease gross margin increased from 2000 to 2001, primarily due to finance income related to the Customer and an increase in operating lease margin of $1.2 million, or
54%, from $2.3 million in 2000 to $3.5 million in 2001. The increase in operating lease gross margin is due to a larger portfolio in 2001 and our normal recurring portfolio review that
resulted in acceleration of depreciation on certain leases in 2000.

FEE INCOME

Fee income includes primarily commissions earned for arranging financing between unrelated parties and for financial advisory services. Fee income also includes
gross profit from the sale to third parties of the Company's interests in notes receivable and direct finance leases. Upon sale, the Company records fee income equal to the difference between the
sales price and the carrying value of the related asset. 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.

19

---

Fee
income was $1.1 million, 4.7 million and $2.1 million in 2002, 2001 and 2000, respectively. Fee income in 2001 was higher than 2002 and 2000, primarily because of fees earned for
financial advisory services for the Customer.

INTEREST EXPENSE

Interest expense decreased to $7.8 million in 2002 from $9.7 million in 2001 due to lower levels of borrowings combined with generally lower
interest rates. Interest expense increased in 2001 from $8.4 million to $9.7 million in 2001 due to higher levels of borrowings.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

The decrease of $1.6 million in selling, general and administrative expenses in 2002 compared to 2001 reflects:



The
increase of $1.3 million in selling, general and administrative expenses in 2001 compared to 2000 reflects:



COLLECTION AND ASSET IMPAIRMENT PROVISIONS

The collection and asset impairment provisions represent the Company's estimate of the amounts expected to be lost related to specific accounts, including
estimated losses on future non-cancelable lease rentals and notes receivable. In 2002, the provision reflects reserves for various uncollectible receivables. In 2001, provisions made for
one significant customer in 1999 and 2000 were reversed as the financial condition of the customer improved significantly. The receivables from this customer were collected in full in
March 2002. The 2000 provision reflects one customer that defaulted under its financing agreements.

INCOME TAXES

The Company's effective tax benefit rate was approximately 32% for 2002. The effective rate for 2002 is lower than the federal statutory rate of 34% due primarily
to miscellaneous costs that are non-deductible for federal income tax purposes and therefore do not provide any tax benefit. The Company's effective tax rate was approximately 45% for
2001. The effective rate for 2001 is higher than the federal statutory rate of 34% due primarily to non-deductible amortization of asset/loan acquisition costs acquired through the
issuance of warrants. The Company's effective tax benefit rate was

20

---

approximately 41% for 2000, and is higher than the federal statutory rate of 34% due primarily to non-deductible amortization.

The
Company's deferred tax assets include net operating loss ("NOL") carryovers of approximately $600,000, which expire in 2022. The NOL may also be carried back up to
five years. The NOL is available to offset federal income tax liability.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2002, the Company had $115,000 in cash and cash equivalents, and $4.1 million in availability on lines of credit. The funds
necessary to support the Company's activities have been provided by cash flows generated primarily from operating activities 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. 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.

On
February 24, 2003, the Company announced that it had entered into a letter of intent with respect to a proposal submitted by the Management Group to acquire all of the
approximately 69% of the outstanding shares of the Company's common stock not already owned by the Management Group. Under the terms of the letter of intent, the Company will pay certain fees and
costs associated with the transaction, consisting primarily of legal costs and investment banking fees. Management estimates that such costs will be in the range of $500,000 to $700,000, with said
costs being paid from general corporate funds.

The
Company prepares its balance sheet in an unclassified format, as is customary in its industry, because the working capital concept is not particularly meaningful for its business.
However, if the Company did prepare a classified balance sheet, the components of working capital, with the changes therein, would be presented as shown in the following table. The following table
presents the components of consolidated working capital at December 31, 2002 and 2001 (in thousands):

|                                                           |  | Balance at December 31, |        |  |  
|---------------------------------------------------------- |  | ----------------------- | ------ |  | -
|
|Cash and cash equivalents                                  |  | $                       | 115    |  | $
|Current portion of notes and lease receivables, net        |  |                         | 11,081 |  |  
|Current payments due from equipment under operating leases |  |                         | 18,821 |  |  
|Equipment held for sale or lease                           |  |                         | 3,350  |  |  
|Other current assets                                       |  |                         | 9,806  |  |  
|                                                           |  |                         |        |  |  
|Total current assets                                       |  |                         | 43,173 |  |  
|                                                           |  |                         |        |  |  
|Customer deposits                                          |  |                         | 3,440  |  |  
|Current portion of notes payable and subordinated debt     |  |                         | 30,671 |  |  
|Accounts payable and other accrued expenses                |  |                         | 2,832  |  |  
|                                                           |  |                         |        |  |  
|Total current liabilities                                  |  |                         | 36,943 |  |  
|                                                           |  |                         |        |  |  
|Net working capital (deficit)                              |  | $                       | 6,230  |  | $
|                                                           |  |                         |        |  |  

21

---

CASH FLOW

Net cash provided by continuing operating activities amounted to $16.4 million in 2002 compared to $13.3 million in 2001. Net cash provided by
continuing operating activities includes cash used for originating notes and direct finance leases, and cash provided by collections on notes and direct finance lease receivables and proceeds from
sale or discounting of notes and leases receivable, as well as the collection of deposits on originated leases and notes receivable and the return to customers of deposits at maturity of a lease or
note. The higher level of cash provided by continuing operating activities in 2002 primarily reflects higher proceeds from those activities. Without considering those activities, net cash provided by
operating activities was approximately $6 million in 2002, compared to approximately $13 million in 2001. The decline reflects the Company's operating losses for 2002. With respect to
the Company's discontinued operating activities, the Company used net cash of $1.6 million in 2002 and $1.5 million in 2001.

During
the year ended December 31, 2001, the cash provided by investing activities was $4.0 million compared to $22.4 million of cash used for investing activities
in 2002. This decrease in cash provided by investing activities is primarily a result of the sale of equipment in 2001. In 2002, cash provided by financing activities was approximately
$3.6 million, and in 2001, cash used in financing activities was approximately $13.8 million. The increase in cash provided by financing activities reflects the cash flow from the sale
of equipment that was used to repay debt in 2001.

See
Note 4 to the Company's Consolidated Financial Statements included in Part IV, Item 15 for a description of the Company's debt financing.

The
Company's current financial resources, including estimated cash flows from future operations and the lines of credit which total approximately $16.9 million (of which
$4.1 million is available as of December 31, 2002), 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 from which it borrows money related to specific financial transactions and to which it sells financial transactions on a
regular basis. The Company is also actively pursuing additional financing in the form of subordinated debt from a private placement, the proceeds of which would be secured by new finance originations.
No assurance can be given that the Company will be successful in completing this financing.

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

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As of December 31, 2002, the Company's contractual cash obligations under its lines of credit, equipment notes, subordinated debt and operating leases for
the next five years are as follows (in thousands):

|                              |  |   |        | Payments due by Period
|----------------------------- |  | - | ------ | ----------------------
|
|Lines of credit               |  | $ | 12,853 |                       
|Equipment notes (recourse)    |  |   | 21,838 |                       
|Equipment notes (nonrecourse) |  |   | 25,726 |                       
|Subordinated debt             |  |   | 9,162  |                       
|Operating leases              |  |   | 2,717  |                       
|                              |  |   |        |                       
|Total                         |  | $ | 72,296 |                       
|                              |  |   |        |                       

22

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For
additional information, see Note 4, "Notes Payable and Subordinated Debt," and Note 11, "Commitments and Contingencies," of the Company's Consolidated Financial
Statements included in Part IV, Item 15.

FORWARD-LOOKING STATEMENTS

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

CAUTIONARY STATEMENTS

As provided for under the Private Securities Litigation Reform Act of 1995, the Company wishes to caution investors that the following important risk factors,
among others, in some cases have affected and in the future could affect the Company's actual results of operations and cause such results to differ materially from those anticipated in the
forward-looking statements made in this document and elsewhere by or on behalf of the Company.

Effects of Proposed Going Private Transaction.The proposed going private transaction announced on February 24, 2003
may cause substantial time commitments for the Company's executive officers and directors. Should these matters distract management from the Company's business, the Company's operations could be
adversely affected.

Strict Regulation by Gaming Authorities.Financing gaming equipment and remarketing gaming machines to casino operators in
the United States are subject to strict regulation under various state, county and municipal laws. The Company and its required officers and certain shareholders have received the necessary licenses,
permits and authorizations required to own and distribute gaming machines in Nevada, New Jersey, Mississippi, California, Colorado, Iowa, Indiana, Illinois, New Mexico, Minnesota and Washington.
Additionally, the Company has received its slot route operator's and operator's licenses in Nevada. Failure of the Company or any of its key personnel to obtain or maintain the requisite licenses,
permits and authorizations would have a materially adverse effect on the Company. Expansion of the Company's activities may be hindered by delays in obtaining requisite state licenses or the inability
to obtain such licenses. No assurance can be given as to the term for which the Company's licenses will be renewed in a particular jurisdiction or as to what license conditions, if any, may be imposed
by such jurisdiction in connection with any future renewals. The Company cannot

23

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predict the effects that adoption of and changes in gaming laws, rules and regulations might have on its future operations.

Competition.In recent years, the Company has focused primarily on providing financing to the gaming industry, including
remarketing previously leased gaming machines to casino operators in the United States. 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. With regard to casino operations, gaming of all types is available throughout Nevada, including many locations that compete directly or indirectly with Rocky's in Reno, Nevada. The operation
of casinos is a highly competitive business. In fact, Reno, Nevada casinos are anticipated to suffer greater competitive risks from a major Native American owned casino complex
scheduled to open in June 2003 near Sacramento, California. The principal competitive factors in the industry include the quality and location of the facility, the nature and quality of the
amenities and customer services offered and the implementation and success of marketing programs. Significant competition encountered by the Company may have a materially adverse effect on the
Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors.

Demand for the Company's Products and Services.The Company believes that its ability to increase revenues, cash flow and
profitability will depend, in part, upon continued market acceptance of the Company's products and services. There can be no assurance that the market acceptance of the Company's products and services
will continue. Changes in market conditions in the gaming industry and in the financial condition of casino operators, such as consolidation within the industry or other factors, could limit or
diminish market acceptance of these products and services. Historically, the Company has experienced significant nonrecurring revenues in connection with its financing and sales of gaming equipment to
casino operators. The Company has attracted new customers to replace these nonrecurring revenues. Insufficient market acceptance of the Company's products and services or a decline in the public
acceptance of gaming could have a materially adverse effect on the Company's business, financial condition and results of operations.

