**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB**

 
| **ý** | **Annual Report Under Section 13 or 15(d) of the Securities  Exchange Act of 1934** |
|------------|-------------------------------------------------------------------------------------|

 

**Forthe fiscal year ended: December 31, 2002**

 
| **o** | **Transition Report Under Section 13  or 15(d) of the Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------|

 

**Commissionfile number 0-20630**

 

**FULL HOUSERESORTS, INC.**

(Name of Small Business Issuer in ItsCharter)

 
| **Delaware**                                                    |   | **13-3391527**                              |
|-----------------------------------------------------------------|--------|---------------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer Identification No.)        |
|                                                            |   |                                        |
| **4670 S. Fort Apache Rd., Suite 190, Las Vegas, Nevada 89147** |
| (Address and zip code of principal  executive offices)          |
|                                                            |   |                                        |
| **(702) 221-7800**                                              |
| (Issuer’s Telephone Number, Including Area  Code)          |
|                                                            |   |                                        |
| Securities registered under Section 12(b)  of the Exchange Act: |
|                                                            |
| **None**                                                        |   | **None**                                    |
| (Title of Each Class)                                           |   | (Name of Each Exchange on Which Registered) |
|                                                            |   |                                        |
| Securities registered under Section 12(g)  of the Exchange Act: |
|                                                            |   |                                        |
| **Common Stock, $.0001 per Share**                              |
| (Title of class)                                                |

 

Check whetherthe registrant:  (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for the past90 days.  Yes ý  No o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. ý

 

State issuer’s revenues for its most recent fiscal year:  $4,817,681*.*

 

The aggregate market value of registrant’s voting $.0001 par valuecommon stock held by non-affiliates of the registrant, as of June 30, 2002 was:$1,717,549.

 

The number of shares outstanding of registrant’s $.0001 par valuecommon stock, as of March 14 2003, was 10,340,380 shares.

 

# **Documents Incorporated By Reference**

The Registrant’s Definitive Proxy Statement for its 2003 annual meetingof stockholders will be filed with the Securities and Exchange Commission nolater than 120 days after the end of the fiscal year covered by this Form10-KSB pursuant to General Instruction E 3 of the Form 10-KSB.  Information from such Definitive ProxyStatement will be incorporated by reference into Part III, items 9, 10, 11 and12 hereof.

 

 

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**PARTI**

 

**1.****        Descriptionof Business.**

 

**BACKGROUND**

 

Full House Resorts, Inc. develops and operates destination resorts andentertainment and gaming centers.  Weoperate Midway Slots and Simulcast at the Delaware State Fairgrounds inHarrington, Delaware.  Midway Slots andSimulcast has a total of approximately 1,400 gaming devices, a 450-seat buffet,a 50-seat diner and an entertainment lounge area.  We also operated, until August 2002, the Mill Casino, which islocated on Tribal Trust Lands of the Coquille Indian Tribe in North Bend,Oregon. We are also involved in the development of a Tribal project in BattleCreek, Michigan.

 

Our involvement with Indian Tribes began in May 1994 when Lee Iacocca,currently one of our directors, brought to us opportunities to become involvedin the development of gaming projects in the Detroit, Michigan metropolitanarea together with certain Indian tribes that we refer to as the OrganizedTribes, a second project in Michigan with the Nottawaseppi Huron Band ofPotawatomi, a project in southern California with the Torres Martinez DesertCahuilla Indians and the Harrington, Delaware project.

 

We were incorporated in Delaware on January 5, 1987.  Our executive offices are located at 4670 S.Fort Apache Rd., Suite 190, Las Vegas, Nevada 89147, telephone (702) 221-7800.

 

**GTECHJOINT VENTURES**

 

In April 1995, we entered into a series of agreements with GTECHCorporation, a wholly-owned subsidiary of GTECH Holdings Corporation, a leadingsupplier of computerized on-line lottery systems and services forgovernment-authorized lotteries, to jointly pursue gaming opportunities.  Excluded from these agreements was theDeadwood Gulch Resort, which we then owned. Pursuant to the agreements, joint venture companies equally owned byDreamport, Inc., the gaming and entertainment subsidiary of GTECH, and FullHouse were formed.  We contributed our gamingrights to the North Bend, Oregon facility and our gaming rights to develop theTorres Martinez, Nottawaseppi Huron Band of Potawatomi and Delaware State Fairprojects to the joint venture companies.

 

In payment for our interest in the joint venture companies, wecontributed cash and other intangible assets to the companies and committed toloan the joint venture companies up to $16.4 million to complete the NorthBend, Oregon and Delaware facilities. We agreed to guarantee one-half of the obligations of the joint venturecompanies to GTECH under these loans. The Delaware and Oregon loans have been repaid in full.  GTECH also agreed to make loans to us forour portion of the financing of projects if we were unable to otherwise obtainfinancing.  GTECH provided projectmanagement, technology and other expertise to analyze, develop and manage theimplementation of opportunities developed by the joint venture companies.  GTECH also loaned us $3.0 million, with interestpayable monthly at prime, and the principal balance originally due in January2001.  This note was paid in February2002.  Although the loan was convertibleinto 600,000 shares of our common stock, the loan conversion clause expiredwithout exercise.  As part of the GTECHrelationship, Allen E. Paulson, William P. McComas and Lee Iacocca gave GTECHan option, which expired on December  29, 2000, to buy their shares shouldthey have proposed to transfer them.

 

**Acquisitionof GTECH’s Interest**

 

On March 30, 2001, we bought GTECH’s 50% interest in three jointventure projects that had been equally owned by GTECH and us:

 

Gaming Entertainment, LLC, owner of an agreement that continued throughAugust 2002 with the Coquille Indian Tribe, which conducted gaming at The MillCasino in North Bend, Oregon;

 

Gaming Entertainment (Michigan), LLC, owner of a management agreementwith the Nottawaseppi Huron Band of Potawatomi to develop and manage a gamingfacility near Battle Creek, Michigan; and

 

Gaming Entertainment (California), LLC, owner of a management agreementwith the Torres Martinez Band of Desert Cahuilla Indians to manage a gamingfacility near Palm Springs, California.

 

The purchase price was $1.8 million, and was funded through ourexisting credit facility.  As part ofthis transaction, GTECH extended the due date of our $3.0 million promissorynote until January  25, 2002, with interest at prime.  This note was repaid in full in February2002.  Also, as part of thistransaction, GTECH was no longer required to provide the necessary financingfor the development projects in Michigan and California.

 

This transaction did not include our other joint venture with GTECH,Gaming Entertainment (Delaware), LLC, owner of a management agreement,continuing through 2011, to manage Midway Slots & Simulcast in Harrington,Delaware.  We continue to own this jointventure with GTECH.

 

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Below is a short description of our remaining joint venture with GTECHand the gaming projects and opportunities that we now own.

 

**Project CurrentlyOperating**

 

**MidwaySlots and Simulcast—Harrington, Delaware**

 

We opened Midway Slots and Simulcast, owned by Harrington Raceway, Inc.on August 20, 1996.  The original35,000 square foot facility located near Dover, Delaware, was developed,financed and is managed by a Full House-Dreamport joint venture company.  The joint venture provided over $11 millionin financing, developed the project and acts as manager of the gaming facilityunder a 15-year contract.  The facilityopened with 500 gaming devices, a simulcast parlor and a small buffet.

 

During 1998, the 150-seat simulcast parlor was moved to the HarringtonRaceway Grandstand, the food and beverage operation in the Grandstand wasimproved and expanded, and additional gaming devices were added to the facilitybringing the total to 742.  HarringtonRaceway, Inc. secured a bank loan to pay for these and other improvements andto pay off the development loan from the joint venture company.

 

In May 2000, the facility was expanded by an additional 35,000 squarefeet, the food service offerings were expanded to include a 450-seat buffet anda 50-seat diner, and an entertainment lounge area was added.  The facility now accommodates 1,430 gamingdevices.  The cost of approximately $6.5million was funded by the owner.

 

Midway Slots and Simulcast is located in Harrington, Delaware on Route13, approximately 20 miles south of Dover, Delaware between Philadelphia andBaltimore/Washington, D.C.  Midway Slotsand Simulcast is one of three facilities operating in Delaware.  The closest competing casino is in Dover andoperates 2,000 devices, the maximum number allowed in Delaware.  The other facility is approximately 60 milesnorth of Harrington.

 

Under the 15 year management agreement, the venture receives apercentage of gross revenues and operating profits.  The joint venture company changed its management fee structurefor revenues and operating profits in excess of defined amounts, in recognitionof the owner providing complete financing for the May 2000 expansion.

 

In November 2002, both Maryland and Pennsylvania elected governorssupporting some type of gaming legalization. Our facility draws a significant number of customers from Maryland andwe believe that competitive gaming in Maryland would have an impact on ourfacility.  The magnitude would depend onboth the form of gaming that is authorized, and the locations of competingfacilities.

 

**Project OperatingDuring Part of 2002**

 

**TheMill Casino—North Bend, Oregon**

 

The Mill Casino opened on May 19, 1995 with 250 video lotteryterminals, nine blackjack tables, three poker tables, a restaurant and buffet,a saloon, a bingo hall, a gift shop and a snack bar on Tribal Trust Lands ofthe Coquille Indian Tribe in North Bend, Oregon.  We originally received 13% of gaming revenue, but that decreasedto 10% under the terms of the agreement. Also, if gross gaming revenue for any twelve-month period exceeded$20,000,000, then only 10% of amounts in excess of such threshold would bepaid.  No Fees were to be paid afterAugust  19, 2002, the termination date of our agreement with theTribe.  The contract expired accordingto its terms in August 2002.

 

**Projects inDevelopment**

 

**NottawaseppiHuron Band of Potawatomi—Battle Creek, Michigan**

 

We entered into a series of agreements in January 1995 with theNottawaseppi Huron Band of Potawatomi, a Michigan Indian Tribe, to develop andmanage gaming and non-gaming commercial opportunities for the Tribe.  The Tribe’s state reservation lands are inSouthcentral Michigan.  If developed,the facility will target the Ft. Wayne, Indiana and Lansing and Detroit,Michigan metropolitan areas.

 

The Tribe achieved final federal recognition as a tribe in April1996.  The Tribe obtained a GamingCompact from Michigan’s governor early in 1997 to operate an unlimited numberof electronic gaming devices as well as roulette, keno, dice and banking cardgames.  The Michigan Legislatureratified the Compact by resolution in December 1998, along with compacts forthree other tribes.  A lawsuit was filedin 1999 by “Taxpayers of Michigan Against Casinos” in Ingham County CircuitCourt.  The lawsuit challenged theconstitutionality of the approval process of these gaming compacts.  On January  18, 2000, Judge Peter D.Houk ruled that the compacts must be approved by a legislative bill rather thanby resolution.  The State of Michiganfiled an appeal to the

 

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Michigan Court of Appeals onFebruary  4, 2000.  We joined inthe appeal filing as an intervening defendant. On November 12, 2002, the Michigan Court of Appeals unanimouslyoverturned the lower court decision; ruling that the compacts were valid.  The plaintiff filed an appeal with theMichigan Supreme Court on December 3, 2002. The parties have filed their initial briefs.

 

In December 1999, the management agreements, along with the requiredlicensing applications were submitted to the National Indian Gaming Commission,which we refer to as the NIGC.  We metwith the NIGC several times to review suggested revisions to the managementagreements and, working with the Tribe, have incorporated all the appropriatechanges.

 

In December 1999, the Tribe applied to have its existing reservationlands, as well as additional land in its ancestral territory, taken into trustby the Bureau of Indian Affairs.  Theparties selected a parcel of land for the gaming enterprise, which is underoption, and completed a Fee-to-Trust application that was submitted to the Bureauof Indian Affairs in Washington, D.C. in February 2002.  On August 9, 2002, the United StatesDepartment of Interior issued its notice to take the land into trust for thebenefit of the Tribe.  On August 30, 2002“Citizens Exposing Truth About Casinos” filed a complaint in Federal DistrictCourt for the District of Columbia, seeking to prevent this land from beingtaken into trust.   The parties havefiled their initial briefs and are awaiting the scheduling of oral arguments.

 

A Full House-GTECH joint venture company had the exclusive right toprovide financing and casino management expertise to the Tribe in exchange fora defined percentage of net profits and certain other considerations from anyfuture gaming or related activities of the Tribe.  If the project is developed, a third party will be paid a royaltyfee in lieu of its original 15% ownership interest in earlier contracts withthe Tribe.

 

We acquired GTECH’s interest in this project in March 2001.  On February 15, 2002, we entered into an agreement with RAMEntertainment, LLC, a privately held investment company, whereby RAM willacquire a 50% interest in the California and Michigan projects and provide thenecessary funding for their development. RAM loaned us $2,381,260, which we used to retire our outstanding loanfrom GTECH.  The loan is to be convertedto a 50% equity position in these projects once our management contractsreceive regulatory approval, and the gaming site is taken into trust for theTribe.  If these approvals were not receivedby February 15, 2003, then the loan was to be repaid and RAM would forfeit anyinterest in these ventures.  However, wehave entered into an agreement to extend this date to August 15, 2003.