24

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Continued Availability of Adequate Financing.The amount and number of financing transactions that can be originated by the
Company are directly dependent upon and limited by its ability to fund such transactions, either through the sale of such transactions to institutional investors or through the Company's working
capital, lines of credit and other financing sources. In addition, the Company desires to hold a greater volume of transactions, particularly leases, in its portfolio. There is no assurance that the
Company's present funding sources will be willing to purchase future transactions, expand existing lines of credit, or continue to provide the Company with a source of funds under acceptable terms.
Further, there can be no assurance that the Company would be able to locate new funding sources, if needed. As a result, funding for the Company's transactions may not be available on acceptable terms
or on a timely basis, if at all. The inability of the Company to obtain suitable and timely funding for its transactions could have a materially adverse effect on the Company's operations.

Ability to Recover Investment in Equipment.The gaming equipment leased under operating leases by the Company and the
inventory of gaming devices represents a substantial portion of the Company's capital. Under the operating leases, the Company retains title to the gaming equipment and assumes the risk of not
recovering its entire investment in the gaming equipment through either re-leasing or selling the gaming equipment. At the inception of each operating lease, the Company estimates the
residual value of the leased equipment, which is the estimated market value of the equipment at the end of the initial lease term. The actual residual value realized may differ from the estimated
residual value, resulting in a gain or loss when the leased equipment is sold or re-leased at the end of the lease term. The inability to re-lease or sell the gaming equipment
on favorable terms could have a materially adverse effect on the Company.

Risks Relating to Financing Transactions.The Company has funded selected gaming equipment transactions entirely with its own
working capital or with borrowed funds rather than immediately selling the transactions to institutional investors. In certain situations, the Company retains a portion of the transactions it
originates. This approach requires substantial capital and places the Company at risk for its investment in the transactions, which may subject the Company to greater loss in the event of a default by
the lessee or borrower, or an inability to sell the transactions to institutional investors after a period of temporary investment by the Company. In connection with its financing transactions, the
Company's level of risk depends primarily on the creditworthiness of the lessee or borrower and the underlying collateral.

No
assurance can be given that the Company will not incur significant losses with respect to financing transactions in the future, or that such losses will not have a materially adverse
effect on the Company's financial condition.

Risks Relating to Sovereign Nation Status of Certain Customers.The Company has provided, and may provide in the future,
financing to Native American tribes. Native American tribes in the United States generally enjoy sovereign immunity from lawsuits, similar to that of the United States government. Although the Company
generally obtains a waiver of sovereign immunity, there can be no assurance that a tribe will not assert sovereign immunity, even if such right has been waived. The law regarding sovereign immunity is
unsettled. If any Native American tribe defaults and successfully asserts its right of sovereign immunity, the Company's ability to recover its investment and originate and sell future Native American
gaming transactions could be materially adversely affected.

Dependence on Current Management.The Company's success is largely dependent on the efforts of Johan P. Finley, its founder
and Chief Executive Officer. Although the Company maintains $2 million of "key person" life insurance and has an employment agreement with Mr. Finley, the loss of Mr. Finley's
services could have a materially adverse effect on the Company's business.

Potential Fluctuations in Results.The Company's quarterly results have historically fluctuated due to the timing of
completion of large financing transactions, as well as the timing of recognition of the

25

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resulting fee income upon the completion of brokered transactions. Thus, the results of any quarter are not necessarily indicative of the results that may be expected for any other interim period.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Control by Current Management.Johan P. Finley, the Company's founder and Chief Executive Officer, owns approximately 23.5%
of the Company's outstanding common stock. In addition, Mr. Finley's wife and children own approximately 7.1% of the Company's outstanding common stock. Thus, Mr. Finley effectively
controls the election of all members of the Company's Board of Directors and determines all corporate actions. Such ownership may discourage acquisition of large blocks of the Company's securities and
may depress the price of the common stock and have an anti-takeover effect.

Anti-Takeover Provisions; Preferred Stock.The Company's Amended and Restated Articles of Incorporation provide
that no investor may become a holder of 5% or more of the Company's stock without first agreeing to consent to a background investigation, provide a financial statement and respond to questions from
gaming regulators. Such ownership limitations may discourage acquisition of large blocks of the Company's equity securities, may depress the price of the Company's common stock and have an
anti-takeover effect.

The
Company's Amended and Restated Articles of Incorporation authorize the Board of Directors to issue preferred stock and establish the rights and preferences of such shares without
stockholder approval. The voting rights of the preferred stock may be greater than the voting rights of common stock in certain circumstances, and thus the issuance of preferred stock may diminish the
voting power of holders of common stock and make it more difficult for a third party to acquire the Company.

The
Company's directors are subject to investigation and review by gaming regulators in jurisdictions in which the Company is licensed or has applied for a license. Such investigation
and review of the Company's directors may have an anti-takeover effect.

As
a Minnesota corporation, the Company is subject to certain "anti-takeover" provisions of the Minnesota Business Corporation Act. These provisions and the power to issue
additional stock and to establish separate classes or series of stock may, in certain circumstances, deter or discourage takeover attempts and other changes in control of the Company not approved by
the Board.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. A changing interest rate environment will not significantly impact the Company's margins since the effects of higher or lower borrowing costs would be reflected in the rates for newly
originated leases or collateralized loans. Therefore, consistent with the Company's strategy and intention to hold most of its originations to maturity, the Company does not have a significant
exposure to interest rate changes.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements, including notes thereto, are listed in Part IV, Item 15 of this report and are included after the
signature page beginning on page F-1. The Company's supplementary financial data is contained in Note 14 to the Company's Consolidated Financial Statements.

26

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The number of directors currently serving on the Company's Board of Directors is six. Each director holds office until the next Annual Meeting of Shareholders or
until his or her successor is elected and qualified.

Certain
biographical information furnished by the Company's incumbent directors and executive officers is presented as follows:

JOHAN
P. FINLEY, age 41, is the founder of the Company and has been its Chief Executive Officer and Chairman of the Board of Directors since the Company's inception in
February 1988. He was President of the Company from its inception to July 1999. In addition, Mr. Finley was the President and Chief Executive Officer of RCM Inc. and Home
Products, Inc. from 1991 to 1994.

PETER
D. CLEARY, age 45, has been a member of the Company's Board of Directors since January 1996 and has been President, Chief Operating Officer and Treasurer of the Company
since July 1999. He was Executive Vice President of the Company from November 1998 to July 1999. Prior to that, Mr. Cleary served as Vice President and Chief Financial
Officer from September 1995 to November 1998. From 1980 to 1995, Mr. Cleary served in various positions with Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP), most
recently as Audit Manager.

JOEL
M. KOONCE, age 64, has been a member of the Company's Board of Directors since April 1994. From 1986 to 1998, he served as Group Vice President and Chief Financial and
Administrative Officer of CENEX, Inc., a distributor of petroleum and agronomy products and other farm supplies located in St. Paul, Minnesota. Prior to joining CENEX, Mr. Koonce served
in various management positions with Land O'Lakes, most recently as Vice President of Administration and Planning for Agricultural Services. Mr. Koonce served in various management positions
for General Mills from 1965 to 1981.

JAMES
L. MORRELL, age 49, has been a member of the Company's Board of Directors since March 1996, and is an independent financial consultant. From 1986 to 1995, Mr. Morrell was
employed by Dain Bosworth Inc. where he held a number of management positions, most recently Managing Director, Corporate Finance. During 1997, Mr. Morrell served as acting Chief Financial Officer of
Miller & Schroeder Financial, Inc., a company that has served as a lender to the Company. During
2001, Mr. Morrell served as President and Chief Financial Officer of The Marshall Group, a company that has provided investment banking services to the Company.

PATRICK
R. CRUZEN, age 56, has been a member of the Company's Board of Directors since June 2000. He is currently President of Cruzen & Associates, which offers a wide
range of project-based services to the gaming industry. Mr. Cruzen was previously President and Chief Operating Officer of Grand Casinos from 1994 to 1996. From 1990 until 1994,
Mr. Cruzen served as Senior Vice President of Finance/Administration of MGM Grand, Inc.

LONA
M.B. FINLEY, age 38, has been a member of the Company's Board of Directors since May 1998, and has been Chief Administrative Officer since July 1998, Executive Vice
President since February 2002, and Secretary since October 2002. Ms. Finley has served in various other positions with the Company since 1988, and is the spouse of Johan P.
Finley.

27

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Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors, executive officers and persons who beneficially own
more than 10% of a registered class of the Company's equity securities ("ten-percent owners") to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership
and subsequent reports of changes in ownership of a registered class of the Company's equity securities. Directors, executive officers and 10% owners are also required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.

To
the Company's knowledge, based solely on its review of the copies of such reports furnished to the Company and written representations that no other reports were required during the
fiscal year ended December 31, 2002, all Section 16(a) filing requirements applicable to its directors, executive officers and 10% owners were satisfied.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning the compensation of the Company's executive officers as of December 31, 2002 who received
total salary and bonus in excess of $100,000 for the year ended December 31, 2002 (the "Named Executive Officers").

|                                                                   |  |                |  |   |                         |  |   | Long-term
Compensation |  |                      | 
|------------------------------------------------------------------ |  | -------------- |  | - | ----------------------- |  | - | ---------------------- |  | -------------------- | 
|
|
|
|Johan P. Finley,
Chief Executive Officer and
Chairman of the Board |  | 2002
2001
2000 |  | $ | 341,250
325,000
325,000 |  | $ | 
50,000
50,000        |  | 25,000
25,000
25,000 | 
|Peter D. Cleary,
President, Chief Operating
Officer and Treasurer  |  | 2002
2001
2000 |  | $ | 210,000
195,000
140,000 |  |   | 

                  |  | 10,000

           | 

---

Employment Agreements

The following information describes the employment agreements of the Named Executive Officers.

In
February 1998, the Company entered into a five-year employment agreement with Johan P. Finley. The agreement provides for a monthly salary of $27,083 that is
subject to annual increases as recommended by the Compensation Committee and approved by the Board of Directors. In January 2002, Mr. Finley received a salary increase to $28,437 per
month. Mr. Finley also receives a grant of 25,000 stock options each year during the term of the agreement, each of which vests over a five year period. The agreement provides for annual
bonuses in increments of $50,000 if the Company meets certain earnings per share projections. The agreement provides that Mr. Finley is entitled to an automobile of his selection, a life
insurance policy and certain other benefits that are generally available to salaried employees of the Company. The agreement also contains provisions regarding

28

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payments to be made to Mr. Finley in the event of a termination of his employment by the Company, change in control of the Company or a sale of the majority of the Company's assets or stock.
Mr. Finley's employment contract was extended by vote of the Board of Directors on February 10, 2003 for an additional two-year period, and included modifications to the
change in control provisions included in the agreement. As modified, Mr. Finley is entitled to a reduced sale bonus of $250,000 in the event of the sale of a majority of the Company's assets or
stock to a single purchaser or group of purchasers.

In
September 1995, the Company entered into an employment agreement with Peter D. Cleary that renewed automatically for a one-year term in September 2000. In
January 2002, the Company renewed its employment agreement with Mr. Cleary. Under the terms of this one-year contract, Mr. Cleary receives a salary of $210,000 and a
grant of 10,000 stock options in 2002 and is eligible to earn an annual cash and/or stock option bonus based on various factors and in the sole and absolute discretion of the Compensation Committee.
Unless terminated by either party, the contract renews automatically each year.