 

On November 5, 1996, Michigan voters approved licenses for three gamingfacilities within the City of Detroit, approximately 100 miles from the BattleCreek area.  Two temporary facilitiesbegan operations in 1999, and the third opened in 2000.  We do not believe that operation of threegaming facilities in Detroit will have a material adverse impact on theproposed Huron Potawatomi casino.

 

**TorresMartinez Band of Desert Cahuilla Indians—Thermal, California**

 

In April 1995, we entered into a Gaming and Development Agreement and aGaming Management Agreement with the Torres Martinez Desert Cahuilla Indians.  The agreements give us certain rights todevelop, manage, and operate gaming activities for the Tribe and the right toreceive a defined percentage of the net revenues from gaming activities.  Our right to receive a percentage of therevenues is subject to our obligation to arrange or provide financing for thedevelopment.  The rights to theseagreements were assigned to a Full House-GTECH joint venture company.  In 1997, a new Gaming Management Agreementwas signed, further defining the rights and obligations of the Tribe and FullHouse.  In March 2001, we acquiredGTECH’s interest in this project.

 

During 1996, the Tribe reached a settlement in its litigation with theDepartment of Justice and two water districts, under which the Tribe will bepaid $14.0 million in compensation. Additionally, the Tribe will have the right to select up to 11,200 acresof new reservation land to be taken into trust in replacement for the samequantity of land, which was flooded by the rising level of the Salton Sea.  That settlement, which required legislativeenactment, was approved by the U. S. House of Representatives and the Senate inDecember 2000.  The settlement allowsthe Tribe to acquire land in a specifically defined area (generally in the PalmSprings, California area) for purposes of conducting a gaming enterprise.

 

The Tribe asked the California governor to negotiate a compact allowingthem to conduct gaming on their current reservation.  To date the request has not been honored.  In February 2001, an action was filed inU.S. District Court by several Card Club owners challenging the Tribalcompacts.  The litigation claims thatawarding exclusive rights to Indian Tribes violates federal statutory andconstitutional law.  The court ruled infavor of the Tribal compacts.  Weunderstood that the governor was awaiting action by the courts beforeaddressing any pending compact requests. The Tribe has been contacted by the governor’s office indicating awillingness to discuss their compact request.

 

In August 2001, we received a notice from the Tribe purporting to severour relationship.  Our balance sheetincludes as a receivable, a $25,000 advance due from the Tribe.  In addition, Gaming and Contract Rightsincludes approximately $140,000 attributable to this contract.  We have incurred an aggregate ofapproximately $1 million in costs, including interest, on the Tribe’sbehalf.  In June 2002, the Triberequested additional documentation concerning these costs, which we haveprovided.  We are discussing an appropriateresolution of this matter including reimbursement for costs that weincurred.  While there can be noassurance, we believe

 

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that we can recover the amountscarried on our balance sheet based upon the Tribe’s expressed intentions aswell as our contractual rights.

 

**THEMEHOTEL/CASINO—BILOXI, MISSISSIPPI**

 

We bought a one-acre parcel of land on the gulf coast in Biloxi,Mississippi in February 1998, for $4,621,670 with the intent of developing athemed casino resort.  The land is nearthe interchange of Beach Blvd. and Interstate 110, and next to the Beau RivageResort developed by Mirage Resorts, Inc. We later negotiated to buy and/or lease approximately six additionalacres, which, together with the parcel already acquired, would constitute theproject site.

 

In November 1998, we executed a series of agreements with Hard RockCafe International to develop the project in Biloxi, Mississippi.  The agreements give us the right to developand operate a Hard Rock Casino in Biloxi. We paid a territory fee of $2,000,000. In September 1998, Full House and Allen  E. Paulson formed alimited liability company, equally owned, for the purpose of developing thisproject.  Mr. Paulson agreed tocontribute a gaming vessel (the former Treasure Bay barge in Tunica, MS.), andwe agreed to contribute our rights to the Hard Rock agreements.  In June 2001, we agreed to dissolve thiscompany with each party retaining their respective rights and assets.

 

Hard Rock was to be a partner with us in a Management and DevelopmentAgreement for an ongoing management fee. In February 1999, we entered into various option agreements with severalowners of the adjacent properties needed for our project.   We also started discussions with investmentbankers concerning the financing for the project, and started preparing ouroffering materials.  During thosediscussions, it became clear that the expected capital market requirements forthe project financing were not acceptable to either Hard Rock or us.

 

By mutual agreement we ended the Management and Development Agreementwhich relieved Hard Rock of its obligation to co-manage the facility.  We are still allowed to seek an equitypartner to fill Hard Rock’s role. Additionally, the parties amended certainportions of the Licensing Agreement. While negotiating to amend the agreements, we entered into discussionswith potential equity partners. Discussions with potential partners ended in November 1999 without adefinitive agreement.

 

After being unable to find an equity partner, we were faced withexpiring, but extendible, purchase options and deposits.  After analyzing the costs and risks of thoseoptions, we elected not to spend the necessary $600,000 for additionalextensions, since it was unlikely that we would be able to complete thetransaction by the extended expiration date. As a result, the options expired and we forfeited our deposits,resulting in a write-off of $1,350,000 in 1999.  In addition in 1999, we also expensed the costs incurred forpreparing the draft offering documents.

 

Although we no longer had agreements in place to control thedevelopment site, we continued communications with the various landowners andpotential equity partners to assist in the development and management of theproject.  During the third quarter of2001, our discussions with various potential partners for the development ofthe Hard Rock - Biloxi project concluded with no agreement.  Because of the timing requirements in ouragreements with Hard Rock, and the current conditions in the tourism industry,we do not believe we can develop this project as planned.

 

Since we will not be developing this project as planned, we reviewedthe carrying values of our Mississippi investments which include a one acreparcel of land acquired for $4,621,670, the Hard Rock license acquired for$2,000,000, and development permits and plans carried at $444,130.  We recorded an impairment provision of$4,593,800, to reduce the carrying value to $2,472,000, which primarily representsthe estimated fair value of our land parcel. We also expensed $250,000 in the first quarter of 2001 related to theexpiration of a land purchase option that we chose not to exercise or renew.

 

In November 2002, we entered into a termination agreement with HardRock with respect to the Licensing Rights, which were due to expire by contracton November 20, 2003.  We received$100,000 in exchange for relinquishing any right we had to prevent Hard Rockfrom entering into any other licensing agreements in Mississippi prior to theoriginal contract termination date. Additionally, if Hard Rock executes a new licensing agreement for Biloxiwithin one year of the termination agreement, we agreed to provide consultingservices to Hard Rock for a two year period.

 

**GOVERNMENTREGULATION**

 

The ownership, management, and operation of gaming facilities aresubject to many federal, state, provincial, tribal and/or local laws,regulations and ordinances, which are administered by the relevant regulatoryagency or agencies in each jurisdiction. These laws, regulations and ordinances are different in eachjurisdiction, but mostly deal with the responsibility, financial stability andcharacter of the owners and managers of gaming operations as well as personsfinancially interested or involved in gaming operations.

 

Neither Full House nor any subsidiary may own, manage or operate agaming facility unless they obtain proper licenses, permits and approvals.  Applications for a license, permit orapproval may be denied for reasonable cause. Most regulatory authorities

 

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license, investigate, anddetermine the suitability of any person who has a material relationship withus.  Persons having materialrelationships include officers, directors, employees, and security holders.

 

Once obtained, licenses, permits, and approvals must be renewed fromtime to time and generally are not transferable.  Regulatory authorities may at any time revoke, suspend,condition, limit, or restrict a license for reasonable cause.  License holders may be fined and in somejurisdictions and under certain circumstances gaming operation revenues can beforfeited.  We cannot guarantee that wewill obtain any licenses, permits, or approvals, or if obtained, will berenewed or not revoked in the future. In addition, a rejection or termination of a license, permit, orapproval in one jurisdiction may have a negative effect in other jurisdictions.  Some jurisdictions require gaming operatorslicensed in that state to receive their permission before conducting gaming inother jurisdictions.

 

The political and regulatory environment for gaming is dynamic andrapidly changing.  The laws,regulations, and procedures dealing with gaming are subject to the interpretationof the regulatory authorities and may be amended.  Any changes in such laws, regulations, or their interpretationscould have a negative effect on Full House.

 

Certain specific provisions applicable to us are described below.

 

**IndianGaming.**  Gamingon Indian Lands (lands over which Indian tribes have jurisdiction and whichmeet the definition of Indian Lands under the Indian Gaming Regulatory Act of1988, which we refer to as the Regulatory Act), is regulated by federal, stateand tribal governments.  The regulatoryenvironment regarding Indian gaming is always changing.   Changes in federal, state or tribal law orregulations may limit or otherwise affect Indian gaming or may be appliedretroactively and could then have a negative effect on Full House or itsoperations.

 

The terms and conditions of management contracts or other agreements,and the operation of casinos on Indian Land, are subject to the Regulatory Act,which is implemented by the NIGC.  Thecontracts also are subject to the provisions of statutes relating to contractswith Indian tribes, which are supervised by the Secretary of the U.S.Department of the Interior.  TheRegulatory Act is interpreted by the Secretary of the Interior and the NIGC andmay be clarified or amended by the judiciary or legislature.   Under the Regulatory Act, the NIGC has thepower to:

 
| • |   | inspect and examine certain Indian gaming facilities;                         |
|--------|--------|-------------------------------------------------------------------------------|
|   |   |                                                                          |
| • |   | do background checks on persons associated with Indian gaming;                |
|   |   |                                                                          |
| • |   | inspect, copy and audit all records of Indian gaming facilities;              |
|   |   |                                                                          |
| • |   | hold hearings, issue subpoenas, take depositions, and adopt  regulations; and |
|   |   |                                                                          |
| • |   | penalize violators of the Regulatory Act.                                     |

 

Penalties for Regulatory Act violators include fines, and possibletemporary or permanent closing of gaming facilities.    The Department of Justice may also imposefederal criminal sanctions for illegal gaming on Indian Lands and for theftfrom Indian gaming facilities.

 

The Regulatory Act also requires that the NIGC review tribal gamingordinances.  Such ordinances areapproved only if they meet certain requirements relating to:

 
| • |   | ownership;                                                          |
|--------|--------|---------------------------------------------------------------------|
|   |   |                                                                |
| • |   | security;                                                           |
|   |   |                                                                |
| • |   | personnel background;                                               |
|   |   |                                                                |
| • |   | record keeping and auditing of the tribe’s gaming enterprises; |
|   |   |                                                                |
| • |   | use of the revenues from gaming; and                                |
|   |   |                                                                |
| • |   | protection of the environment and the public health and safety.     |

 

The Regulatory Act also regulates Indian gaming and managementcontracts.  The NIGC must approvemanagement contracts and collateral agreements, including agreements like promissorynotes, loan agreements and security agreements.  A management contract can be approved only after determining thatthe contract provides for:

 

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| • |   | adequate accounting procedures and verifiable financial reports,  copies of which must be furnished to the tribe;                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| • |   | tribal access to the daily operations of the gaming enterprise,  including the right to verify daily gross revenues and income;

                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| • |   | minimum guaranteed payments to the tribe, which must have priority  over the retirement of development and construction costs;

                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| • |   | a ceiling on the repayment of such development and construction  costs; and                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| • |   | a contract term not exceeding five years and a management fee not  exceeding 30% of profits if the Chairman of the NIGC determines that the fee  is reasonable considering the circumstances; provided that the NIGC may  approve up to a seven year term and a management fee not to exceed 40% of net  revenues if the NIGC is satisfied that the capital investment required or the  income projections for the particular gaming activity justify the larger  profit allocation and longer term. |

 

Under the Regulatory Act, we must provide the NIGC with backgroundinformation, including financial statements and gaming experience, on:

 
| • |   | each person with management responsibility for a management contract;                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                           |
| • |   | each of our directors; and                                                                                                     |
|   |   |                                                                                                                           |
| • |   | the ten persons who have the greatest direct or indirect financial  interest in a management contract to which we are a party. |

 

The NIGC will not approve a management company and may void an existingmanagement contract if a director, key employee or an interested person of themanagement company:

 
| • |   | is an elected member of the Indian tribal government that owns the  facility being managed;                                                                                                                                                                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                        |
| • |   | has been or is convicted of a felony or misdemeanor gaming offense;                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                        |
| • |   | has knowingly and willfully provided materially false information to  the NIGC or a tribe;                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                        |
| • |   | has refused to respond to questions from the NIGC;                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                        |
| • |   | is a person whose prior history, reputation and associations pose a  threat to the public interest or to effective gaming regulation and control,  or create or enhance the chance of unsuitable, unfair or illegal activities  in gaming or the business and financial arrangements incidental thereto; or |
|   |   |                                                                                                                                                                                                                                                                                                        |
| • |   | has tried to influence any decision or process of tribal government  relating to gaming.                                                                                                                                                                                                                    |

 

Contracts mayalso be voided if:

 
| • |   | the management company has materially breached the terms of the  management contract, or the tribe’s gaming ordinance; or  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                            |
| • |   | a trustee, exercising the skill and diligence to which a trustee is  commonly held, would not approve such management contract. |

 

The Regulatory Act divides games that may be played on Indian Land intothree categories.  Class I Gamingincludes traditional Indian games and private social games and is not regulatedunder the Regulatory Act.  Class IIGaming includes bingo, pull tabs, lotto, punch boards, tip jars, instant bingo,and other games similar to bingo, if those games are played at a location wherebingo is played.  Class III Gamingincludes all other commercial forms of gaming, such as video casino games(e.g., video slots, video blackjack); so-called “table games” (e.g., blackjack,craps, roulette); and other commercial gaming (e.g., sports betting andpari-mutuel wagering).