Each
employment agreement is subject to earlier termination for cause or upon disability or death. In the event of termination for cause, each employment agreement provides for the
payment of salary through the effective date of the termination. In the event of termination without cause, each employment agreement provides for the accelerated vesting of the employee's unvested
options and the lump-sum payment by the Company of the employee's then current annual base salary. In the event of a change of control, each employment agreement permits the employee to
either remain an employee of the Company or its successor or terminate the agreement such that the employee's unvested options
become vested and the Company becomes obligated to provide the lump-sum payment of the employee's then current annual base salary. Mr. Finley has agreed not to compete with the
Company following termination of employment for a period of two years. Mr. Cleary has agreed not to compete with the Company following termination of employment for a period of six months.

The
Company's executive officers have waived the stock option grants that would otherwise have been granted to each of them in February 2003 pursuant to their employment
contracts.

Stock Options

In the event of dissolution, liquidation or a change in control of the Company (as described in the Company's stock option plans), all outstanding options under
the Company's stock option plans will become exercisable in full and each optionee will have the right to exercise his or her options or to receive a cash payment in certain circumstances.

The
following table summarizes certain information concerning stock option grants made in 2002 to the Named Executive Officers. Shown are hypothetical gains that could be realized for
the respective options, based on assumed rates of annual compound stock price appreciation of 5% and 10% from the date the options were granted over the term of the options. Any amount realized upon
exercise of the options will depend upon the market price of the Company's common stock at the time the option is exercised relative to the exercise price of the option. There is no assurance that the
amounts reflected in this table will be realized.

29

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2002 STOCK OPTION GRANTS

|                |  |        |  |       |   |   |      |  |         | Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
For Option Terms
|--------------- |  | ------ |  | ----- | - | - | ---- |  | ------- | -----------------------------------------------------------------------------------------------
|
|
|
|Johan P. Finley |  | 25,000 |  | 17.64 | % | $ | 4.60 |  | 1/31/07 |                                                                                                
|Peter D. Cleary |  | 10,000 |  | 7.06  | % |   | 3.78 |  | 3/01/12 |                                                                                                

---

2002 YEAR-END OPTION VALUE TABLE

The following table sets forth the number and aggregate dollar value of all unexercised options held by the Named Executive Officers as of the end of 2002. Since
the closing bid price of a share of the Company's common stock on December 31, 2002 was $1.12, there was no current value for the
unexercised, in-the-money options held by the Named Executive Officers. There were no options exercised by the Named Executive Officers during 2002.

|                |  | Number of Shares Underlying Unexercised Options
at December 31, 2002 |  | Value of Unexercised In-the-Money Options
at December 31, 2002
|--------------- |  | -------------------------------------------------------------------- |  | --------------------------------------------------------------
|
|
|Johan P. Finley |  | 51,000                                                               |  | 70,000                                                        
|Peter D. Cleary |  | 111,000                                                              |  | 43,000                                                        

Compensation of Directors

Each non-employee Board member receives an annual cash retainer of $10,000 and a fee of $1,750 for each in-person Board meeting attended
and $875 for each telephone meeting. Upon the initial election or appointment to the Board of Directors, each non-employee director is automatically granted a non-qualified
option to purchase 10,000 shares of the Company's Common Stock at its fair market value on the date of grant. The option has a term of ten years and becomes exercisable as to 2,500 shares on the date
of each Annual Meeting of Shareholders at which the director is re-elected or is serving an unexpired term. In addition, the Company grants a non-qualified stock option to
purchase 5,000 shares of the Company's Common Stock at its fair market value on the date of grant to each non-employee director on an annual basis. The option has a term of ten years and
becomes exercisable as to 1,000 shares on the date of each Annual Meeting of Shareholders at which the director is re-elected or is serving an unexpired term. The Company reimburses
officers and directors for their authorized expenses.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The Company's only outstanding class of voting securities is Common Stock, $0.01 par value, of which 3,801,939 shares were outstanding as of the close of business
on March 5, 2003. Each share of Common Stock is entitled to one vote on all matters put to a vote of shareholders. The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 5, 2003 by: (i) each person known by the Company to be the beneficial owner of more than

30

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5% of the outstanding shares of Common Stock; (ii) each director; (iii) each executive officer of the Company included in the Summary Compensation Table set forth provided in Item 11,
"Executive Compensation"; and (iv) all executive officers and directors as a group.

Unless
otherwise indicated, each of the following persons has sole voting and investment power with respect to the shares of Common Stock set forth opposite their respective names:

Name

Number(4)

Percent of ClassJohan P. Finley (1)(2)

980,786

25.3
%Peter D. Cleary (1)

127,358

3.3
%Lona M.B. Finley (1)(3)

401,377

10.2
%Joel M. Koonce (1)

23,500

*James L. Morrell (1)

20,000

*Patrick R. Cruzen (1)

5,000

*All officers and directors as a group (6 persons)

1,558,021

40.0
%


---

For
information with respect to the Company's equity plan information, see Item 5, "Market for Common Equity and Related Stockholder MattersEquity Compensation Plan
Information."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company entered into a letter of intent, dated as of February 23, 2003, with Johan P. Finley, Lona M.B. Finley and Peter D. Cleary with respect to a
proposed going private transaction. For additional information, see Item 1, "BusinessRecent Developments."

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.Within 90 days prior to the filing date of this Annual Report on
Form 10-K (the "Evaluation Date"), the Company evaluated, under the supervision of its Chief Executive Officer and its President, Chief Operating Officer, Treasurer and Interim
Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures. Based on this evaluation, the Company concluded that its disclosure controls and procedures are
effective to ensure that information the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in SEC rules and forms.

Changes in internal controls.Subsequent to the Evaluation Date, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

31

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

During
the quarter ended December 31, 2002, no reports on Form 8-K were filed by the Company. A Form 8-K was filed on February 27,
2003 for the purpose of reporting the letter of intent with respect to a proposal submitted by a management group consisting of Johan P. Finley, Lona M.B. Finley, and Peter D. Cleary to acquire all of
the approximately 69% of the outstanding shares of the Company's common stock not already owned by the management group for $1.25 per share in cash, and an additional $1.50 per share in deferred cash
payment rights. There were no other reports on Form 8-K during the period from January 1, 2003 to the filing date of this Annual Report on Form 10-K.

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 2003 Annual Meeting of Shareholders,
a copy of any of the exhibits listed below upon payment of $0.25 per page.

32

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EXHIBIT INDEX

|Exhibit
No. |  | Description                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Articles of Incorporation dated September 21, 1993 (4)                                                                                      
|3.2         |  | Articles of Amendment to Articles of Incorporation dated February 24, 1994 (4)                                                                                   
|3.3         |  | Articles of Amendment to Articles of Incorporation dated April 26, 1994 (4)                                                                                      
|3.4         |  | Articles of Amendment of Amended and Restated Articles of Incorporation dated May 3, 1995 (4)                                                                    
|3.5         |  | Bylaws of the Registrant (1)                                                                                                                                     
|3.6         |  | Certificate of Designation of Preferred Stock dated March 30, 1998 and filed as of April 7, 1998 (13)                                                            
|3.7         |  | Amended and Restated Bylaws dated May 12, 2000 (18)                                                                                                              
|3.8         |  | Articles of Amendment to Articles of Incorporation dated May 14, 2001 (14)                                                                                       
|4.1         |  | Specimen of Common Stock Certificate (1)                                                                                                                         
|4.2         |  | Indenture, between PDS Financial Corporation and U.S. Bank Trust National Association for the Registrant's 10% Senior Subordinated Notes Due July 1, 2004 (5)    
|4.3         |  | Indenture between PDS Gaming Corporation and U.S. Bank Trust National Association for the Registrant's 12% Senior Subordinated Notes Due July 1, 2007 (15)       
|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, dated February 1, 1998 (1)                                                                      
|10.6        |  | Form of Tax Indemnification Agreement between the Registrant and Johan P. Finley (1)                                                                             
|10.7        |  | Loan and Security Agreement, dated October 29, 1998 between Heller Financial, Inc., as lender, and the Registrant as Borrower (6)                                
|10.8        |  | Loan and Security Agreement, dated October 29, 1998 between Heller Financial, Inc., as lender, and PDS Financial Corporation-Nevada, as Borrower (6)             
|10.9        |  | Master Loan Agreement, dated December 15, 1998, by and among the Registrant, PDS Financial Corporation-Nevada and Miller & Schroeder Investments Corporation (6) 
|10.10       |  | Loan and Security Agreement, dated April 28, 1999 between SunWest Bank as Lender and PDS Financial Corporation-Nevada as Borrower (9)                            
|10.11       |  | Master Revolving Line of Credit  Promissory Note by and among the Registrant, PDS Financial Corporation  Nevada and Nevada State Bank, dated April 22, 1999 (9)
|10.12       |  | Master Loan Agreement, dated October 28, 1999, by and among the Registrant, PDS Financial Corporation-Nevada and Miller & Schroeder Investments Corporation (9)  
|            |  |                                                                                                                                                                  

33

---

|10.13 |  | Agreement for Technology Transfer, Manufacture, Distribution and Affecting Patent, Trademark and Copyrights by and between the Registrant and DigiDeal Corporation dated June 16, 1999 (8)                                                                            
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14 |  | Agreement for Technology Transfer, Manufacture, Distribution and Affecting Patent, Trademark and Copyrights (Sovereign Nations) by and between the Registrant and DigiDeal Corporation dated June 16, 1999 (8)                                                        
|10.15 |  | Amended and Restated Agreement for Technology Transfer, Manufacture, Distribution and Affecting Patent, Trademark and Copyrights by and between the Registrant and DigiDeal Corporation, effective June 16, 1999 and dated September 7, 2000
(12)                     
|10.16 |  | Deferred Compensation Plan, adopted February 4, 2000 and effective as of April 1, 2000 (10)                                                                                                                                                                           
|10.17 |  | Purchase Agreement by and among the Registrant, PDS Financial Corporation and C.J. Classics, Inc. dated June 12, 2000 (11)                                                                                                                                            
|10.18 |  |  Amended and Restated Agreement for Technology Transfer, Manufacture, Distribution and Affecting Patent, Trademark and Copyrights by and among the Registrant and DigiDeal Corporation, effective August 31, 1999 and dated February 23, 2001
(12)                   
|10.19 |  | Amended and Restated Agreement for Technology Transfer, Manufacture, Distribution and Affecting Patent, Trademark and Copyrights (Sovereign Nations) by and among the Registrant and DigiDeal Corporation, effective August 31, 1999 and dated February 23,
 2001 (13)
|10.20 |  |  License Agreement, dated March 20, 2001, between Action Gaming, Inc. and the Registrant (18)                                                                                                                                                                        
|10.21 |  | Promissory Note, dated May 14, 2001, between U.S. Bank National Association, as lender, and PDS Financial Corporation, et. al., as borrower (16)                                                                                                                      
|10.22 |  | Loan and Security Agreement (Full Recourse), dated as of July 26, 2001, between SunWest Bank, as lender, and PDS Financial Corporation-Nevada, as borrower (17)                                                                                                       
|10.23 |  | Loan Agreement, dated as of August 6, 2001, by and between Bremer Business Finance Corporation, as lead lender, and PDS Gaming Corporation, PDS Gaming Corporation-Nevada, PDS Financial Corporation-Mississippi and PDS Gaming Corporation-Colorado, as
borrower (17)
|10.24 |  | Master Guidance Line Promissory Note, dated October 18, 2001, by PDS Gaming Corporation, PDS Gaming Corporation-Nevada, PDS Financial Corporation-Mississippi and PDS Gaming Corporation-Colorado in favor of First International Bank & Trust
(18)                   
|10.25 |  |  Nonrecourse Proceeds Sharing Agreement, dated December 31, 2001, between Heller EMX, Inc. and the Registrant (18)                                                                                                                                                   
|10.26 |  |  Distributor Agreement, dated January 1, 2002, between TEKBILT, Inc. and the Registrant (18)                                                                                                                                                                         
|10.27 |  |  Remarketing and Repurchase Agreement, dated January 11, 2002, between TEKBILT, Inc. and the Registrant (18)                                                                                                                                                         
|10.28 |  | Credit Agreement, dated February 1, 2002, between Wells Fargo Bank, National Association, and the Registrant (18)                                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                       