 

Class II Gaming is allowed on Indian Land if performed according to atribal ordinance which has been approved by the NIGC and if the state in whichthe Indian Land is located allows such gaming for any purpose.  Class II Gaming also must comply withseveral other requirements, including a requirement that key managementofficials and employees be licensed by the tribe.

 

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Class III Gaming is permitted on Indian Land if the same conditionsthat apply to Class II Gaming are met and if the gaming is performed accordingto the terms of a written agreement between the tribe and the host state.  The Regulatory Act requires states tonegotiate in good faith with Indian tribes that seek to enter into tribal-statecompacts, and gives Indian tribes the right to get a federal court order toforce negotiations.

 

The negotiation and adoption of tribal-state compacts is vulnerable tolegal and political changes that may affect our future revenues and securitiesprices.  Full House cannot predict:

 
| • |   | which additional states, if any, will approve casino gaming on Indian  Land;                       |
|--------|--------|----------------------------------------------------------------------------------------------------|
|   |   |                                                                                               |
| • |   | the timing of any such approval;                                                                   |
|   |   |                                                                                               |
| • |   | the types of gaming permitted by each tribal-state compact;                                        |
|   |   |                                                                                               |
| • |   | any limits on the number of gaming machines allowed per facility; or                               |
|   |   |                                                                                               |
| • |   | whether states will attempt to renegotiate or take other steps that  may affect existing compacts. |

 

Under the Regulatory Act, Indian tribal governments have primaryregulatory authority over gaming on Indian Land within the tribe’s jurisdictionunless a tribal-state compact has delegated this authority.   Therefore, persons engaged in gaming activities,including Full House, are subject to the provisions of tribal ordinances andregulations on gaming.

 

Tribal-State Compacts have been litigated in several states, includingCalifornia and Michigan.  In addition,many bills have been introduced in Congress that would amend the RegulatoryAct.   If the Regulatory Act wereamended, the governmental structure and requirements by which Indian tribes mayperform gaming could be significantly changed.

 

**COMPETITION**

 

The gaming industryis highly competitive.  Gamingactivities include traditional land-based casinos; river boat and docksidegaming; casino gaming on Indian land; state-sponsored lotteries and video pokerin restaurants, bars and hotels; pari-mutuel betting on horse racing, dogracing and jai alai; sports bookmaking; and card rooms.  The Indian-owned casinos that we developedand operate compete with all these forms of gaming, and will compete with anynew forms of gaming that may be legalized in additional jurisdictions, as wellas with other types of entertainment.

 

Midway Slots andSimulcast is one of three facilities currently operating in Delaware.  In addition, in November 2002, bothMaryland and Pennsylvania elected governors supporting some type of gaminglegalization.  Our facility draws asignificant number of customers from Maryland and we believe that competitivegaming in Maryland would have an impact on our facility.  The magnitude would depend on both the formof gaming that is authorized, and the locations of competing facilities.

 

The State ofMichigan, a potential development site for Full House, currently has threegaming facilities operating in Detroit and numerous Indian casinos.

 

Additionally, weare in constant competition with other companies in the industry to acquireother legal gaming sites and for opportunities to manage casinos on Indianland.  Many of our competitors arelarger in terms of potential resources and personnel.  Such competition in the gaming industry could adversely affectour ability to attract customers and thus, adversely affect operating results.In addition, further expansion of gaming into new jurisdictions could alsoadversely affect our business by diverting customers from its managed casinosto competitors in such jurisdictions.

 

**RISK FACTORS**

 

In addition tofactors discussed elsewhere in this Form 10-KSB, the following are importantfactors that could cause actual results or events to differ materially fromthose contained in any forward-looking statement made by or on behalf of FullHouse.

 

The Gaming Industryis Highly Regulated.  Gaming facilityownership, management and operation is subject to many federal, state,provincial, tribal and/or local laws, regulations, and ordinances which areadministered by particular regulatory agency or agencies in each jurisdiction.  These laws, regulations and ordinances aredifferent in each jurisdiction but generally deal with the responsibility,financial stability and character of the owners and managers of gamingoperations and persons financially interested or involved in gaming operations.  The change of these laws, regulations orordinances could affect our performance.

 

We Are Currently aDefendant in Litigation Which Could Result in an Obligation to Pay SubstantialAmounts.  Full House and some of ourcurrent and former directors and officers are defendants in a lawsuit with LoneStar Casino regarding the potential acquisition of a riverboat casino on theMississippi Gulf Coast.  We cannotguarantee the results of such litigation.

 

8

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We Will NeedAdditional Capital to Pursue Gaming Opportunities.  We believe we have enough revenue to finance presentoperations.  We will, however, needsubstantial additional funding to pursue gaming opportunities in Michigan andCalifornia.  We may not be able to getsuch financing.  If we get suchfinancing, you should know that any additional equity financings may bedilutive to shareholders, and any debt financing may involve additionalrestrictions.  An inability to raisesuch funds when needed might require us to delay, scale back or eliminate someof our expansion and development goals, and might require us to ceaseoperations entirely.

 

We Have NumerousCompetitors.  The gaming industry ishighly competitive.  Gaming activitiesinclude traditional land-based casinos; river boat and dockside gaming; casinogaming on Indian land; state-sponsored lotteries and video poker inrestaurants, bars and hotels; pari-mutuel betting on horse racing, dog racingand jai alai; sports bookmaking; and card rooms.  The Indian-owned casinos that we are trying to develop andoperate compete with all these forms of gaming, and any new forms of gamingthat may be legalized in additional jurisdictions, as well as with other typesof entertainment.

 

Our ManagementContracts Are of Limited Duration.  Weare prohibited by law from having an ownership interest in any casino we managefor Indian tribes.  The managementcontract for the Coquille Indian Tribe, which conducts the gaming at The MillCasino, ended in August 2002.  Ourmanagement contract for Midway Slots and Simulcast ends in August 2011.  If a management contract is not renewed wewill lose the revenues from such contract which would have a negative effect onour results of operations.  There can beno assurance that our current management contracts will be renewed.

 

Our ManagementContracts Are Subject to Governmental or Regulatory Modification.  The NIGC has the power to requiremodifications to Indian management contracts under some circumstances or tovoid such contracts or secondary agreements including loan agreements if wefail to obtain the required approvals or to comply with the necessary laws andregulations.  While we believe that ourmanagement contracts meet the applicable requirements, NIGC has the right toreview each contract and has the authority to reduce the term of a managementcontract or the management fee or otherwise require modification of thecontract.  Such changes would have anegative effect on our profitability.

 

We Have LimitedRecourses Against Tribal Assets. Development of our gaming opportunities will require us to makesubstantial loans to tribes for the construction, development, equipment andoperations.  Our only recourse forcollection of indebtedness from a tribe or money damages for breach or wrongfultermination of a management contract is from revenues, if any, from casinooperations.

 

We Depend Heavilyon Key Personnel.  We currently haveonly four full time employees, and therefore we rely heavily on the efforts ofeach of these employees.  The loss ofany of our personnel would have a negative impact on Full House.

 

We Have a LimitedBase of Operations.  Our principaloperations currently consist of the management of one facility (Midway Slotsand Simulcast).  This, combined with thepotentially significant investment associated with any new managed facilitiesmay cause our operating results to fluctuate significantly.  Additionally, delays in the opening ornon-opening of any future casinos could also significantly affect our profitability.  Future growth in revenues and profits willdepend on our ability to continue to increase the number of our managed casinosand facilities or develop new business opportunities.  There is no guarantee that we will be able to increase the numberof managed casinos.

 

Development of New Casinos is Subject to Many Risks, Some of Which WeMay Not Be Able to Control.  The openingof each of the proposed facilities will depend on, among other things, thecompletion of construction, hiring and training of sufficient personnel andobtaining all regulatory licenses, permits, allocations andauthorizations.  The number of theapprovals needed to construct and open new facilities is extensive, and thefailure to obtain such approvals could prevent or delay the completion ofconstruction or opening of all or part of such facilities or otherwise affectthe design and features of the proposed casinos.

 

Even if approvals and financing are obtained, major constructionprojects entail significant risks, including a shortages of materials orskilled labor, unforeseen engineering, environmental and/or geologicalproblems, work stoppages, weather interference, unanticipated cost increasesand non-availability of construction equipment.  Construction, equipment or stalling problems or difficulties inobtaining any of the requisite licenses, permits, allocations andauthorizations from regulatory authorities could increase the total cost, delayor prevent the construction or opening or any of these planned casinodevelopments or otherwise affect their design. In addition, once developed, we cannot guarantee that we will be able tomanage these casinos on a profitable basis or to attract a sufficient number ofguests, gaming customers and other visitors to make the various operationsprofitable independently.

 

**EMPLOYEES**

 

As of March 15, 2003, we had four full time employees, three of whom are ourexecutive officers.  Our joint ventureoperations have approximately 420 full time employees, and management believesthat its relationship with its employees is good.  None of our employees are currently represented by a labor union,although such representation could occur in the future.

 

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**2.****       ****Description of Property.**

 

We leased approximately12.5 acres of Tribal Trust Lands from an entity owned by the Coquille IndianTribe on which the Mill Casino is located. We subleased the land on which the casino is located back to the Tribalentity.  This lease and sublease expiredon August 15, 2002.

 

A Full House-GTECHjoint venture company has a fifteen-year lease and leaseback agreement withHarrington Raceway, Inc.  The leaseencumbers the revenues of the gaming facility. The lease is treated as a capital lease and payments began on August 20, 1996.

 

Full House owns aone-acre parcel of land in Biloxi, Mississippi, which was intended to be aportion of a future gaming development site.

 

**3.****       ****Legal Proceedings.**

 

In October 1994, wefiled an action for declaratory relief in Mississippi, seeking a determinationby the court that no relationship exists between us and Lone Star CasinoCorporation regarding the potential acquisition of a riverboat casino on theMississippi gulf coast (Full House Resorts, Inc. v. Lone Star CasinoCorporation v. Allen E. Paulson, Second Judicial District of the Chancery Courtof Harrison County, Mississippi).  LoneStar filed a counterclaim alleging breaches of fiduciary duty, breach ofcontract, conspiracy to breach contract and to breach fiduciary duty and commonlaw fraud.  The trial court grantedsummary judgment in favor of all defendants on that counterclaim, and Lone Starappealed that judgment to the Mississippi appellate court.   In April 1998, the Appeals Court affirmedthe dismissal of all counts against all parties, excepting Lone Star’s claimagainst us for breach of contract, which it remanded to the trial court foradditional hearing.  In January 2000, LSCapital, successor entity to Lone Star Casino Corporation, announced that ithad retained counsel to pursue the two remaining claims it had alleged againstus which were not already dismissed by the Mississippi appellate courts.  In April 2000, the trial judge dismissedboth counts for Lone Star’s failure to prosecute its claims for nearly twentymonths after their remand from the Court of Appeals.  Lone Star appealed that ruling and the Mississippi State Court ofAppeals reversed the dismissal, and in late 2001 again remanded the claimsagainst the Company for breach of contract, back to the trial court for furtherproceedings.

 

**4.****       ****Submission of Matters to a Vote of Security Holders**.

None.

 

**PART II**

 

**5.****       ****Market for Common Equity And Related Stockholder Matters.**

 

**(a)           Market Information**

 

Our common stockwas listed by The Nasdaq SmallCap Market under the symbol FHRI until April 17, 2001.  Thereafter, the stockbegan trading on the OTC Bulletin Board. Set forth below are the high and low sales prices of the common stock asreported on the Nasdaq SmallCap Market System and the OTC Bulletin Board forthe periods indicated.

 
|                         |   | **High** |   | **Low** |   |
|------------------------------|--------|----------|--------|---------|--------|
| Year Ended December 31, 2002 |   |     |   |    |   |
|                         |   |     |   |    |   |
| First Quarter                |   | $        | 0.64   |    | $      | 0.25 |   |
| Second Quarter               |   | 0.70     |   | 0.33    |   |
| Third Quarter                |   | 0.60     |   | 0.28    |   |
| Fourth Quarter               |   | 0.70     |   | 0.42    |   |
|                         |   |     |   |    |   |
| Year Ended December 31, 2001 |   |     |   |    |   |
|                         |   |     |   |    |   |
| First Quarter                |   | $        | 1.22   |    | $      | 0.56 |   |
| Second Quarter               |   | 0.95     |   | 0.65    |   |
| Third Quarter                |   | 0.83     |   | 0.51    |   |
| Fourth Quarter               |   | 0.51     |   | 0.26    |   |

 

The quotationsreflect inter-dealer prices, without retail mark-up, mark-down or commission,and may not represent actual transactions. On March 14, 2003, the last sale price of the Common Stock as reportedby the OTC Bulletin Board was $0.46.