34

---

|10.29 |  | Employment Agreement, dated February 28, 2002, between the Registrant and Peter D. Cleary (18)                                                                                                                                    
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.30 |  | Employment Agreement, dated February 28, 2002, between the Registrant and Lona M. B. Finley (18)                                                                                                                                  
|10.31 |  | Promissory Note, dated March 13, 2002, between First Savings Bank and the Registrant (19)                                                                                                                                         
|10.32 |  | 2002 Stock Option Plan (20)                                                                                                                                                                                                       
|10.33 |  | Amendment to Loan Agreement and Note, dated May 3, 2002, between U.S. Bank N.A. and the Registrant (19)                                                                                                                           
|10.34 |  |  Amendment and Termination Agreement, dated May 3, 2002, by and between DigiDeal Corporation and the Registrant (19)                                                                                                             
|10.35 |  | Master Loan Agreement, dated as of May 14, 2002, by and among PDS Gaming Corporation, PDS Gaming Corporation-Nevada, PDS Gaming Corporation-Mississippi, PDS Gaming Corporation-Colorado, and First State Bank of Thermopolis (21)
|10.36 |  |  First Amended and Restated Amendment and Termination Agreement, made on August 14, 2002 with an effective date of May 3, 2002, by and between PDS Gaming Corporation and DigiDeal Corporation (22)                              
|10.37 |  | Letter Agreement, dated as of February 10, 2003, between the Registrant and Johan P. Finley amending the Employment Agreement between the Registrant and Johan P. Finley, dated February 1, 1998                                  
|10.38 |  | Letter of Intent, dated February 23, 2003, by and between Johan P. Finley, Lona M.B. Finley, Peter D. Cleary and the Registrant                                                                                                   
|10.39 |  | Press release, dated February 24, 2003, announcing the execution of the Letter of Intent (23)                                                                                                                                     
|10.40 |  | Press release, dated February 26, 2003, announcing clarification regarding deferred payment rights described in the press release dated February 24, 2003 (23)                                                                    
|21.1  |  | Subsidiaries of the Registrant                                                                                                                                                                                                    
|23.1  |  | Consent of Independent Accountants                                                                                                                                                                                                
|99.1  |  | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350                                                                                                                                  

---

Footnotes to Exhibit Index

35

---

36

---



SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                     |  | PDS GAMING CORPORATION
|-------------------- |  | ----------------------
|Date: March 31, 2003 |  | By:                   

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 31, 2003.

|Name |  | Title                                
|---- |  | -------------------------------------
|     |  |                                      
|By   |  | /s/JOHAN P. FINLEYJohan P. Finley    
|By   |  | /s/PETER D. CLEARYPeter D. Cleary    
|By   |  | /s/LONA M.B. FINLEYLona M.B. Finley  
|By   |  | /s/PATRICK R. CRUZENPatrick R. Cruzen
|By   |  | /s/JOEL M. KOONCEJoel M. Koonce      
|By   |  | /s/JAMES L. MORRELLJames L. Morrell  

37

---

CERTIFICATIONS

I,
Johan P. Finley, Chief Executive Officer and Chairman of PDS Gaming Corporation, certify that:





|Date: March 31, 2003 |  | By: | /s/JOHAN P. FINLEYJohan P. Finley,
Chief Executive Officer and Chairman
|-------------------- |  | --- | -----------------------------------------------------------------------

38

---

I, Peter D. Cleary, President, Chief Operating Officer, Treasurer and Interim Chief Financial Officer of PDS Gaming Corporation, certify that:





|Date: March 31, 2003 |  | By: | /s/PETER D. CLEARYPeter D. Cleary,
President, Chief Operating Officer, Treasurer
and Interim Chief Financial Officer
|-------------------- |  | --- | --------------------------------------------------------------------------------------------------------------------

39

---



PART IV

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

PageConsolidated Financial Statements:Report of Independent Accountants

F-2Consolidated Balance Sheets as of December 31, 2002 and 2001

F-3Consolidated Statements of Income (Loss) for the Years Ended December 31, 2002, 2001 and 2000

F-4Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000

F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000

F-6Notes to Consolidated Financial Statements

F-7 - F-21Schedule IIValuation and Qualifying Accounts and Reserves

F-22


F-1

---

REPORT OF INDEPENDENT ACCOUNTANTS

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

We
have audited the accompanying consolidated balance sheets of PDS Gaming Corporation and Subsidiaries as of December 31, 2002 and 2001, and related consolidated statements of income
(loss), stockholders' equity and cash flows for the years ended December 31, 2002, 2001 and 2000. 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 audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. 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 audits 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 Gaming Corporation and
Subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and cash flows for the years ended December 31, 2002, 2001 and 2000, in conformity with accounting
principles generally accepted in the United States.

In
connection with our audits of the consolidated financial statements referred to above, we audited the financial schedule of valuation and qualifying accounts and reserves for the
years ended December 31, 2002, 2001 and 2000. In our opinion, this financial schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material
respects, the information stated therein.

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

Las
Vegas, Nevada
March 14, 2003

F-2

---



PDS GAMING CORPORATION AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        DECEMBER 31, 2002 AND 2001

|                                                         |                                                                                                                   | 2002 |            | 2001      
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ---- | ---------- | ----------
|ASSETS:                                                  |                                                                                                                   |      |            |           
|Cash and cash equivalents                                |                                                                                                                   | $    | 115,000    |           
|Restricted cash                                          |                                                                                                                   |      | 1,377,000  |           
|Notes, accounts and leases receivable, net of allowances |                                                                                                                   |      | 41,203,000 |           
|Equipment under operating leases, net                    |                                                                                                                   |      | 42,487,000 |           
|Equipment held for sale or lease                         |                                                                                                                   |      | 3,350,000  |           
|Other assets, net                                        |                                                                                                                   |      | 9,306,000  |           
|                                                         |                                                                                                                   |      |            |           
|                                                         |                                                                                                                   | $    | 97,838,000 |           
|                                                         |                                                                                                                   |      |            |           
|LIABILITIES AND STOCKHOLDERS' EQUITY:                    |                                                                                                                   |      |            |           
|Equipment vendors payable                                |                                                                                                                   | $    | 14,385,000 |           
|Accounts payable                                         |                                                                                                                   |      | 233,000    |           
|Customer deposits                                        |                                                                                                                   |      | 3,440,000  |           
|Notes payable                                            |                                                                                                                   |      | 59,977,000 |           
|Subordinated debt                                        |                                                                                                                   |      | 9,054,000  |           
|Accrued expenses and other                               |                                                                                                                   |      | 2,599,000  |           
|                                                         |                                                                                                                   |      |            |           
|                                                         |                                                                                                                   |      | 89,688,000 |           
|                                                         |                                                                                                                   |      |            |           
|Stockholders' equity:                                    |                                                                                                                   |      |            |           
|                                                         | Common stock, $.01 par value, 20,000,000 shares authorized, 3,799,978 and 3,745,872 shares issued and outstanding |      |            | 38,000    
|                                                         | Additional paid-in capital                                                                                        |      |            | 11,812,000
|                                                         |                                                                                                                   |      |            |           
|                                                         | Retained earnings (deficit)                                                                                       |      |            | (3,700,000
|                                                         |                                                                                                                   |      |            |           
|                                                         |                                                                                                                   |      | 8,150,000  |           
|                                                         |                                                                                                                   |      |            |           
|                                                         |                                                                                                                   | $    | 97,838,000 |           
|                                                         |                                                                                                                   |      |            |           

See
notes to consolidated financial statements.