 

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**(b)           Holders**

 

As of March 14, 2003, we had approximately 133 holders of record of our common stock.  We believe that there are over 1,000beneficial owners.

 

**(c)           Dividends**

 

We have never paiddividends on our common stock or Preferred Stock.  Holders of common stock are entitled to receive such dividends asmay be declared by the Board of Directors out of funds legally availabletherefor.

 

Holders of ourSeries 1992-1Preferred Stock are entitled to receive dividends, when, as and if declared bythe Board of Directors out of funds legally available therefor, in the annualamount of $.30 per share, payable in arrears semi-annually on the 15th day ofDecember and June, in each year. Dividends on the Series 1992-1 Preferred Stock commenced accruing on July  1, 1992and are cumulative.  We have notdeclared or paid the accrued dividends on our Preferred Stock which werepayable since issuance, totaling $2,205,000 and, accordingly, are in default inregard thereto.

 

Since we are indefault in declaring, setting apart for payment or paying dividends on thePreferred Stock, we are restricted from paying any dividend or making any otherdistribution or redeeming any stock ranking junior to the Preferred Stock.

 

We intend to retainfuture earnings, if any, to provide funds for the operation of our business,retirement of our debt and payment of preferred stock dividends and,accordingly, do not anticipate paying any cash dividends on our common stock inthe near future.

 

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

 

**Forward LookingStatements**

 

This Annual Reporton Form 10-KSB contains forward -looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, as amended, relating to ourfinancial condition, profitability, liquidity, resources, business outlook,proposed acquisitions, market forces, corporate strategies, consumerpreferences, contractual commitments, legal matters, capital requirements andother matters.  The Private SecuritiesLitigation Reform Act of 1995 provides a safe harbor for forward-lookingstatements.  We note that many factorscould cause our actual results and experience to change significantly from theanticipated results or expectations expressed in our forward-lookingstatements.  When words and expressionssuch as: “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,”“objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,”“may,” “could,” “should,” “might,” “likely,” “enable,” or similar words orexpressions are used in this Form 10-KSB, as well as statementscontaining phrases such as “in our view,” “there can be no assurance,”“although no assurance can be given,” or “there is no way to anticipate withcertainty,” forward-looking statements are being made.

 

Various risks anduncertainties may affect the operation, performance, development and results ofour business and could cause future outcomes to change significantly from thoseset forth in our forward-looking statements, including the following factors:

 
| • |   | our growth strategies;                                                    |
|--------|--------|---------------------------------------------------------------------------|
|   |   |                                                                      |
| • |   | our development and potential acquisition of new facilities;              |
|   |   |                                                                      |
| • |   | risks related to development and construction activities;                 |
|   |   |                                                                      |
| • |   | anticipated trends in the gaming industries;                              |
|   |   |                                                                      |
| • |   | patron demographics;                                                      |
|   |   |                                                                      |
| • |   | access to capital;                                                        |
|   |   |                                                                      |
| • |   | general market and economic conditions;                                   |
|   |   |                                                                      |
| • |   | our ability to finance future business requirements;                      |
|   |   |                                                                      |
| • |   | the availability of adequate levels of insurance;                         |
|   |   |                                                                      |
| • |   | the ability to successfully integrate acquired companies and  businesses; |

 

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| • |   | management retention and development;                                                                                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                |
| • |   | changes in Federal, state, and local laws and regulations, including  environmental and gaming license legislation and regulations; |
|   |   |                                                                                                                                |
| • |   | regulatory approvals;                                                                                                               |
|   |   |                                                                                                                                |
| • |   | competitive environment;                                                                                                            |
|   |   |                                                                                                                                |
| • |   | risks, uncertainties and other factors described from time to time in  this and our other SEC filings and reports.                  |

 

We undertake noobligation to publicly update or revise any forward-looking statements as aresult of future developments, events or conditions.  New risk factors emerge from time to time and it is not possiblefor us to predict all such risk factors, nor can we assess the impact of allsuch risk factors on its business or the extent to which any factor, orcombination of factors, may cause actual results to differ significantly fromthose forecast in any forward-looking statements.

 

**Accounting Policies**

 

Our accountingpolicies are more fully described in Note 2 of Notes to ConsolidatedFinancial Statements.  As disclosedtherein, the preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions about future events that affect the amounts reported in thefinancial statements and accompanying notes. Future events and their effects cannot be determined with absolutecertainty.  Therefore, the determinationof estimates requires the exercise of judgment.  Actual results inevitably will differ from those estimates andsuch differences may be material to the financial statements.

 

The mostsignificant accounting estimates inherent in the preparation of our financialstatements include estimates associated with management’s evaluation of therecoverability of intangibles.  Variousassumptions and other factors underlie the determination of these significantestimates.  The process of determiningsignificant estimates is fact specific and takes into account factors such ashistorical experience, current and expected economic conditions.  We constantly re-evaluate these significantfactors and make adjustments where facts and circumstances dictate.  Historically, actual results have notsignificantly deviated from those determined using the estimates describedabove.

 

**Results of Operations**

 

**Year Ended December 31, 2002Compared to Year Ended December 31, 2001**

 

**Revenues**.  As a result of the acquisition of GTECH’s interest in three jointventure projects (Oregon, Michigan and California), our classification ofrevenues is not directly comparable to prior periods.  The revenues related to our Delaware contract continue to bereported as joint venture revenue, but as of March  31, 2001, the revenuerelated to the Oregon contract is reported as management fees.

 

Total operatingrevenues decreased $178,145 from the prior year period. This decrease is due tothe termination, in August 2002, of the Oregon management agreement, partiallyoffset by improved performance in Delaware. With the expiration of the Oregon contract, our Delaware joint ventureis now our sole source of revenue.  Thisrevenue stream is being used to fund our ongoing operations and the pursuit ofa successful development project in Michigan.

 

*Delaware Joint Venture*.  Our share of income from the Delaware joint venture was$3,288,122, an increase of $313,448, or 10%, compared to $2,974,674 in2001.  During 2002 we were able toincrease the gaming capacity by approximately 150 machines bringing the totalto 1,430 as of December 31, 2002.  Thisincreased capacity, coupled with continuing growth in the market, helped todrive a 16% increase in gaming win.  Inlate November 2002, a non smoking law became effective in Delaware.  This law, which prohibits smoking inenclosed public facilities, applies to our facility.  We experienced a decline in revenue of approximately 14% duringDecember, which was also negatively impacted by severe winter weather.  However, we believe the smoking restrictionsare having a significant impact on our revenues, and also at the competingfacilities in Delaware.

 

*Oregon*.  The total fees attributable to the Oregon contract were$1,529,559 in 2002, compared to $2,303,519 in 2001.  This contract expired in August 2002 in accordance with itsterms, and the reduction in fees is due to the contract termination.

 

**Cost and Expenses**.  As a result of our acquisition of GTECH’s interest in three jointventure projects, our classification of expenses is not directly comparable toprior periods.  The expenses related toour California and Michigan projects, which had been reported as joint venturepre-opening costs, as of March 31, 2001, are reported as development costs.

 

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**Pre-opening and Development**.  Total development related costs (joint venture pre-opening costsand development costs) for the California and Michigan projects were $954,063in 2002, compared to $955,441 for the prior year.  The majority of these costs were due to increased activitiesrelated to the Michigan venture with the Huron Potawatomi Tribe in Battle Creek.  These costs were primarily for legal andconsulting fees to assist the Tribe in obtaining suitable land and complyingwith the requirements of the Indian Gaming Regulatory Act, as well as landoption payments.  We also increased ourownership in these projects to 100% in March 2001.

 

Pre-opening anddevelopment expenses in 2001 included $250,000 related to the expiration of aland purchase option in Biloxi, Mississippi that we chose not to exercise orrenew.  No similar expense was incurredin 2002.

 

**General and AdministrativeExpenses**.  General and administrative expensesincreased by $132,863 to $1,776,059 in 2002 compared to $1,643,196 in the prioryear.  This increase is primarily due toa litigation settlement of $125,000 related to our intended Hard Rock Biloxidevelopment.

 

**Impairment**.  The Impairment provision of $4,593,800, recorded in the thirdquarter of 2001, resulted from an assessment of the carrying values of ourMississippi assets as a result of the unsuccessful conclusion of discussions withpotential partners.  These assets totaled$7,065,800, for land, licenses and permits. The reduction of the carrying value to $2,472,000 represents theestimated fair value of the land parcel.

 

**Depreciation and Amortization**.  Depreciation expense decreased from $23,828 to $16,258.  Amortization of the acquired contract rightswas $200,292 compared to $168,828 in the prior period.  The increase is due to 12 months ofamortization in 2002, compared to only nine months in the prior year. Ourgoodwill had been fully amortized as of September  30, 2001.

 

**Interest Expense**.  Interest expense was $146,067 in 2002 compared to $286,745 in2001.  This decrease is due to a 30%reduction in the average debt outstanding, coupled with a reduction in oureffective borrowing rate from 7% to 5.15%.

 

**Interest and Other Income**.  In November 2002 we entered into a termination agreement withHard Rock concerning our Biloxi, Mississippi licensing rights in exchange for atermination fee of $100,000.  Interestincome is primarily due to earnings on invested cash balances and was slightlyless than the prior year due to declining interest rates.

 

**Income Tax Benefit (Provision).**  The income tax provision for the current year reflects aneffective tax rate of 47.8%, which is a combination of state taxes on jointventure earnings combined with the tax effect of non-deductible amortizationexpenses.  The income tax benefitrecorded for 2001 is primarily a result of the expected tax benefit from therealization of the Impairment provision recorded in the third quarter of 2001.  At December  31, 2002, we had netoperating loss carryforwards for federal income tax purposes of approximately$464,000, which may be carried forward to offset future taxable income.  The loss carryforwards expire in 2019.  The availability of the loss carryforwardsmay be limited in the event of a significant change in ownership of Full Houseor our subsidiaries.

 

**Year Ended December 31, 2001Compared to Year Ended December 31, 2000**

 

**Revenues**.  As a result of the acquisition of GTECH’s interest in three jointventure projects (Oregon, Michigan and California), our classification ofrevenues is not directly comparable to prior periods.  The revenues related to our Delaware contract continue to bereported as joint venture revenue, but as of March  31, 2001, the revenuerelated to the Oregon contract is reported as management fees.

 

Total operatingrevenues increased $1,072,497, or 27% from the prior year period. This increaseis due to improved performance in Delaware and the acquisition of theadditional 50% interest in the Oregon joint venture.

 

*Delaware Joint Venture*.  Our share of income from the Delaware joint venture was$2,974,674, an increase of $191,031, or 7%, compared to $2,783,643 in2000.  On May  11, 2000, we openedan expansion of the Harrington facility, and these revenue increases areprimarily attributable to the increased gaming capacity, coupled withcontinuing growth in the market.

 

*Oregon*.  The total fees attributable to the Oregon contract were$2,303,519 in 2001 compared to $2,279,372 in 2000.  As a result of our March 2001 acquisition of GTECH’s 50%interest, we received a total of $2,021,152 of these fees during 2001.  This compared to our joint venture share ofrevenues of $1,139,686 in the prior year.

 

**Cost and Expenses**.  As a result of our acquisition of GTECH’s interest in three jointventure projects, our classification of expenses is not directly comparable toprior periods.  The expenses related toour California and Michigan projects, which had been reported as joint venture pre-openingcosts, as of March  31, 2001, are reported as development costs.

 

**Pre-opening and Development**.  Total development related costs (joint venture pre-opening costsand development costs) for the California and Michigan projects were $955,441in 2001, compared to $584,337 for the prior year.  The majority of these costs

 

13

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were due to increased activities related to the Michigan venture withthe Huron Potawatomi Tribe in Battle Creek. These costs were primarily for legal and consulting fees to assist theTribe in obtaining suitable land and complying with the requirements of theIndian Gaming Regulatory Act, as well as land option payments.  We also increased our ownership in theseprojects to 100%.

 

We also expensed$250,000 in the first quarter of 2001 related to the expiration of a landpurchase option in Biloxi, Mississippi that we chose not to exercise or renew.

 

**General and AdministrativeExpenses**.  General and administrative expensesdecreased by $202,508 to $1,643,196 in 2001 compared to $1,845,704 in the prioryear.  This decrease is primarily due toreduced payroll expenses and legal fees.

 

**Impairment**.  The Impairment provision of $4,593,800, recorded in the thirdquarter of 2001, resulted from an assessment of the carrying values of ourMississippi assets as a result of the unsuccessful conclusion of discussionswith potential partners.  These assetstotaled $7,065,800, for land, licenses and permits.  The reduction of the carrying value to $2,472,000 represents theestimated net realizable value of the land parcel.

 

**Depreciation and Amortization**.  Although our goodwill had been fully amortized as of September 30, 2001, as a result of the acquired contract rights, our depreciationand amortization expense increased by $41,326.

 

**Interest Expense**.  Interest expense was $286,745 in 2001 compared to $328,379 in2000.  The decrease of  $41,634 is primarily due to the reductionsin the prime interest rate during 2001.

 

**Interest and Other Income**.  Interest and other income was comparable to the prior year and isprimarily due to earnings on invested cash balances.

 

**Income Tax Benefit (Provision).**  The income tax benefit for the current year period is primarily aresult of the expected tax benefit from the realization of the Impairmentprovision recorded in the third quarter. The effective tax rate reflects a combination of state taxes on jointventure earnings combined with the tax effect of non-deductible amortizationexpenses.  At December  31, 2001,we had net operating loss carryforwards for federal income tax purposes ofapproximately $523,000, which may be carried forward to offset future taxableincome.  The loss carryforwards expirein 2019.  The availability of the losscarryforwards may be limited in the event of a significant change in ownershipof Full House or our subsidiaries.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We held cash andcash equivalents of $1,164,053 as of December  31, 2002.  Net cash provided by operating activitieswas $1,771,870 as compared to $1,962,276 in the prior year.  The decrease is primarily due to thedecreased cash flow from Oregon as a result of the expiration of the contract,partially offset by improved performance in Delaware.  Net cash used in investing activities was $256,496, primarily tofund $240,000 in advances to the Michigan Tribe pursuant to our agreements withthem.  In 2001we used $1,800,000 to fundthe GTECH acquisition and $200,000 for advances to the Michigan Tribe.Financing activities used $1,218,740 in cash in 2002 as we repaid the$3,000,000 GTECH note and $600,000 outstanding on our bank line with the$2,381,260 proceeds from the RAM note and cash provided by operations.Financing activities provided net cash of $450,000 in 2001, as we drew $1,800,000on our credit line to fund the GTECH acquisition, and repaid $1,350,000 duringthe year.

 

In 1998, weobtained a $2,000,000 line of credit with Coast Community Bank of Mississippiwith an initial maturity date of February  25, 1999.  We have renewed this line on an annualbasis.  In February 2002, the renewalreduced the availability to $1,000,000 and extended the maturity date to May12, 2003.  The line bears interest adjustabledaily at one-half percent above prime (4.75% at December 31, 2002) and requiresinterest payments monthly on the outstanding balance with all principal andaccrued interest due at maturity on May  12, 2003.  At December  31, 2002, there wasnothing outstanding on the bank line.

 

On February 15,2002, we entered into an agreement with RAM Entertainment, LLC, a privatelyheld investment company, whereby RAM may acquire a 50% interest in theCalifornia and Michigan projects and provide the necessary funding for theirdevelopment.  RAM advanced $2,381,260 tous in the form of a loan, to be forgiven upon receipt by the Huron PotawatomiTribe of federal approvals for its proposed casino near Battle Creek,Michigan.  The loan bears interestadjustable daily at prime and requires interest payments monthly.  The principal was due at maturity onFebruary  15, 2003 unless earlier forgiven pursuant to its terms.  The anticipated approvals have not yet beenreceived, and the parties have extended the maturity date to August 15, 2003.

 

As a result of ouragreement with RAM, development funding cash needs for the Michigan project maybe primarily provided by RAM. Therefore, our future cash requirements will primarily be to fundgeneral and administrative expenses.  OurOregon contract expired in August 2002, leaving the Delaware joint venture as oursole source of operating cash flow.  Webelieve that adequate financial resources will be available to execute ourcurrent business plan.

 

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On April 15, 2002we announced the intent to hire an investment advisor to assist in enhancingshareholder value through the exploration of strategic alternatives.  Although the process is ongoing, there canbe no assurance that any substantive results will be achieved.

 

Full House was aparty to a series of agreements with GTECH Corporation, a leading supplier ofcomputerized systems and services for government-authorized lotteries, tojointly pursue certain gaming opportunities. Pursuant to the agreements, joint venture companies equally owned byGTECH and Full House were formed.  FullHouse contributed its rights to the North Bend, Oregon facility and the rightsto develop the Torres Martinez, Nottawaseppi Huron Band of Potawatomi andDelaware State Fair projects to the joint venture companies.  GTECHcontributed cash and other intangible assets and agreed to loan the jointventure entities up to $16.4 million to complete the North Bend, Oregon andDelaware facilities.  Full House agreedto guarantee one-half of the obligations of the joint venture companies to GTECHunder these loans, all of which have been repaid. GTECH also provided projectmanagement, technology and other expertise to analyze and develop/manage theimplementation of opportunities developed by the joint venture entities.  GTECH also loaned Full House $3.0 million,which loan was convertible into 600,000 shares of Full House Common Stock.  The loan conversion clause expired withoutexercise.  In addition, Full House hasbeen reimbursed by one of the joint venture companies for certain advances andexpenditures made by Full House relating to the gaming development agreements. As part of this transaction, Allen  E. Paulson, William  P.McComas and Lee Iacocca granted to GTECH an option, which expired December 29, 2000, to purchase their shares should they have proposed to transferthem.    The parties are no longerrequired to present gaming opportunities to the other for joint development.

 

On March  30,2001, we acquired GTECH’s 50% interest in three joint venture projects that hadbeen equally owned by the two companies: Gaming Entertainment, LLC, GamingEntertainment (Michigan), LLC, and Gaming Entertainment (California), LLC.  The purchase price was $1.8 million, and wasfunded through Full House’s existing credit facility.  As part of this transaction, GTECH extended the due date of our$3.0 million promissory note until January 25, 2002, with interest atprime.  This note was paid in February2002.

 

As a result of ouragreement with GTECH, receipt by Full House of revenues from the Delaware ventureis governed by the terms of the joint venture agreement.  The contract provides that net cash flow(after certain deductions) is to be distributed monthly to Full House andGTECH.  While Full House does notbelieve that this arrangement will adversely impact its liquidity, ourcontinuing cash flow is dependent on the operating performance of this jointventure, and the ability to receive monthly distributions.

 

As part of theMichigan and California management agreements with the tribes, we have advancedfunds for tribal operations and the construction of a tribal communitycenter.  The Receivable is attributableto this funding, and the repayment obligation is dependent on the futureprofitable operation of the tribes’ gaming enterprises.  In August 2001, we received a notice fromthe Torres-Martinez Tribe in California purporting to sever ourrelationship.  Our balance sheetincludes as a receivable a $25,000 advance due from Torres-Martinez Tribe, andincluded in Gaming and Contract Rights is approximately $140,000 attributableto this contact.  We have incurredaggregate expenses of approximately $1 million, including interest, on behalfof Torres-Martinez Tribe.  InJune 2002, the Tribe requested additional documentation concerning these costs,which we have provided.  We arediscussing an appropriate resolution of this matter including reimbursement forcosts that we incurred.   We believe that these amounts are recoverable based upon theexpressed intentions of Torres-Martinez Tribe, as well as our contractualrights.

 

In November 1998,we executed a series of agreements with Hard Rock related to the proposeddevelopment project in Biloxi, Mississippi. Pursuant to a licensing agreement, Full House has the right to developand operate a Hard Rock Casino in Biloxi. We have paid a territory fee of $2,000,000.  In September 1998, Full House and Allen  E. Paulson formed alimited liability company, equally owned, for the purpose of developing thisproject.  Mr. Paulson agreed tocontribute a gaming vessel (the former Treasure Bay barge in Tunica, MS.), andwe agreed to contribute our rights to the Hard Rock agreements.  In June 2001, we agreed to dissolve thiscompany with each party retaining their respective rights and assets.

 

In September 2001,our discussions with potential partners concluded with no agreements.  Based upon the timing requirements in ouragreements with Hard Rock, and the current conditions in the tourism industrywe did not reasonably expect to be able to develop this project as planned.  As a result of these circumstances, we havereviewed the carrying values of our Mississippi investments and recorded anImpairment provision of $4,593,800.

 

In November 2002, we executed a termination agreement with respect toour Hard Rock licensing rights in Biloxi, Mississippi in exchange for a$100,000 termination fee.  Additionally,if Hard Rock executes a new licensing agreement for Biloxi within one year ofthe termination agreement, we agreed to provide consulting services to HardRock for a two year period.

 

As of December 31, 2002, we had cumulative undeclared and unpaid dividends in the amountof $2,205,000 on the 700,000 outstanding shares of our 1992-1 Preferred Stock.  Such dividends are cumulative whether or notdeclared, and are currently in arrears.

 

**Quantitative Disclosure AboutMarket Risk**.  Market risk is the risk of loss from changesin market rates or prices, such as interest rates and commodity prices.  We are exposed to market risk in the form ofchanges in interest rates and the potential impact such changes may have on ourvariable rate debt.  We have notinvested in derivative based financial instruments.

 

15

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Our total outstanding short-term debt of $2.4 million at December 31,2002, is subject to variable interest rates, which averaged 4.68% during thecurrent year.  Our variable rate debt isbased on the Prime lending rate and therefore, our interest rates on thisvariable rate debt will change as the Prime rate changes.  Based on our $2.4 million of outstandingvariable rate debt at December 31, 2002, a hypothetical 100 basis point (1%)change in rates would result in an annual interest expense change ofapproximately $24,000.

 

**Recent Accounting Pronouncements**.  In July 2001, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standard (“SFAS”) No.  141,“Business Combinations” and SFAS No.  142, “Goodwill and Other IntangibleAssets.”  SFAS  141 prohibits thepooling of interests method of accounting for business combinations initiatedafter June  30, 2001.  SFAS 142, which was effective for Full House in January 2002, requires, amongother things, the discontinuance of goodwill amortization.  In addition, the standard includesprovisions for the reclassification of certain existing intangibles asgoodwill, reassessment of the useful lives of existing intangibles, and ongoingassessments of potential impairment of existing goodwill.

 

Our goodwill, netof accumulated amortization, and the carrying value of the Hard Rock licensingand development rights have been reduced to zero.  Other existing intangibles consist of net Gaming and ContractRights of $5,189,947.

 

In June 2001, theFASB issued SFAS No.  143 “Accounting for Asset Retirement Obligations”which addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs.  This Statementapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development and / ornormal operation, except for certain obligations of lessees.  This Statement is effective for fiscal yearsbeginning after June  15, 2002. The adoption of SFAS No. 143 is not expected to have a material effecton the Company’s financial statements.

 

In August 2001, theFASB issued SFAS No.  144 “Accounting for the Impairment or Disposal ofLong-Lived Assets” which addresses financial accounting and reporting for theimpairment or disposal of long-lived assets and supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of.”    The provisions of this Statement are effective for fiscal years beginningafter December  15, 2001 and interim periods within those fiscalyears.  The adoption of SFAS No. 144 didnot have a material effect on the Company’s financial statements.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies Emerging Issues TaskForce (EITF) Issue 94-3, Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity. The provisions of this Statementare effective for exit or disposal activities that are initiated after December31, 2002, with early application encouraged. The adoption of SFAS No. 146 isnot expected to have a material effect on the Company’s financial statements.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness to Others,” and interpretation of FASB StatementsNo. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. ThisInterpretation elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under guaranteesissued. The Interpretation also clarifies that a guarantor is required torecognize, at inception of a guarantee, a liability for the fair value of theobligation undertaken. The initial recognition and measurement provisions ofthe Interpretation are applicable to guarantees issued or modified afterDecember 31, 2002 and are not expected to have a material effect on theCompany’s financial statements. The disclosure requirements are effective forfinancial statements of interim and annual periods ending after December 31,2002.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure,” an amendment of FASBStatement No. 123. This Statement amends FASB Statement No. 123, Accounting forStock-Based Compensation, to provide alternative methods of transition for avoluntary change to the fair value method of accounting for stock-basedemployee compensation. In addition, this Statement amends the disclosurerequirements of Statement No. 123 to require prominent disclosures in bothannual and interim financial statements. Certain of the disclosuremodifications are required for fiscal years ending after December 15, 2002 andare included in these consolidated financial statements. The adoption of SFAS No.148 is not expected to have a material effect on the Company's financialstatements.

 

16

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**7.****            ****Financial Statements**.

 

The followingfinancial statements are filed as part of this Report:

 

•              Independent Auditors’ Report;

 

•              Consolidated Balance Sheets as of December  31, 2002and 2001;

 

•              Consolidated Statements of Operations for the years endedDecember  31, 2002 and 2001;

 

•              Consolidated Statements of Stockholders’ Equity for the years endedDecember  31, 2002 and 2001;

 

•              Consolidated Statements of Cash Flows for the years endedDecember  31, 2002 and 2001;

 

•              Notes to Consolidated Financial Statements.

 

**8.****            ****Changes in and Disagreements with Accountants on Accountingand Financial Disclosure.**

 

None.