F-3

---



PDS GAMING CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF INCOME (LOSS)        YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                                                              |                                                                         | 2002 |            | 2001       |   | 2000       |           
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---- | ---------- | ---------- | - | ---------- | ----------
|REVENUES:                                                                                     |                                                                         |      |            |            |   |            |           
|                                                                                              | Equipment sales and sales-type leases                                   |      | $          | 18,907,000 |   | $          | 10,978,000
|                                                                                              | Operating lease rentals                                                 |      |            | 13,691,000 |   |            | 11,142,000
|                                                                                              | Finance income                                                          |      |            | 4,911,000  |   |            | 10,912,000
|                                                                                              | Fee income                                                              |      |            | 1,104,000  |   |            | 4,750,000 
|                                                                                              | Casino                                                                  |      |            | 1,714,000  |   |            | 1,356,000 
|                                                                                              |                                                                         |      |            |            |   |            |           
|                                                                                              |                                                                         |      | 40,327,000 |            |   | 39,138,000 |           
|                                                                                              |                                                                         |      |            |            |   |            |           
|COSTS AND EXPENSES:                                                                           |                                                                         |      |            |            |   |            |           
|                                                                                              | Equipment sales and sales-type leases                                   |      |            | 17,310,000 |   |            | 9,764,000 
|                                                                                              | Depreciation on operating leases                                        |      |            | 9,388,000  |   |            | 7,642,000 
|                                                                                              | Interest                                                                |      |            | 7,832,000  |   |            | 9,704,000 
|                                                                                              | Casino                                                                  |      |            | 2,555,000  |   |            | 1,270,000 
|                                                                                              | Selling, general and administrative                                     |      |            | 3,985,000  |   |            | 5,619,000 
|                                                                                              | Depreciation and amortization on other property                         |      |            | 754,000    |   |            | 868,000   
|                                                                                              | Collection and asset impairment provisions                              |      |            | 141,000    |   |            | 147,000   
|                                                                                              |                                                                         |      |            |            |   |            |           
|                                                                                              |                                                                         |      | 41,965,000 |            |   | 35,014,000 |           
|                                                                                              |                                                                         |      |            |            |   |            |           
|Income (loss) from continuing operations before income taxes (benefit) and extraordinary item |                                                                         |      | (1,638,000 | )          |   | 4,124,000  |           
|Income taxes (benefit)                                                                        |                                                                         |      | (528,000   | )          |   | 1,872,000  |           
|                                                                                              |                                                                         |      |            |            |   |            |           
|Income (loss) from continuing operations before extraordinary item                            |                                                                         |      | (1,110,000 | )          |   | 2,252,000  |           
|Loss from discontinued operations, net of income tax benefit                                  |                                                                         |      | (3,269,000 | )          |   | (1,297,000 | )         
|Extraordinary gain on early extinguishment of debt, net of income tax                         |                                                                         |      |            |            |   | 475,000    |           
|                                                                                              |                                                                         |      |            |            |   |            |           
|Net income (loss)                                                                             |                                                                         | $    | (4,379,000 | )          | $ | 1,430,000  |           
|                                                                                              |                                                                         |      |            |            |   |            |           
|Net income (loss) per share:                                                                  |                                                                         |      |            |            |   |            |           
|Basic:                                                                                        |                                                                         |      |            |            |   |            |           
|                                                                                              | Continuing operations before extraordinary item                         |      | $          | (0.29      | ) | $          | 0.60      
|                                                                                              | Discontinued operations                                                 |      |            | (0.86      | ) |            | (0.35     
|                                                                                              | Extraordinary gain on early extinguishment of debt, less applicable tax |      |            |            |   |            | 0.13      
|                                                                                              |                                                                         |      |            |            |   |            |           
|                                                                                              |                                                                         | $    | (1.15      | )          | $ | 0.38       |           
|                                                                                              |                                                                         |      |            |            |   |            |           
|Diluted:                                                                                      |                                                                         |      |            |            |   |            |           
|                                                                                              | Continuing operations before extraordinary item                         |      | $          | (0.29      | ) | $          | 0.58      
|                                                                                              | Discontinued operations                                                 |      |            | (0.86      | ) |            | (0.33     
|                                                                                              | Extraordinary gain on early extinguishment of debt, less applicable tax |      |            |            |   |            | 0.12      
|                                                                                              |                                                                         |      |            |            |   |            |           
|                                                                                              |                                                                         | $    | (1.15      | )          | $ | 0.37       |           
|                                                                                              |                                                                         |      |            |            |   |            |           
|Weighted average shares outstanding:                                                          |                                                                         |      |            |            |   |            |           
|                                                                                              | Basic                                                                   |      |            | 3,794,000  |   |            | 3,730,000 
|                                                                                              | Diluted                                                                 |      |            | 3,794,000  |   |            | 3,880,000 

See notes to the consolidated financial statements.

F-4

---

PDS GAMING CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY        YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                            |  | Common Stock |  |   |        |  |   |            | 
|----------------------------------------------------------- |  | ------------ |  | - | ------ |  | - | ---------- | 
|
|Balances, January 1, 2000                                   |  | 3,706,971    |  | $ | 37,000 |  | $ | 11,546,000 | 
|Issued pursuant to Employee Stock Purchase Plan             |  | 7,514        |  |   |        |  |   | 10,000     | 
|Net income                                                  |  |              |  |   |        |  |   |            | 
|                                                            |  |              |  |   |        |  |   |            | 
|Balances, December 31, 2000                                 |  | 3,714,485    |  |   | 37,000 |  |   | 11,556,000 | 
|Exercise of stock options, including tax benefit of $25,000 |  | 22,500       |  |   |        |  |   | 57,000     | 
|Issued pursuant to Employee Stock Purchase Plan             |  | 8,887        |  |   |        |  |   | 19,000     | 
|Issuance of stock purchase warrants                         |  |              |  |   |        |  |   | 80,000     | 
|Net income                                                  |  |              |  |   |        |  |   |            | 
|                                                            |  |              |  |   |        |  |   |            | 
|Balances, December 31, 2001                                 |  | 3,745,872    |  |   | 37,000 |  |   | 11,712,000 | 
|Exercise of stock options, including tax benefit of $12,000 |  | 48,500       |  |   | 1,000  |  |   | 90,000     | 
|Issued pursuant to Employee Stock Purchase Plan             |  | 5,606        |  |   |        |  |   | 10,000     | 
|Net loss                                                    |  |              |  |   |        |  |   |            | 
|                                                            |  |              |  |   |        |  |   |            | 
|Balances, December 31, 2002                                 |  | 3,799,978    |  | $ | 38,000 |  | $ | 11,812,000 | 
|                                                            |  |              |  |   |        |  |   |            | 

See
notes to the consolidated financial statements.

F-5

---



PDS GAMING CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                    |                                                     | 2002 |   | 2001        |   | 2000 |            
|----------------------------------- | --------------------------------------------------- | ---- | - | ----------- | - | ---- | -----------
|OPERATING ACTIVITIES                |                                                     |      |   |             |   |      |            
|                                    | Net cash provided by continuing activities          |      | $ | 16,396,000  |   | $    | 13,316,000 
|                                    | Net cash used in discontinued operating activities  |      |   | (1,568,000  | ) |      | (1,490,000 
|                                    |                                                     |      |   |             |   |      |            
|                                    | Net cash provided by operating activities           |      |   | 14,828,000  |   |      | 11,826,000 
|                                    |                                                     |      |   |             |   |      |            
|INVESTING ACTIVITIES                |                                                     |      |   |             |   |      |            
|                                    | Purchases of equipment for leasing                  |      |   | (20,931,000 | ) |      | (19,216,000
|                                    | Proceeds from sale of equipment                     |      |   | 636,000     |   |      | 23,205,000 
|                                    | Other                                               |      |   | (2,084,000  | ) |      |            
|                                    |                                                     |      |   |             |   |      |            
|                                    | Net cash provided by (used in) investing activities |      |   | (22,379,000 | ) |      | 3,989,000  
|                                    |                                                     |      |   |             |   |      |            
|FINANCING ACTIVITIES                |                                                     |      |   |             |   |      |            
|                                    | Proceeds from borrowings                            |      |   | 36,565,000  |   |      | 51,810,000 
|                                    | Repayment of borrowings                             |      |   | (28,783,000 | ) |      | (65,290,000
|                                    | (Increase) reduction in restricted cash             |      |   | (1,377,000  | ) |      |            
|                                    | Repayment of subordinated debt                      |      |   | (2,925,000  | ) |      | (358,000   
|                                    | Stock options exercised                             |      |   | 91,000      |   |      | 57,000     
|                                    | Proceeds from employee stock purchase plan          |      |   | 9,000       |   |      | 19,000     
|                                    |                                                     |      |   |             |   |      |            
|                                    | Net cash provided by (used in) financing activities |      |   | 3,580,000   |   |      | (13,762,000
|                                    |                                                     |      |   |             |   |      |            
|CHANGE IN CASH AND CASH EQUIVALENTS |                                                     |      |   |             |   |      |            
|                                    | Net increase (decrease) during the year             |      |   | (3,971,000  | ) |      | 2,053,000  
|                                    | Balance, beginning of year                          |      |   | 4,086,000   |   |      | 2,033,000  
|                                    |                                                     |      |   |             |   |      |            
|                                    | Balance, end of year                                |      | $ | 115,000     |   | $    | 4,086,000  
|                                    |                                                     |      |   |             |   |      |            

See
notes to the consolidated financial statements.

F-6

---



PDS GAMING CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Business description and concentrations.PDS Gaming Corporation and subsidiaries (the "Company") engages principally in the
leasing and other financing of gaming equipment. The Company also remarkets gaming equipment that it acquires at the end of the lease. This remarketing process and related sales and distribution
effort is viewed by management as a complement to the Company's financing and leasing activities. The Company conducts its financing, leasing and sales activities in many domestic United States gaming
jurisdictions and could be affected by adverse changes in economic conditions in the United States and within the gaming industry.

The
Company manages its concentrations of credit risk by evaluating the credit worthiness of customers before extending credit, perfecting security interests, and initiating legal
collection proceedings when necessary. In establishing an allowance for doubtful collection, the Company considers the customer, the relative strength of the Company's legal position, the value of the
collateral, the related cost of any proceedings and general economic conditions. Obtaining access to the collateral may take several months and require significant costs. The maximum losses that the
Company would incur if a customer failed to pay amounts would be limited to the carrying value after any allowances provided.

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

Historically,
the Company has earned a substantial portion of its revenues from a few customers (Note 9) and has experienced significant nonrecurring revenues and fee income in
connection with its business activities. A reduction in the number of these significant customers or volume of the transactions, or failure to replace the sources of the nonrecurring revenues and fee
income, could also have an adverse affect on future operations.

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

Use of estimates.The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect reported amounts and disclosures, some of which may require revision in future periods. For the Company, the most significant
estimates are residual values, allowances for uncollectible notes, accounts and leases receivable and valuation of equipment held for sale or lease. Some of these estimates can be subject to material
revision within the next year if there are changes in circumstances.

Lease and financing 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

F-7

---

lessee, and finance 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 leases 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 held for sale or lease, consisting primarily of gaming devices, 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 used gaming devices or upon the exercise of a purchase option under an operating lease.

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

Casino revenue.Casino revenue is primarily the net win from gaming activities, which is the difference between gaming wins
and losses. Complementary expenses are offset against complementary revenues.

Cash equivalents.The Company considers all highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. At December 31, 2002 and 2001, cash equivalents consist solely of investments in money market accounts.

Restricted cash.Restricted cash consists of short-term investments, generally having an original maturity of one year or
less, that are pledged against notes payable, and certain funds received from lessees that are being held by the Company pending remittance to the lenders who have financed the leases. Restricted cash
is excluded from cash and cash equivalents for purposes of the statements of cash flows.

Other assets, net.Property, plant and equipment is included in this classification and consists primarily of the land and
building used at Rocky's Casino and Sports Bar in Reno, Nevada and other furniture, equipment and leasehold improvements stated at cost, less accumulated depreciation and amortization calculated using
the straight-line method over the estimated useful lives. Also included are refundable income taxes, deferred income taxes, 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.