 

**PART III**

 

**9.****            ****Directors, Executive Officers, Promoters and Control Persons;Compliance with Section 16(a) of the Exchange Act.**

 

**(a)           Directors of Full House**

 

The informationrequired regarding the identification of our directors is incorporated byreference to the information in the Proxy Statement for the 2003 Annual Meetingof Stockholders.

 

**(b)****          ****Executive Officers of Full House**

 

Our executive officers and their ages as of March 22, 2003 are asfollows:

 
| **Name**              |   | **Age** |   | **Positions**                                      |
|-----------------------|--------|---------|--------|----------------------------------------------------|
| William P. McComas    |   | 76      |   | Chairman, Chief  Executive Officer                 |
|                  |   |    |   |                                               |
| Michael P. Shaunnessy |   | 49      |   | Executive Vice  President, Chief Financial Officer |
|                  |   |    |   |                                               |
| Megan G. McIntosh     |   | 47      |   | Secretary                                          |

 

**William P. McComas** became Chairman of theBoard and Chief Executive Officer on March 5, 1998.  Mr. McComas has been a Director of Full House since November1992.   Mr. McComas has been Presidentof McComas Properties, Inc., a California real estate development company sinceJanuary 1984.  Mr. McComas and companiescontrolled by him have developed several hotels and resorts, including MarinaBay Resort, Fort Lauderdale, Florida; Ocean Colony Hotel and Resort, Half MoonBay, California; Residence Inn by Marriott, Somers Point, New Jersey; and fiveHoliday Inns located in Des Moines, Iowa; San Angelo, Texas; Suffern, New York;Niagara Falls, New York; and Fort Myers, Florida.

 

**Michael P. Shaunnessy** became Executive VicePresident and Chief Financial Officer in July 1998.  Mr. Shaunnessy has over 15 years experience in the gamingindustry.   From 1995 to 1998, he wasVice President and Chief Accounting Officer of Primadonna Resorts, Inc., thedeveloper of New York - New York in Las Vegas, Nevada.  He was with Aztar Corporation from 1983 to 1995, serving insenior financial positions at properties in New Jersey and Nevada, mostrecently as Vice President-Finance for the Tropicana Resort in Las Vegas.

 

**Megan G. McIntosh** has been employed by FullHouse since December  1, 1994 and has been the Secretary of Full Housesince November  20, 1995.  FromApril 1991 until she joined Full House, Ms. McIntosh was an administrativeassistant for a civil engineering firm located in California.  Prior to that time, Ms. McIntosh was anadministrative assistant for a real estate development firm located in SouthernCalifornia.

 

17

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**10.****     ****Executive Compensation.**

 

The informationrequired in response to this item is incorporated by reference to theinformation contained in the Proxy Statement for the 2003 Annual Meeting ofStockholders.

 

**11.****     ****Security Ownership of Certain Beneficial Owners andManagement**.

 

The informationrequired in response to this item is incorporated by reference to theinformation contained in the Proxy Statement for the 2003 Annual Meeting ofStockholders.

 

**12.****     ****Certain Relationships and Related Transactions**.

 

The informationrequired in response to this item is incorporated by reference to theinformation contained in the Proxy Statement for the 2003 Annual Meeting ofStockholders of Full House.

 

**13.****     ****Exhibits and Reports on Form 8-K.**

 

**(a)           Exhibits**

 

2.5           Assignment and SaleAgreement dated March  30, 2001 by and among GTECH Corporation, Dreamport,Inc., GTECH Gaming Subsidiary 2 Corporation, Full House Resorts, Inc., and FullHouse Subsidiary, Inc.  (Incorporated byreference to Full House’s Current Report on Form 8-K as filed with theSecurities and Exchange Commission on April 12, 2001)

 

10.38       Gaming ManagementAgreement between Full House and the Torres Martinez Desert Cahuilla Indiansdated April  23, 1993 (incorporated by reference to Full House’s QuarterlyReport on Form 10-QSB for the quarter ended March  31, 1995)

 

10.50       Agreement dated as ofNovember  18, 1996 by and among Green Acres Casino Management Company,GTECH Corporation, Gaming Entertainment (Michigan) LLC and Full House(Incorporated by reference to Full House’s Annual Report on Form 10-KSB for the fiscal yearended December  31, 1996)

 

10.51       Amended and RestatedClass III Management Agreement dated November  18, 1996 betweenNottawaseppi Huron Band of Potawatomi and Gaming Entertainment (Michigan) LLC(Incorporated by reference to Full House’s Annual Report on Form 10-KSB for the fiscal yearended December  31, 1996)

 

10.56       InvestorAgreement by and between Full House Resorts, Inc. and RAM Entertainment, LLC,dated February 15, 2002 (Incorporated by reference to Full House’s Quarterly Reporton Form 10-QSBfor the quarter ended March  31, 2002)

 

10.57       ManagementAgreement by and between Gaming Entertainment (Delaware), LLC and HarringtonRaceway, Inc. dated January 31,1996 (Incorporated by reference toFull House’s Quarterly Report on Form 10-QSB for the quarter ended September  30, 2002)

 

10.58       Amendmentto Management Agreement by and between Gaming Entertainment (Delaware), LLC andHarrington Raceway, Inc. dated March 18, 1998 (Incorporated by reference toFull House’s Quarterly Report on Form 10-QSB for the quarter ended September  30, 2002)

 

10.59       Amendmentto Management Agreement by and between Gaming Entertainment (Delaware), LLC andHarrington Raceway, Inc. dated July 1, 1999 (Incorporated by reference toFull House’s Quarterly Report on Form 10-QSB for the quarter ended September  30, 2002)

 

10.60       Amendmentto Management Agreement by and between Gaming Entertainment (Delaware), LLC andHarrington Raceway, Inc. dated February 4, 2002 (Incorporated by reference toFull House’s Quarterly Report on Form 10-QSB for the quarter ended September  30, 2002)

 

10.61       Employment Agreement by and between FullHouse Resorts, Inc. and Michael P. Shaunnessy dated January 1, 2002 (Incorporated by reference toFull House’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2002)

 

18

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21            List of Subsidiaries of Full HouseResorts, Inc.*

 

23.1         Consent of Deloitte & Touche LLP *

 

99.1         Certification ofprincipal executive and financial officerspursuant to 18 U.S.C. section 1350 *

 

----

*  Filed herewith.

 

**(b)****      ****Reports on Form 8-K**

 

None

 

**14.          Controls and Procedures**

 

Evaluation of Disclosure Controls and Procedures.  Full House’s chief executive and financialofficers, after evaluating the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Sections 13a-14(c) and 15d-14(c) of theSecurities Exchange Act of 1934) as of a date (“Evaluation Date”) within 90days before the filing of this annual report, have concluded that as of theEffective Date, the Company’s disclosure controls and procedures were effectiveand designed to ensure that material information relating to the Company wouldbe made known to them to allow timely decisions regarding disclosures.

 

Changes in Internal Controls. Full House does not believe that there are significant deficiencies inthe design or operation of its internal controls that could adversely effectits ability to record, process, summarize and report financial data.  There were no significant changes in ourinternal controls or in other factors that could significantly affect thosecontrols subsequent to the Evaluation Date.

 

19

----

 

**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hascaused this Report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                       |   | FULL HOUSE  RESORTS, INC. |
|----------------------------|--------|---------------------------|
|                       |   |                      |
| Date:  March 25, 2003 |   | By:                       | /s/ WILLIAM P.  MCCOMAS |
|                       |   |                      |  William P. McComas, CEO |

 

In accordance withthe Securities Exchange Act of 1934, this Report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

 
| **Name and Capacity**                                                   |   | **Date**       |
|-------------------------------------------------------------------------|--------|----------------|
|                                                                    |   |           |
| /s/ WILLIAM P.  MCCOMAS                                                 |   | March 25, 2003 |
| William P.  McComas, Chairman of the Board and  Chief Executive Officer |   |           |
|                                                                    |   |           |
| /s/ LEE A.  IACOCCA                                                     |   | March 25, 2003 |
| Lee A. Iacocca,  Director                                               |   |           |
|                                                                    |   |           |
| /s/ MICHAEL P.  SHAUNNESSY                                              |   | March 25, 2003 |
| Michael P.  Shaunnessy, Executive Vice President                        |   |           |
| (Principal  Financial and Accounting Officer)                           |   |           |

 

20

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**CERTIFICATION**

 

I, William P. McComas, certifythat:

 
| 1.     | I have reviewed this annual report on Form 10 - K of Full House  Resorts, Inc.;                                                                                                                                                                                                                                                                                                                   |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 2.     | Based on my knowledge, this quarterly report does not contain any  untrue statement of a material fact or omit to state a material fact  necessary to make the statements made, in light of the circumstances under  which such statements were made, not misleading with respect to the period  covered by this annual report;                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 3.     | Based on my knowledge, the financial statements, and other financial  information included in this annual report, fairly present in all material  respects the financial condition, results of operations and cash flows of the  registrant as of, and for, the periods presented in this annual report;                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 4.     | The registrant’s other certifying officers and I are responsible for  establishing and maintaining disclosure controls and procedures (as defined  in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                | designed such disclosure controls and procedures to ensure that  material information relating to the registrant, including its consolidated  subsidiaries, is made known to us by others within those entities,  particularly during the period in which this annual report is being prepared; |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                | evaluated the effectiveness of the registrant’s disclosure controls  and procedures as of a date within 90 days prior to the filing date of this  annual report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                | presented in this annual report our conclusions about the  effectiveness of the disclosure controls and procedures based on our  evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 5.     | The registrant’s other certifying officers and I have disclosed,  based upon our most recent evaluation, to the registrant’s auditors and the  audit committee of the registrant’s board of directors (or persons performing  the equivalent function):                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                | all significant deficiencies in the design or operation of internal  controls which could adversely affect the registrant’s ability to record,  process, summarize and report financial data and have identified for the  registrant’s auditors any material weaknesses in internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                | any fraud, whether or not material, that involves management of other  employees who have a significant role in the registrant’s internal controls;  and |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 6.     | The registrant’s other certifying officers and I have indicated in  this annual report whether or not there were significant changes in internal  controls, or in other factors that could significantly affect internal  controls subsequent to the date of our most recent evaluation, including any  corrective actions with regard to significant deficiencies and material  weaknesses. |
|        |                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  |

 

 
| Dated: March 24, 2003 |   | By:    | /s/  William P. McComas                |
|-----------------------|--------|--------|---------------------------------------------|
|                  |   |   | William P. McComas  Chief Executive Officer |

 

21

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**CERTIFICATION**

 

I, Michael P. Shaunnessy,certify that:

 
| 1.     | I have reviewed this annual report on Form 10-K of Full House  Resorts, Inc.;                                                                                                                                                                                                                                                                                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 2.     | Based on my knowledge, this annual report does not contain any untrue  statement of a material fact or omit to state a material fact necessary to  make the statements made, in light of the circumstances under which such  statements were made, not misleading with respect to the period covered by  this annual report;                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 3.     | Based on my knowledge, the financial statements, and other financial  information included in this annual report, fairly present in all material  respects the financial condition, results of operations and cash flows of the  registrant as of, and for, the periods presented in this annual report;                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 4.     | The registrant’s other certifying officers and I are responsible for  establishing and maintaining disclosure controls and procedures (as defined  in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                | designed such disclosure controls and procedures to ensure that  material information relating to the registrant, including its consolidated  subsidiaries, is made known to us by others within those entities,  particularly during the period in which this annual report is being prepared;

  |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                | evaluated the effectiveness of the registrant’s disclosure controls  and procedures as of a date within 90 days prior to the filing date of this  annual report (the “Evaluation Date”); and |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                | presented in this annual report our conclusions about the  effectiveness of the disclosure controls and procedures based on our  evaluation as of the Evaluation Date; |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 5.     | The registrant’s other certifying officers and I have disclosed,  based upon our most recent evaluation, to the registrant’s auditors and the  audit committee of the registrant’s board of directors (or persons performing  the equivalent function):                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                | all significant deficiencies in the design or operation of internal  controls which could adversely affect the registrant’s ability to record,  process, summarize and report financial data and have identified for the  registrant’s auditors any material weaknesses in internal controls; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                | any fraud, whether or not material, that involves management of other  employees who have a significant role in the registrant’s internal controls;  and |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 6.     | The registrant’s other certifying officers and I have indicated in  this annual report whether or not there were significant changes in internal  controls, or in other factors that could significantly affect internal  controls subsequent to the date of our most recent evaluation, including any  corrective actions with regard to significant deficiencies and material  weaknesses. |
|        |                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |

 
| Dated: March 24, 2003 |   | By:    | /s/  Michael P. Shaunnessy                |
|-----------------------|--------|--------|------------------------------------------------|
|                  |   |   | Michael P. Shaunnessy  Chief Financial Officer |

 

22

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**INDEPENDENT AUDITORS**’  **REPORT**

 

To the Board ofDirectors and Stockholders of Full House Resorts, Inc.:

 

We have audited theaccompanying consolidated balance sheets of Full House Resorts, Inc. andSubsidiaries (the “Company”)as of December 31, 2002 and 2001, and the related consolidated statements ofoperations, stockholders’equity, and cash flows for the years then ended.  These financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion,such consolidated financial statements present fairly, in all materialrespects, the financial position of Full House Resorts, Inc. and Subsidiariesas of December 31, 2002 and 2001, and the results of their operations and theircash flows for the years then ended in conformity with accounting principlesgenerally accepted in the United States of America.

 
| DELOITTE &  TOUCHE LLP           |   |   |   |
|--------------------------------------|--------|--------|--------|
|                                 |   |   |   |
| Las Vegas, Nevada  February 21, 2003 |   |   |   |

 

F-1

----

 

**FULL HOUSE RESORTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2002 AND 2001**

 
|                                                                                                                                                                                             |   | **2002**   |       | **2001**   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| **ASSETS**                                                                                                                                                                                       |   |       |       |       |   |
| CURRENT ASSETS:                                                                                                                                                                                  |   |       |       |       |   |
| Cash and cash equivalents                                                                                                                                                                        |   | $          | 1,164,053  |       | $      | 867,419 |   |
| Receivables                                                                                                                                                                                      |   | 186,969    |       | 209,992    |   |
| Prepaid expenses                                                                                                                                                                                 |   | 106,656    |       | 93,878     |   |
| Total current assets                                                                                                                                                                             |   | 1,457,678  |       | 1,171,289  |   |
|                                                                                                                                                                                             |   |       |       |       |   |
| NON-OPERATING LAND                                                                                                                                                                               |   | 2,472,000  |       | 2,472,000  |   |
| FIXTURES AND EQUIPMENT, net                                                                                                                                                                      |   | 23,612     |       | 23,374     |   |
| INVESTMENTS IN JOINT VENTURES                                                                                                                                                                    |   | 27,876     |       | —     |   |
| RECEIVABLES                                                                                                                                                                                      |   | 1,257,291  |       | 1,017,291  |   |
| GAMING AND CONTRACT RIGHTS, net                                                                                                                                                                  |   | 5,189,947  |       | 5,390,239  |   |
| DEFERRED TAX ASSET                                                                                                                                                                               |   | 712,418    |       | 1,375,949  |   |
| DEPOSITS AND OTHER ASSETS                                                                                                                                                                        |   | 6,382      |       | 14,782     |   |
| TOTAL                                                                                                                                                                                            |   | $          | 11,147,204 |       | $      | 11,464,924 |   |
|                                                                                                                                                                                             |   |       |       |       |   |
| **LIABILITIES  AND STOCKHOLDERS**’**EQUITY**                                                                                                                                                |   |       |       |       |   |
| CURRENT LIABILITIES:                                                                                                                                                                             |   |       |       |       |   |
| Accounts payable                                                                                                                                                                                 |   | $          | 13,426     |       | $      | 21,468 |   |
| Payable to joint ventures                                                                                                                                                                        |   | —     |       | 48,033     |   |
| Current portion of long-term debt                                                                                                                                                                |   | 2,381,260  |       | 3,000,000  |   |
| Accrued expenses                                                                                                                                                                                 |   | 172,654    |       | 171,316    |   |
| Total current liabilities                                                                                                                                                                        |   | 2,567,340  |       | 3,240,817  |   |
|                                                                                                                                                                                             |   |       |       |       |   |
| LONG-TERM DEBT, net of current portion                                                                                                                                                           |   | —     |       | 600,000    |   |
| COMMITMENTS AND CONTINGENCIES (Note 14)                                                                                                                                                          |   |       |       |       |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                       |   |       |       |       |   |
| Cumulative preferred stock, par value $.0001, 5,000,000 shares  authorized;  700,000 shares issued and outstanding; aggregate liquidation preference of  $4,305,000 and $4,095,000, respectively |   | 70         |       | 70         |   |
| Common stock, par value $.0001, 25,000,000 shares authorized;  10,340,380 shares issued and outstanding                                                                                          |   | 1,034      |       | 1,034      |   |
| Additional paid in capital                                                                                                                                                                       |   | 17,429,889 |       | 17,429,889 |   |
| Accumulated deficit                                                                                                                                                                              |   | (8,851,129 | )          | (9,806,886 | )      |
| Total stockholders’ equity                                                                                                                                                                  |   | 8,579,864  |       | 7,624,107  |   |
| TOTAL                                                                                                                                                                                            |   | $          | 11,147,204 |       | $      | 11,464,924 |   |

 

See notes toconsolidated financial statements.

 

F-2

----

 

**FULL HOUSE RESORTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001**

 
|                                                                     |   | **2002**   |      | **2001**   |   |
|--------------------------------------------------------------------------|--------|------------|-----------|------------|--------|
| OPERATING REVENUES                                                       |   |       |      |       |   |
| Joint venture revenue                                                    |   | $          | 3,288,122 |       | $      | 3,257,041 |   |
| Management fees                                                          |   | 1,529,559  |      | 1,738,785  |   |
| Total operating revenues                                                 |   | 4,817,681  |      | 4,995,826  |   |
|                                                                     |   |       |      |       |   |
| OPERATING COSTS AND EXPENSES                                             |   |       |      |       |   |
| Joint venture pre-opening costs                                          |   | —     |      | 122,441    |   |
| Development costs                                                        |   | 954,063    |      | 1,083,000  |   |
| General and administrative                                               |   | 1,776,059  |      | 1,643,196  |   |
| Impairment                                                               |   | —     |      | 4,593,800  |   |
| Depreciation and amortization                                            |   | 216,550    |      | 572,369    |   |
| Total operating costs and expenses                                       |   | 2,946,672  |      | 8,014,806  |   |
|                                                                     |   |       |      |       |   |
| INCOME (LOSS) FROM OPERATIONS                                            |   | 1,871,009  |      | (3,018,980 | )      |
|                                                                     |   |       |      |       |   |
| Interest expense                                                         |   | (146,067   | )         | (286,745   | )      |
| Interest and other income                                                |   | 104,346    |      | 9,067      |   |
|                                                                     |   |       |      |       |   |
| INCOME (LOSS) BEFORE INCOME TAXES                                        |   | 1,829,288  |      | (3,296,658 | )      |
|                                                                     |   |       |      |       |   |
| INCOME TAX (PROVISION) BENEFIT                                           |   | (873,531   | )         | 846,047    |   |
|                                                                     |   |       |      |       |   |
| NET INCOME (LOSS)                                                        |   | 955,757    |      | (2,450,611 | )      |
|                                                                     |   |       |      |       |   |
| Less, undeclared dividends on cumulative preferred stock                 |   | (210,000   | )         | (210,000   | )      |
|                                                                     |   |       |      |       |   |
| NET INCOME (LOSS) APPLICABLE TO COMMON SHARES                            |   | $          | 745,757   |       | $      | (2,660,611 | ) |
|                                                                     |   |       |      |       |   |
| NET INCOME (LOSS) PER COMMON SHARE, basic and diluted                    |   | $          | 0.07      |       | $      | (0.26 | ) |
|                                                                     |   |       |      |       |   |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, basic and  diluted |   | 10,340,380 |      | 10,340,380 |   |

 

See notes toconsolidated financial statements.

 

F-3

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**FULL HOUSE RESORTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’****EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2002 AND2001**

 
|                           |   | **Preferred Stock** |   | **Common Stock** |   | **Additional  Paid-in** |       | **Accumulated** |   |        |   |
|--------------------------------|--------|---------------------|--------|------------------|--------|-------------------------|------------|-----------------|--------|-------------|--------|
|                           |   | **Shares**          |   | **Amount**       |   | **Shares**              |       | **Amount**      |   | **Capital** |   | **Deficit** |   | **Total** |   |
| BALANCE JANUARY 1, 2001   |   | 700,000             |   | $                | 70     |                    | 10,340,380 |            | $      | 1,034       |   | $ | 17,429,889 |   | $ | (7,356,275 | ) | $ | 10,074,718 |   |
|                           |   |                |   |             |   |                    |       |            |   |        |   |   |   |   |   |
| Net loss                       |   | —              |   | —           |   | —                  |       | —          |   | —      |   | (2,450,611 | ) | (2,450,611 | ) |
|                           |   |                |   |             |   |                    |       |            |   |        |   |   |   |   |   |
| BALANCE DECEMBER 31, 2001 |   | 700,000             |   | 70               |   | 10,340,380              |       | 1,034           |   | 17,429,889  |   | (9,806,886 | ) | 7,624,107 |   |
|                           |   |                |   |             |   |                    |       |            |   |        |   |   |   |   |   |
| Net income                     |   | —              |   | —           |   | —                  |       | —          |   | —      |   | 955,757 |   | 955,757 |   |
|                           |   |                |   |             |   |                    |       |            |   |        |   |   |   |   |   |
| BALANCE DECEMBER 31, 2002 |   | 700,000             |   | $                | 70     |                    | 10,340,380 |            | $      | 1,034       |   | $ | 17,429,889 |   | $ | (8,851,129 | ) | $ | 8,579,864 |   |

 

See notes toconsolidated financial statements.

 

F-4

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**FULL HOUSE RESORTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2002 AND2001**

 
|                                                                                      |   | **2002**   |      | **2001**   |   |
|-------------------------------------------------------------------------------------------|--------|------------|-----------|------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |   |       |      |       |   |
| Net income (loss)                                                                         |   | $          | 955,757   |       | $      | (2,450,611 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |   |       |      |       |   |
| Depreciation and amortization                                                             |   | 216,550    |      | 572,369    |   |
| Impairment                                                                                |   | —     |      | 4,593,800  |   |
| Expired purchase options                                                                  |   | —     |      | 250,000    |   |
| Equity in earnings of joint ventures                                                      |   | (3,288,122 | )         | (3,134,600 | )      |
| Distributions from joint ventures                                                         |   | 3,212,213  |      | 3,438,348  |   |
|                                                                                      |   |       |      |       |   |
| Changes in  operating assets and liabilities:                                             |   |       |      |       |   |
| Receivables                                                                               |   | 23,023     |      | (209,992   | )      |
| Prepaid expenses                                                                          |   | (12,778    | )         | (1,074     | )      |
| Deposits and other assets                                                                 |   | 8,400      |      | (7,568     | )      |
| Deferred income taxes                                                                     |   | 663,531    |      | (1,081,049 | )      |
| Accounts payable and accrued expenses                                                     |   | (6,704     | )         | (7,347     | )      |
| Net cash provided by operating activities                                                 |   | 1,771,870  |      | 1,962,276  |   |
|                                                                                      |   |       |      |       |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |   |       |      |       |   |
| Purchase of 50% joint venture interests                                                   |   | —     |      | (1,800,000 | )      |
| Purchases of fixtures and equipment                                                       |   | (16,496    | )    | —     |   |
| Advances on receivable                                                                    |   | (240,000   | )         | (200,000   | )      |
| Net cash used in investing activities                                                     |   | (256,496   | )         | (2,000,000 | )      |
|                                                                                      |   |       |      |       |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |   |       |      |       |   |
| Proceeds from RAM note                                                                    |   | 2,381,260  |      |       |   |
| Repayment of GTECH note                                                                   |   | (3,000,000 | )         | —     |   |
| Proceeds from line of credit                                                              |   | —     |      | 1,800,000  |   |
| Repayment of line of credit                                                               |   | (600,000   | )         | (1,350,000 | )      |
| Net cash (used in) provided by financing activities                                       |   | (1,218,740 | )    | 450,000    |   |
|                                                                                      |   |       |      |       |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                 |   | 296,634    |      | 412,276    |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                              |   | 867,419    |      | 455,143    |   |
| CASH AND CASH EQUIVALENTS, END OF YEAR                                                    |   | $          | 1,164,053 |       | $      | 867,419 |   |
|                                                                                      |   |       |      |       |   |
| Supplemental Cash Flow disclosure:                                                        |   |       |      |       |   |
| Gaming and contract rights                                                                |   |       |      |       | $      | 5,559,067 |   |
| Receivable - joint ventures                                                               |   |       |      | (822,147   | )      |
| Investments in joint ventures                                                             |   |       |      | (2,936,920 | )      |
| Purchase of 50% joint venture interests                                                   |   |       |      |       | $      | 1,800,000 |   |
|                                                                                           |        |            |           |            |        |  |  |  |

 

See notes toconsolidated financial statements.

 

F-5

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**FULL HOUSE RESORTS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.             ORGANIZATION AND NATURE OFOPERATIONS

 

Full House Resorts,Inc. (“FullHouse” or the“Company”) was incorporated in the State of Delaware on January 5, 1987.  We are currently pursuing various gamingopportunities throughout North America.

 

The consolidatedfinancial statements include the accounts of Full House and all its majority-ownedsubsidiaries.  All material intercompanyaccounts and transactions have been eliminated.