Allowances for losses.Various allowances for losses are maintained at levels determined by management to adequately provide
for any estimated declines in the recoverability of related 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 action by lessees with regard to leased equipment at termination of the initial lease term, changes in

F-8

---

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 or its collateral
to future net cash flows expected to be generated by the asset or its collateral value if appropriate. 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 net realizable value 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:

|                                     |                            | 2002 |            | 2001      |   | 2000     
|------------------------------------ | -------------------------- | ---- | ---------- | --------- | - | ---------
|Net income (loss), basic and diluted |                            | $    | (4,379,000 | )         | $ | 1,430,000
|                                     |                            |      |            |           |   |          
|Per share amounts:                   |                            |      |            |           |   |          
|                                     | Basic                      |      | $          | (1.15     | ) | $        
|                                     | Diluted                    |      | $          | (1.15     | ) | $        
|Weighted average shares outstanding: |                            |      |            |           |   |          
|                                     | Basic                      |      |            | 3,794,000 |   |          
|                                     | Effect of dilutive options |      |            |           |   |          
|                                     |                            |      |            |           |   |          
|                                     | Diluted                    |      |            | 3,794,000 |   |          
|                                     |                            |      |            |           |   |          

Options
to purchase 541,000 shares of common stock and warrants to purchase 1,456,000 shares of common stock were not included in the computation of diluted earnings per share for 2002
because the effect would have been anti-dilutive and the options' and warrants' exercise prices were greater than the average market price of the common stock for the year. The weighted average
exercise price for these options and warrants was $4.19 and $7.60, respectively, as of December 31, 2002. These options and warrants expire at various dates through 2012. Weighted-average exercise
prices ($7.16 in 2001 and $7.10 in 2000) in excess of average market prices caused options and warrants to purchase common shares (1,512,000 in 2001 and 1,981,000 in 2000) to be excluded from the
computation of diluted earnings in those years.

Stock compensation.The Company accounts for stock-based employee compensation (Note 6) using the intrinsic value method in
Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees.

Reclassifications.Certain amounts as previously reported have been reclassified to conform to the current year presentation.

F-9

---

2. NOTES, ACCOUNTS AND LEASES RECEIVABLE:

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

|                                                       |  | 2002 |             | 2001 |  
|------------------------------------------------------ |  | ---- | ----------- | ---- | -
|Notes receivable bearing interest at 8.5% to 12.5%     |  | $    | 6,618,000   |      | $
|Minimum direct finance lease payments                  |  |      | 39,072,000  |      |  
|                                                       |  |      |             |      |  
|                                                       |  |      | 45,690,000  |      |  
|Unearned lease income, direct finance leases           |  |      | (12,588,000 | )    |  
|Unamortized costs (discounts)                          |  |      | 40,000      |      |  
|                                                       |  |      |             |      |  
|                                                       |  |      | 33,142,000  |      |  
|Accounts and other                                     |  |      | 9,156,000   |      |  
|Allowance for uncollectible notes, accounts and leases |  |      | (1,095,000  | )    |  
|                                                       |  |      |             |      |  
|                                                       |  | $    | 41,203,000  |      | $
|                                                       |  |      |             |      |  

Notes
and direct finance lease receivables are due in monthly installments, generally collateralized by casino-related equipment and furnishings.

At
December 31, 2002, future minimum payments receivable on notes and leases are as follows:

Year ending December 31,

Notes

Leases

Total2003

$
3,701,000

$
7,380,000

$
11,081,0002004


1,797,000


5,640,000


7,437,0002005


660,000


3,274,000


3,934,0002006


460,000


2,156,000


2,616,0002007





2,220,000


2,220,0002008





18,402,000


18,402,000$
6,618,000

$
39,072,000

$
45,690,000


The
Company grants customers payment terms under notes and leases receivable. These contracts are generally for terms of 6 to 48 months, with a typical term of 36 months, with interest
at prevailing rates, and are collateralized by the equipment sold or leased. The value of such equipment, if repossessed, may be less than the receivable balance outstanding. See Note 9 for a
discussion of the Company's concentration of credit risk.

Changes
in the allowance for uncollectible notes, accounts and lease receivables are as follows:

|                           |                                | 2002 |           | 2001    |  
|-------------------------- | ------------------------------ | ---- | --------- | ------- | -
|Balance, beginning of year |                                | $    | 1,067,000 |         | $
|                           | Charge-offs, net of recoveries |      |           | (98,000 | )
|                           | Collection provision           |      |           | 126,000 |  
|                           |                                |      |           |         |  
|Balance, end of year       |                                | $    | 1,095,000 |         | $
|                           |                                |      |           |         |  

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.

F-10

---

3. EQUIPMENT UNDER OPERATING LEASES:

Equipment under operating leases consists of gaming equipment and casino/hotel-related equipment leased for periods ranging from 6 to 60 months as follows:

|                              |  | 2002 |             | 2001 |  
|----------------------------- |  | ---- | ----------- | ---- | -
|Gaming and related equipment  |  | $    | 54,453,000  |      | $
|Less accumulated depreciation |  |      | (11,966,000 | )    |  
|                              |  |      |             |      |  
|                              |  | $    | 42,487,000  |      | $
|                              |  |      |             |      |  

Changes
in the impairment allowance are as follows:

|                           |                                | 2002 |   | 2001 |  
|-------------------------- | ------------------------------ | ---- | - | ---- | -
|Balance, beginning of year |                                | $    |  |      | $
|                           | Charge-offs, net of recoveries |      |   |      |  
|                           | Collection provision           |      |   |      |  
|                           |                                |      |   |      |  
|Balance, end of year       |                                | $    |  |      | $
|                           |                                |      |   |      |  

In
addition to impairment provisions made for equipment under operating leases, the Company recorded a charge of $500,000 in 2001 for obsolete equipment held for sale or lease. Lessees
generally have the future right to purchase the equipment for fair value at the termination of the lease.

At
December 31, 2002, future minimum lease payments to be received by the Company on operating leases for the years ending December 31, 2003 through 2005 are approximately $18,821,000,
$16,370,000, $8,399,000, respectively and none thereafter.

4. NOTES PAYABLE AND SUBORDINATED DEBT:

Notes payable consist of the following:

|                                                                                                                                                                                             |             | 2002 |            | 2001       |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---- | ---------- | ---------- | -
|Lines of credit with a maximum aggregate balance of $16,916,000 bearing interest at rates from 5.25% to 10.50%, secured by related investment in leases and equipment held for sale or lease |             | $    | 12,853,000 |            | $
|Equipment notes bearing interest at rates from 0% to 15.08%, secured by related investment in leases:                                                                                        |             |      |            |            |  
|                                                                                                                                                                                             | Recourse    |      |            | 21,838,000 |  
|                                                                                                                                                                                             | Nonrecourse |      |            | 25,726,000 |  
|                                                                                                                                                                                             |             |      |            |            |  
|                                                                                                                                                                                             |             |      | 60,417,000 |            |  
|Unamortized loan discounts                                                                                                                                                                   |             |      | (440,000   | )          |  
|                                                                                                                                                                                             |             |      |            |            |  
|                                                                                                                                                                                             |             | $    | 59,977,000 |            | $
|                                                                                                                                                                                             |             |      |            |            |  

Principal
and interest payments on 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 Company as borrower. Under nonrecourse financing, in the event of a default by a lessee, the lender generally

F-11

---

has recourse only against the lessee and the equipment serving as collateral, but not against the Company.

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

In
May 1998, the Company issued $13,800,000 of 10% senior subordinated debt, due on July 1, 2004, that included 690,000 detachable stock purchase warrants with an exercise price of
$12.25 valued at $690,000 ($108,000 unamortized as of December 31, 2002). Pursuant to the terms of the indenture, beginning July 1, 2000, a total of $2.1 million of the subordinated debt is randomly
selected each year for mandatory redemption. In June 2001, the Company exchanged $2,205,000 of the 10% senior subordinated debt for an equal amount of newly-issued 12% senior subordinated debt that is
due 25% in each of the four consecutive years beginning with the year ending December 31, 2004. Interest is payable quarterly. In addition to the four mandatory yearly redemptions, the Company may
also redeem this subordinated debt, 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 and 2007, respectively.

Principal
payments on recourse and nonrecourse notes payable and subordinated debt, as of December 31, 2002, are due as follows:

|Year ending December 31: |                     | Recourse
Notes
Payable |            | Nonrecourse
Notes
Payable |   | Subordinated
Debt |            | Total
|------------------------ | ------------------- | ---------------------- | ---------- | ------------------------- | - | ----------------- | ---------- | -----
|                         | 2003                |                        | $          | 13,323,000                |   | $                 | 13,780,000 |      
|                         | 2004                |                        |            | 6,809,000                 |   |                   | 9,129,000  |      
|                         | 2005                |                        |            | 2,459,000                 |   |                   | 2,817,000  |      
|                         | 2006                |                        |            | 367,000                   |   |                   |           |      
|                         | 2007                |                        |            | 405,000                   |   |                   |           |      
|                         | 2008 and thereafter |                        |            | 11,328,000                |   |                   |           |      
|                         |                     |                        |            |                           |   |                   |            |      
|                         |                     | $                      | 34,691,000 |                           | $ | 25,726,000        |            | $    
|                         |                     |                        |            |                           |   |                   |            |      

F-12

---

5. INCOME TAXES:

The following summarizes the components of deferred income taxes included in the Company's consolidated balance sheets under Other Assets, Net at December 31,
2002 and Accrued Expenses and Other at December 31, 2001:

2002

2001Deferred tax assets:Customer deposits and prepaid rent

$
1,326,000

$
873,000Net operating loss carryforwards


199,000Asset valuation allowances and impairment provisions


958,000


240,000Other


335,000


256,0002,818,000


1,369,000Deferred tax liabilities:Lease transactions


(967,000
)

(1,514,000
)Initial direct costs


(264,000
)

(113,000
)(1,231,000
)

(1,627,000
)Net deferred tax assets (liabilities)

$
1,587,000

$
(258,000
)


Income
tax expense (benefit), before allocation to loss from discontinued operations and extraordinary items, is comprised as follows:

2002

2001

2000Current

$
(241,000
)
$
655,000

$
71,000Deferred


(1,845,000
)

534,000


434,000$
(2,086,000
)
$
1,189,000

$
505,000


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:

2002

2001

2000Income taxes at federal statutory rate

34
%
34
%
34
%State income taxes, net of federal effect



2

2Non-deductible amortization of costs

(2
)
5

4Other, net



4

132
%
45
%
41
%


F-13

---

6. STOCKHOLDERS' EQUITY:

1993 Stock Option Plan.The Company established its 1993 Stock Option Plan (the "1993 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 1993 Plan provides that options granted thereunder
may be either incentive stock options ("ISO's") or nonqualified stock options. At December 31, 2002, the maximum number of shares of common stock available for grant under the 1993 Plan was 1,600,000.

Options
may have a maximum term of up to ten years. The exercise price of ISO's granted under the 1993 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 1993 Plan. The 1993 Plan expires on April 1, 2003. Newly elected non-employee directors of the Company receive an
initial grant of non-qualified options to purchase 10,000 shares of common stock upon election to the Board and an annual grant of non-qualified options to purchase 5,000 shares of common stock.

Option
activity under the 1993 Plan is summarized as follows:

|                                         |                                         | Options
Available for
Grant |          | Options
Outstanding |          | Weighted Average
Exercise Price
Per Share
|---------------------------------------- | --------------------------------------- | --------------------------- | -------- | ------------------- | -------- | -----------------------------------------
|Balances, December 31, 1999              |                                         | 142,000                     |          | 802,000             |          | $                                        
|                                         | Granted                                 |                             | (326,000 | )                   | 326,000  |                                          
|                                         | Canceled                                |                             | 233,000  |                     | (233,000 | )                                        
|                                         |                                         |                             |          |                     |          |                                          
|Balances, December 31, 2000              |                                         | 49,000                      |          | 895,000             |          |                                          
|                                         | Increases in number of shares available |                             | 250,000  |                     |         |                                          
|                                         | Granted                                 |                             | (242,000 | )                   | 242,000  |                                          
|                                         | Exercised                               |                             |         |                     | (23,000  | )                                        
|                                         | Canceled                                |                             | 133,000  |                     | (133,000 | )                                        
|                                         |                                         |                             |          |                     |          |                                          
|Balances, December 31, 2001              |                                         | 190,000                     |          | 981,000             |          |                                          
|                                         | Granted                                 |                             | (142,000 | )                   | 142,000  |                                          
|                                         | Exercised                               |                             |          |                     | (48,000  | )                                        
|                                         | Canceled                                |                             | 340,000  |                     | (340,000 | )                                        
|                                         |                                         |                             |          |                     |          |                                          
|Balances, December 31, 2002              |                                         | 388,000                     |          | 735,000             |          | $                                        
|                                         |                                         |                             |          |                     |          |                                          
|Options exercisable at December 31, 2002 |                                         |                             |          | 414,000             |          | $                                        
|                                         |                                         |                             |          |                     |          |                                          

The
following table summarizes stock options outstanding at December 31, 2002:

Options Outstanding

Options ExercisableRange of Exercise Prices

Number of
Options
Outstanding

Weighted Average
Remaining
Contractual Life

Number of
Options
Outstanding

Weighted Average
Remaining
Contractual Life$1.05 - $  2.50

264,000

7.4

111,000

5.0$2.51 - $  5.00

397,000

5.9

236,000

4.0$5.01 - $  7.50

5,000

7.0

4,000

7.0$7.51 - $10.04

69,000

6.0

63,000

6.0735,000



414,000


F-14

---

At
December 31, 2002, the range of exercise prices and weighted average remaining contractual life of outstanding options was $1.05$10.04 and 6.4 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 Statement of Financial Accounting Standards
No. 123,Stock Based Compensation, net income and net income per share for 2002, 2001 and 2000 would have been as follows:

2002

2001

2000Pro forma net income (loss):Basic and diluted

$
(4,834,000
)
$
960,000

$
347,000Pro forma net income (loss) per share:Basic

$
(1.27
)
$
0.26

$
0.09Diluted

$
(1.27
)
$
0.25

$
0.09


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 $1.03, $1.09 and $0.52 per option for 2002, 2001 and 2000, 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:

2002

2001

2000Risk-free interest rate

3.7
%
3.7
%
5.1
%Expected life

5 years

5 years

5 yearsExpected volatility

60
%
60
%
60
%Expected dividends

0

0

0


2002 Stock Option Plan.The Company established its 2002 Stock Option Plan (the "2002 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 2002 Plan provides that options granted thereunder
may be either incentive stock options ("ISO's") or nonqualified stock options. At December 31, 2002, the maximum number of shares of common stock available for grant under the 2002 Plan was
800,000. The Company has not granted any options under the 2002 Plan.

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 2002, the Company discontinued its table games division and terminated certain exclusive intellectual property
rights and all related duties and obligations, including warrants originally issued to DigiDeal Corporation to purchase 368,000 common shares of the Company under certain conditions.

In
December 2001, the Company issued warrants to purchase 181,700 shares of common stock to a financial institution in connection with an agreement entered into between the two parties.
As part of this agreement, warrants to purchase 181,700 shares of common stock that were issued to the financial institution in 1998, in partial consideration for the approval of a $25 million
revolving line of credit,

F-15

---

were cancelled. The warrants issued in 2001 are presently exercisable, have an exercise price of $3.20 per share and expire in 2006. The warrants issued in 1998 were exercisable when cancelled, had
an exercise price of $4.66 per share and would have expired in 2003. The Company valued the warrants issued in 2001 at a total of $80,000, which was treated as debt issuance costs and expensed, with a
corresponding entry to additional paid-in capital.

The
Company has also issued 740,000 detachable stock purchase warrants as part of the Subordinated Debt offering. These warrants are presently exercisable, have an exercise price of
$12.25 per share and expire in 2003.

7. DISCONTINUED OPERATIONS:

At the end of the first quarter 2002, the Company discontinued operations of its Table Games Division, with the exception of servicing games currently under lease
and selling or leasing games in inventory, and certain components of its Casino Slot Exchange Division. The Company has retained its ability to repair and remarket gaming devices which come off lease.
The Company no longer purchases used gaming devices and reconditions them on a custom basis. This decision was made due to unacceptable operating results from, among other things, slower than
anticipated customer installations, inadequate profit margins and the continuing costs of maintaining exclusive rights to certain intellectual property. Accordingly, the Company has reclassified these
activities as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assets. As a result of these decisions and actions, the Company recognized a disposal loss of $2.4 million in 2002 primarily related to the write-off of its investment in
certain intangibles and other assets of the Table Games and Casino Slot Exchange Divisions

Results
from discontinued operations, net of income tax benefit, are as follows:

Year Ended December 312002

2001

2000Loss on discontinued operations:Loss on disposal

$
(2,370,000
)Operating loss


(2,457,000
)
$
(2,375,000
)
$
(2,216,000
)Income tax benefit


1,558,000


1,078,000


886,000$
(3,269,000
)
$
(1,297,000
)
$
(1,330,000
)Loss per share (diluted):Loss on disposal

$
(0.62
)Operating loss


(0.65
)
$
(0.61
)
$
(0.60
)Income tax benefit


0.41


0.28


0.25$
(0.86
)
$
(0.33
)
$
(0.35
)


As
of December 31, 2002, the assets associated with discontinued operations consisted primarily of the Company's inventory of certain slot machines and table games and its investment in
DigiDeal Corporation, with a combined carrying value of $2.9 million.

F-16

---

8. OTHER EMPLOYEE MATTERS:

Benefit plans.The Company maintains a contributory defined contribution benefit plan that qualifies under Section 401(k) of
the Internal Revenue Code and covers eligible employees. Company contributions are at the discretion of the Board of Directors, and are currently established as 50% of the employee's contribution up
to a maximum employee contribution of 6% of the employee's earnings. The Company's contributions to the plan in 2002, 2001 and 2000 were not material.

Employment agreements.The Company has entered into employment agreements with its three executive officers. Some of the
agreements contain provisions for automatic extension for additional one-year periods unless notice of nonextension is given. Each of the agreements contains noncompete and nonsolicitation clauses
which continue for various periods following termination of employment. The agreements, among other things, provide for initial base salaries, benefits, payment of discretionary cash and stock
bonuses, and contain "change of control" provisions. The agreements also provide for the annual grant of stock options. In February 2003, each of the three executive officers agreed to waive
their 2003 annual stock option grants.

9. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT:

The financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts and notes receivable. Each of the
Company's business segments conducts business in and the resulting receivables are concentrated in specific legalized gaming regions.

As
of December 31, 2002, the Company's three largest customers represented 50%, 23% and 5% of the total portfolio of notes, accounts and leases of $74,585,000. No other customer
represented more than 5% of the portfolio.

Based
on the carrying value of the portfolio, 98% of the Company's portfolio at December 31, 2002, is located in the United States, with 50%, 38% and 6% in the states of New Jersey,
Nevada and Colorado, respectively.

During
2002, three customers accounted for 24%, 24% and 9% of revenue, respectively. During 2001, three customers accounted for 29%, 8% and 7% of revenue, respectively. During 2000,
three customers accounted for 23%, 13% and 11% of revenue, respectively.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts at December 31, 2002 for cash and cash equivalents, notes, accounts and leases receivable, net of allowances, equipment vendors 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.

11. COMMITMENTS AND CONTINGENCIES:

Litigation.In May 2002, the Company received notification that Tekbilt, Inc. ("Claimant") had submitted a Demand for
Arbitration to the American Arbitration Association alleging breach of a Distributor Agreement (the "Agreement") with Claimant in connection with the Company's discontinued operations. In the
notification, Claimant alleged that such breach has caused Claimant to sustain substantial damages. The monetary damages sought by claimant are unspecified. The Company timely filed its Answering
Statement and has asserted a Counterclaim against Claimant. The Company seeks the dismissal of Claimant's claims in their entirety, an award of monetary damages and reimbursement of all costs and
expenses incurred by the Company as a result of the case, including

F-17

---

attorneys fees. Neither party has specified its alleged damages. The case is in a preliminary stage, and the hearing before the American Arbitration Association panel is expected to occur in 2003.
Although unable to predict the outcome of this matter, management believes the Claimant's claim to be without merit and will vigorously pursue all legal defenses available to it. Management, further,
does not believe that the outcome of such arbitration is likely to have a material adverse effect on the Company. Accordingly, no accounting recognition has been provided for losses, if any.

On
March 7, 2003, the Company announced that it had been named as a defendant in a purported class action lawsuit filed by a shareholder in District Court, Clark County, Nevada. The
complaint alleges that the members of the Company's Board of Directors violated their fiduciary duties in approving a letter of intent with respect to the proposal submitted by a management group to
acquire shares of common stock of the Company. The complaint seeks to enjoin the management group from acquiring the shares. The Company believes the allegations are without merit and intends to
vigorously defend the lawsuit.

Lease and other commitments.The Company leases office space, warehouse space for its equipment remarketing activities,
retail space and personal property under terms of various noncancelable operating leases expiring through 2009. The lease agreements require the Company to pay monthly base rent in varying amounts
plus its pro rata share of operating expenses. Percentage rents apply to the leased retail space to the extent that certain sales thresholds are exceeded. Rent expense for
continuing operations was approximately $485,000, $308,000 and $320,000 in 2002, 2001 and 2000, respectively.

Future
minimum lease payments under these leases are as follows:

Year Ending December 31,2003

$
826,0002004


837,0002005


191,0002006


189,0002007


187,000Thereafter


487,000$
2,717,000


Residual sharing.The Company agreed to share the proceeds from future sales of equipment at lease termination, but only to
the extent, if any, that such proceeds exceed the Company's original estimate of residual values of the equipment made at the inception of the respective leases. The Company's obligation to assign
assets to a residual sharing pool is collateralized by receivables totaling $12.5 million at December 31, 2002. The value of the equipment to be assigned to the sharing pool is calculated based on the
present value of the Company's original anticipated residual value in the equipment at lease termination (originally $7.2 million), subject to adjustment as defined. The sharing pool has not been
fully identified, and the parties to the residual sharing agreement are continuing to negotiate the make up of the sharing pool.

F-18

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12. SUBSEQUENT EVENT:

On February 24, 2003, the Company announced that it had entered into a letter of intent with respect to a proposal submitted by a management group consisting of
Johan P. Finley, the Company's Chairman and Chief Executive Officer, Lona M.B. Finley, the Company's Executive Vice President, Secretary and Chief Administrative Officer, and Peter D. Cleary, the
Company's President, Chief Operating Officer and Treasurer (collectively, the "Management Group"), to acquire all of the approximately 69% of the outstanding shares of the Company's common stock not
already owned by the Management Group for $1.25 per share in cash and an additional $1.50 per share in deferred cash payment rights.

The
deferred payment rights represent the right to receive three equal installments of $.50 per share of common stock on, respectively, the first, second and third anniversaries of the
closing of the transaction. After the final deferred payment of $.50 is made on the third anniversary, total cash payments per share will total $2.75. The holders of such deferred payment rights will
have no rights as shareholders of the Company, and the rights themselves will not be transferable except pursuant to testamentary disposition or by operation of law.

The
proposal is subject to, among other things, the execution of a definitive agreement, approval by a committee of the Company's independent directors and by a majority of the Company's
shares not owned by the Management Group, the procuring of all necessary consents of the Company's commercial lenders and the trustees under the indentures covering the Company's outstanding debt
securities (the "Indentures"), the securing of required approvals from all gaming regulatory agencies, the obtaining of the necessary financing, and the receipt by the Company of a favorable fairness
opinion from an investment bank. The Management Group intends, pursuant to the terms of the Indentures, to maintain the Company's status as a public reporting company under the Securities Exchange Act
of 1934 until July 1, 2004. The Management Group further intends to keep the Company's operations intact and maintain its headquarters at its present location.

F-19

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13. SUPPLEMENTAL CASH FLOW INFORMATION:

|                                                                                            |                                                                                                                      | 2002                                                       |   | 2001        |            | 2000 |            
|------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | - | ----------- | ---------- | ---- | -----------
|Reconciliation of net income (loss) to net cash provided by (used in) operating activities: |                                                                                                                      |                                                            |   |             |            |      |            
|                                                                                            | Income (loss) from continuing operations and extraordinary gain from early extinguishment of debt, net of income tax |                                                            | $ | (1,110,000  | )          | $    | 2,727,000  
|                                                                                            | Depreciation on operating leases                                                                                     |                                                            |   | 9,388,000   |            |      | 7,642,000  
|                                                                                            | Depreciation on other property                                                                                       |                                                            |   | 754,000     |            |      | 868,000    
|                                                                                            | Collection and asset impairment provisions                                                                           |                                                            |   | (639,000    | )          |      | (1,092,000 
|                                                                                            | Deferred income taxes                                                                                                |                                                            |   | (287,000    | )          |      | 1,620,000  
|                                                                                            | Debt extinguishments discounts                                                                                       |                                                            |   |             |            |      | (870,000   
|                                                                                            | Originations of notes and direct finance leases receivables                                                          |                                                            |   | (20,887,000 | )          |      | (22,109,000
|                                                                                            | Proceeds from:                                                                                                       |                                                            |   |             |            |      |            
|                                                                                            |                                                                                                                      | Sale or discounting of notes and leases receivables        |   |             | 7,727,000  |      |            
|                                                                                            |                                                                                                                      | Collections on notes and direct finance leases receivables |   |             | 22,081,000 |      |            
|                                                                                            | Gain on sale of financial assets                                                                                     |                                                            |   | (532,000    | )          |      | (343,000   
|                                                                                            | Changes in operating assets and liabilities:                                                                         |                                                            |   |             |            |      |            
|                                                                                            |                                                                                                                      | Accounts receivable                                        |   |             | (232,000   | )    |            
|                                                                                            |                                                                                                                      | Equipment held for sale or lease                           |   |             | 2,047,000  |      |            
|                                                                                            |                                                                                                                      | Accounts payable and accrued expenses                      |   |             | (2,298,000 | )    |            
|                                                                                            |                                                                                                                      | Customer deposits                                          |   |             | 1,620,000  |      |            
|                                                                                            | Other, net                                                                                                           |                                                            |   | (1,236,000  | )          |      | (1,825,000 
|                                                                                            |                                                                                                                      |                                                            |   |             |            |      |            
|                                                                                            |                                                                                                                      | Net cash provided by continuing operating activities       |   | $           | 16,396,000 |      | $          
|                                                                                            |                                                                                                                      |                                                            |   |             |            |      |            
|                                                                                            | Loss from discontinued operations, net of income tax benefit                                                         |                                                            | $ | (3,269,000  | )          | $    | (1,297,000 
|                                                                                            | Deferred income taxes                                                                                                |                                                            |   | (1,558,000  | )          |      | (1,078,000 
|                                                                                            | Collection and asset impairment provisions                                                                           |                                                            |   | 823,000     |            |      | 549,000    
|                                                                                            | Depreciation on other property                                                                                       |                                                            |   | 66,000      |            |      | 78,000     
|                                                                                            | Amortization of intangibles                                                                                          |                                                            |   |             |            |      | 258,000    
|                                                                                            | Write-off of amounts invested in discontinued operations                                                             |                                                            |   | 2,370,000   |            |      |            
|                                                                                            |                                                                                                                      |                                                            |   |             |            |      |            
|                                                                                            |                                                                                                                      | Net cash used by discontinued operating activities         |   | $           | (1,568,000 | )    | $          
|                                                                                            |                                                                                                                      |                                                            |   |             |            |      |            
|Cash paid during the year for:                                                              |                                                                                                                      |                                                            |   |             |            |      |            
|                                                                                            | Interest                                                                                                             |                                                            | $ | 7,823,000   |            | $    | 9,627,000  
|                                                                                            | Income taxes                                                                                                         |                                                            |   | 350,000     |            |      | 89,000     
|Significant non-cash financing and investing activities:                                    |                                                                                                                      |                                                            |   |             |            |      |            
|                                                                                            | Increase in equipment vendors payable                                                                                |                                                            | $ | 14,389,000  |            |      |            
|                                                                                            | Equipment sold to lessee, paid for after year end                                                                    |                                                            |   | 7,609,000   |            |      |            
|                                                                                            | Investment in direct finance lease with recourse borrowing                                                           |                                                            |   |             |            | $    | 13,500,000 
|                                                                                            | Leases of equipment previously held for sale or lease                                                                |                                                            |   |             |            |      | (379,000   
|                                                                                            | Operating leases converted to direct finance leases upon exercise of purchase options                                |                                                            |   |             |            |      |            
|                                                                                            | Equipment previously held under lease returned to inventory                                                          |                                                            |   |             |            |      | 267,000    
|                                                                                            | Exchange of notes receivable, direct finance leases and equipment under operating leases for business acquired       |                                                            |   |             |            |      |            
|                                                                                            | Liabilities incurred for purchase of website                                                                         |                                                            |   |             |            |      |            

F-20

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14. QUARTERLY RESULTS (UNAUDITED):

The following table sets forth selected historical operating results for each quarter of 2002 and 2001. 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:

|                                         |                                          | 2002 Quarter Ended |           
|---------------------------------------- | ---------------------------------------- | ------------------ | ----------
|
|Revenues                                 |                                          | $                  | 9,433,000 
|Income taxes                             |                                          |                    | (349,000  
|Income (loss) from continuing operations |                                          |                    | (481,000  
|Loss from discontinued operations        |                                          |                    | (1,392,000
|Net loss                                 |                                          |                    | (1,873,000
|Per share, basic and diluted:            |                                          |                    |           
|                                         | Income (loss) from continuing operations |                    |           
|                                         | Loss from discontinued operations        |                    |           
|                                         | Net loss                                 |                    |           
|Total originations                       |                                          |                    | 9,500,000 



|                                                            |                                   | 2001 Quarter Ended |          
|----------------------------------------------------------- | --------------------------------- | ------------------ | ---------
|
|Revenues                                                    |                                   | $                  | 7,517,000
|Income taxes                                                |                                   |                    | 421,000  
|Income from continuing operations before extraordinary item |                                   |                    | 632,000  
|Loss from discontinued operations                           |                                   |                    | (168,000 
|Extraordinary item, net of income tax                       |                                   |                    |          
|Net income                                                  |                                   |                    | 464,000  
|Per share, basic:                                           |                                   |                    |          
|                                                            | Income for continuing operations  |                    |          
|                                                            | Loss from discontinued operations |                    |          
|                                                            | Extraordinary item                |                    |          
|                                                            | Net income                        |                    |          
|Per share, diluted:                                         |                                   |                    |          
|                                                            | Income for continuing operations  |                    |          
|                                                            | Loss from discontinued operations |                    |          
|                                                            | Extraordinary item                |                    |          
|                                                            | Net income                        |                    |          
|Total originations                                          |                                   |                    | 6,300,000

The
summation of quarterly per share amounts may not equal the calculation for the full year, as each quarterly calculation is performed discretely. During 2002 and 2001, management
refined its estimates of income taxes in the fourth quarter.

F-21

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PDS Gaming Corporation and Subsidiaries  SCHEDULE IIVALUATION AND QUALIFYING  ACCOUNTS AND RESERVES  Years Ended December 31, 2002, 2001, and 2000  (in thousands)

|                                                                            |  |   |       | Additions |   |       |  |  
|--------------------------------------------------------------------------- |  | - | ----- | --------- | - | ----- |  | -
|
|Year ended December 31, 2002:                                               |  |   |       |           |   |       |  |  
|Allowance for doubtful accounts
(deducted from accounts receivable)         |  | $ | 1,067 |           | $ | 126   |  | $
|                                                                            |  |   |       |           |   |       |  |  
|Allowance for obsolescence
(deducted from equipment held for sale or lease) |  | $ | 583   |           | $ | 634   |  | $
|                                                                            |  |   |       |           |   |       |  |  
|Allowance for impairment
(deducted from equipment under operating lease)    |  | $ |      |           | $ |      |  | $
|                                                                            |  |   |       |           |   |       |  |  
|Year ended December 31, 2001:                                               |  |   |       |           |   |       |  |  
|Allowance for doubtful accounts
(deducted from accounts receivable)         |  | $ | 1,697 |           | $ | 651   |  |  
|                                                                            |  |   |       |           |   |       |  |  
|Allowance for obsolescence
(deducted from equipment held for sale or lease) |  | $ | 199   |           | $ | 1,082 |  |  
|                                                                            |  |   |       |           |   |       |  |  
|Allowance for impairment
(deducted from equipment under operating lease)    |  | $ | 297   |           | $ | 239   |  |  
|                                                                            |  |   |       |           |   |       |  |  
|Year ended December 31, 2000:                                               |  |   |       |           |   |       |  |  
|Allowance for doubtful accounts
(deducted from accounts receivable)         |  | $ | 2,338 |           | $ | 120   |  |  
|                                                                            |  |   |       |           |   |       |  |  
|Allowance for obsolescence
(deducted from equipment held for sale or lease) |  | $ | 270   |           | $ | 229   |  |  
|                                                                            |  |   |       |           |   |       |  |  
|Allowance for impairment
(deducted from equipment under operating lease)    |  | $ | 400   |           | $ | 92    |  | $
|                                                                            |  |   |       |           |   |       |  |  

F-22

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