 

Effective December29, 1995, we entered into a series of agreements with GTECH Corporation (“GTECH”) to jointly pursuegaming opportunities.  Pursuant to theagreements, four limited liability companies (“Joint Ventures”) were formed. Wehad a 50% interest in each joint venture, which was accounted for using theequity method.  On March 30, 2001 weacquired the GTECH ownership in three of these joint ventures, Oregon, Michiganand California, which are now wholly-owned and consolidated.  The Delaware venture was not included inthis transaction and continues to be accounted for using the equity method.

 

Full House and itsprincipal stockholder entered into an agreement to jointly pursue developmentof a themed casino resort in Biloxi, Mississippi and formed a limited liabilitycompany for such purpose, which was 50% owned by each member.  In June 2001, this arrangement wasterminated by mutual agreement.

 

2.             SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

 

CASH AND CASHEQUIVALENTS - Cash in excess of daily requirements is invested in highly liquidshort-term investments with maturities of three months or less whenpurchased.  Such investments are statedat cost, which approximates market, and are deemed to be cash equivalents for purposesof the consolidated statements of cash flows.

 

CONCENTRATIONS OFCREDIT RISK - Full House’s financial instruments that are exposed toconcentrations of credit risk consist primarily of cash equivalents andlong-term receivables.  A portion ofFull House’scash equivalents is in high quality securities placed with major banks andfinancial institutions.  Management doesnot believe that there is significant risk of loss associated with suchinvestments.  The receivable is relatedto the Michigan development and represents advances made to the Tribe to fundits operations.  This amount isrepayable from the operations of the gaming facility and although there can beno assurance that a facility will be opened, management does not believe thatthere is significant risk of loss associated with such investment.

 

INVESTMENTS INJOINT VENTURES - Investments in joint ventures are accounted for using theequity method of accounting.  Under theequity method, original investments are recorded at cost and adjusted by FullHouse’sshare of earnings, losses, and distributions of the joint ventures.

 

FIXTURES ANDEQUIPMENT - Fixtures and equipment are stated at cost and consist primarily ofoffice furniture and fixtures and computer equipment.  Depreciation is computed by the straight-line method over periodsof 3 to 7 years.  Accumulateddepreciation was $124,475 and $108,217 at December 31, 2002 and 2001,respectively.

 

GOODWILL - Goodwillrepresents the excess cost over the net assets of businesses acquired during1995. Goodwill was being amortized on the straight-line basis over 6 years, andwas fully amortized at December 31, 2001. Amortization expense was $379,713 for 2001.

 

IMPAIRMENT OFLONG-LIVED ASSETS - Full House reviews the carrying values of its long-livedand identifiable intangible assets for possible impairment, at least annually,or whenever events or changes in circumstances indicate that the carryingamount of assets may not be recoverable. During 2001, Full House recorded an impairment provision of $4,593,800,as described in Note 3.

 

FAIR VALUE OFFINANCIAL INSTRUMENTS - The carrying value of Full House’s cash and cashequivalents, receivables and accounts payable, approximates fair value becauseof the short maturity of those instruments. Full House estimates the fair value of its long-term debt based on thecurrent rates offered to Full House for loans of the same remainingmaturities.  The estimated fair valuesof Full House’s long-term debt approximate their recorded values at December31, 2002.

 

INCOME TAXES - FullHouse accounts for income taxes in accordance with SFAS No. 109, *“**Accounting for Income Taxes*,” which requiresrecognition of deferred tax assets and liabilities for the expected future taxconsequences of events

 

F-6

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that have beenreflected in the financial statements or tax returns.  Deferred income taxes reflect the net effect of (a) temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes, and(b) operating loss and tax credit carryforwards.

 

EARNINGS PER COMMONSHARE - Basic earnings per share (“EPS”) is computed based upon the weightedaverage number of common shares outstanding during the year.  Diluted EPS is computed based upon theweighted average number of common and common equivalent shares plus theweighted average number of options outstanding if their effect upon exercisewould have been dilutive using the treasury stock method.

 

AWARDS OFSTOCK-BASED COMPENSATION - Full House has adopted SFAS No. 123, *“**Accounting for Awards of Stock-Based Compensation”***whichestablishes financial accounting and reporting standards for stock-basedemployee compensation plans and for transactions where equity securities areissued for goods and services.  Thisstatement defines a fair value based method of accounting for an employee stockoption or similar equity instrument and encourages all entities to adopt thatmethod of accounting for all of their employee stock compensation plans.  However, it also allows an entity tocontinue to measure compensation cost for those plans using the intrinsic valuebased method of accounting prescribed by APB Opinion No. 25, *“**Accounting for Stock Issued to Employees.”*  Full House continues to apply APB Opinion No. 25 to its stockbased compensation awards to employees and discloses the required pro formaeffect on net income and net income per common share.

 

The Company hasthree stock-based employee compensation plans, which are described more fullyin Note 13.  The Company accounts forthose plans under the recognition and measurement principles of APB Opinion No.25 and related Interpretations.  Nostock-based employee compensation cost is reflected in net income, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.

 

Since all optionsthat are outstanding as of December 31, 2002 have vested, applying the fairvalue recognition provisions of SFAS No. 123 results in pro forma net income(loss) that is the same as historical reported net income (loss) during theyears ended 2002 and 2001.

 

SEGMENT REPORTING -Full House has three business segments consisting of operations, developmentand a corporate overhead department. Full House evaluates performance primarily based upon operating incomeof the segment.  The accounting policiesof the segments are the same as those described in this summary of significantaccounting policies.

 

RECENTLY ISSUEDACCOUNTING STANDARDS *** *-** In July 2001, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandard (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwilland Other Intangible Assets.”  SFAS 141prohibits the pooling of interests method of accounting for businesscombinations initiated after June 30, 2001. SFAS 142, which became effective for Full House in January 2002,requires, among other things, the discontinuance of goodwill amortization.  In addition, the standard includesprovisions for the reclassification of certain existing intangibles asgoodwill, reassessment of the useful lives of existing intangibles, and ongoingassessments of potential impairment of existing goodwill.

 

As of December 31,2001, our goodwill, net of accumulated amortization, and the carrying value ofthe Hard Rock licensing and development rights have been reduced to zero.  Other existing intangibles consist of net Gamingand Contract Rights of $5,189,947.

 

In June 2001, theFASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations” whichaddresses financial accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated asset retirementcosts.  This Statement applies to legalobligations associated with the retirement of long-lived assets that resultfrom the acquisition, construction, development and / or normal operation,except for certain obligations of lessees. This Statement is effective for fiscal years beginning after June 15,2002.  The adoption of SFAS No. 143 isnot expected to have a material effect on the Company’s financial statements.

 

In August 2001, theFASB issued SFAS No. 144 “Accounting for the Impairment or Disposal ofLong-Lived Assets” which addresses financial accounting and reporting for theimpairment or disposal of long-lived assets and supersedes FASB Statement No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of.”   Theprovisions of this Statement are effective for fiscal years beginning afterDecember 15, 2001 and interim periods within those fiscal years.  The adoption of SFAS No. 144 did not have amaterial effect on the Company’s financial statements.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies Emerging Issues TaskForce (EITF) Issue 94-3, Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity. The provisions of this Statementare effective for exit or disposal activities that are initiated after December31, 2002, with early application encouraged. The adoption of SFAS No. 146 isnot expected to have a material effect on the Company’s financial statements.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness to Others,” and interpretation of FASB StatementsNo. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. ThisInterpretation elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under guaranteesissued. The Interpretation also clarifies that a guarantor is required torecognize, at inception of a guarantee, a liability for the fair value of theobligation undertaken. The initial recognition and measurement provisions ofthe Interpretation are applicable to guarantees issued or

 

F-7

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modified after December 31, 2002 and are not expected to have amaterial effect on the Company’s financial statements. The disclosurerequirements are effective for financial statements of interim and annualperiods ending after December 31, 2002.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure,” an amendment of FASBStatement No. 123. This Statement amends FASB Statement No. 123, Accounting forStock-Based Compensation, to provide alternative methods of transition for avoluntary change to the fair value method of accounting for stock-basedemployee compensation. In addition, this Statement amends the disclosurerequirements of Statement No. 123 to require prominent disclosures in bothannual and interim financial statements. Certain of the disclosuremodifications are required for fiscal years ending after December 15, 2002 andare included in these consolidated financial statements.  The adoption of SFAS No. 148 is not expectedto have a material effect on the Company's financial statements.

 

USE OF ESTIMATES -The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.  Significant estimates used by Full Houseinclude estimated useful lives for depreciable and amortizable assets, valuationof current and long-term receivables, potential impairment of non-operatingland and gaming and contract rights, and certain accrued liabilities.  Actual results could differ from thoseestimates.

 

3.             IMPAIRMENT

 

In November 1998,we executed a series of agreements with Hard Rock Cafe International (“HardRock”) related to the proposed development project in Biloxi, Mississippi.  Pursuant to a licensing agreement, we paid aterritory fee of $2,000,000 for the right to develop and operate a Hard RockCasino in Biloxi. Full House and Allen E. Paulson formed a limited liabilitycompany, equally owned, for the purpose of developing this project.  Mr. Paulson agreed to contribute a gamingvessel (the former Treasure Bay barge in Tunica, MS.), and we agreed tocontribute our rights to the Hard Rock agreements.  In June 2001, we agreed to dissolve this company with each partyretaining their respective rights and assets. We then entered negotiations with interested parties to develop thisproject in various alternative forms.

 

During the thirdquarter, our discussions with various potential partners for the development ofthe Hard Rock - Biloxi project concluded with no agreement.  Based upon the timing requirements in ouragreements with Hard Rock, and the current conditions in the tourism industrywe do not reasonably expect to be able to develop this project as planned.  As a result of these circumstances, we havereviewed the carrying values of our Mississippi investments which include a oneacre parcel of land acquired for $4,621,670, the Hard Rock license acquired for$2,000,000, and development permits and plans carried at $444,130.  In September 2001, Full House, in accordancewith SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of,” recorded an impairment charge of$4,593,800 to reduce the carrying value to $2,472,000, which represents theestimated fair value of our land parcel based on management's best estimate,using an independent third-party appraisal conducted in September 2001.

 

4.             RECEIVABLES

 

Full House hasadvanced funds to the Michigan and California Tribes to fund tribal operationsand for development expenses related to these projects.  The repayment of these amounts is dependentupon the development of the projects, and ultimately, the successful operationof the facilities.  As of December 31,2002 the net receivable represented $1,232,291 due from the Michigan Tribe and$25,000 due from the California Tribe.  While there can be no assurance, we believe that we can recover theamounts carried on our balance sheet based upon the Tribe’s expressedintentions as well as our contractual rights.

 

The currentreceivables include $125,000 due from the Allen E. Paulson estate whichrepresents their 50% share of a litigation settlement in Mississippi concerningour Hard Rock development, and $50,000 due from Hard Rock pursuant to atermination agreement executed in November 2002.  The Hard Rock payment was received in February 2003.

 

5.             INVESTMENTS IN JOINTVENTURES

 

Full House enteredinto a series of agreements with GTECH in 1995 to jointly pursue gamingopportunities. Pursuant to the agreements, the following limited liabilitycompanies, each owned 50% by Dreamport, Inc. (“Dreamport”), a subsidiary of GTECH,and 50% by Full House were formed: Gaming Entertainment, LLC (“Oregon”),Gaming Entertainment (Delaware), LLC (“Delaware”),Gaming Entertainment (Michigan), LLC (“Michigan”),and Gaming Entertainment (California), LLC (“California”).

 

Full Housecontributed to the capital of the joint ventures its rights to agreements withthe Oregon Tribe to finance and develop a gaming and entertainment facility inNorth Bend, Oregon and the rights to develop the California Tribe, MichiganTribe and Delaware State Fair gaming projects. In payment for its interest in the joint ventures, GTECH contributedcash and other intangible assets and committed to loan the joint ventures up to$16.4 million to complete the North Bend, Oregon and Delaware facilities

 

F-8

----

 

On March 30, 2001,we acquired GTECH’s 50% interest in three of these joint venture projects thathad been equally owned by the two companies: Gaming Entertainment LLC, GamingEntertainment (Michigan), LLC, and Gaming Entertainment (California), LLC.  (Note 6.)

 

This transactiondid not include our other joint venture with GTECH, Gaming Entertainment(Delaware), LLC, owner of a management agreement, continuing through 2011, tomanage Midway Slots & Simulcast in Harrington, Delaware.  This joint venture continues to be equallyowned by us and GTECH.

 

As a result ofacquiring full ownership of three previous joint ventures, the classificationof both revenue and expenses related to these projects has changed.  The revenues related to the Delawarecontract continue to be reported as joint venture revenue, but as ofMarch 31, 2001, the revenues related to the Oregon contract are reportedas management fees.  The expensesrelated to the California and Michigan projects, which had been reported as jointventure pre-opening costs, are reported as development costs, as of March 31,2001.

 

The Investments inJoint Ventures on the balance sheet now reflects only our ownership interest inthe Delaware LLC, however, as of December 31, 2001 this investment was carriedat zero because the aggregate cash distributions had exceeded the reportedearnings of the joint venture by $48,033. This amount is reflected on the 2001 balance sheet as Payable to JointVentures.  The Delaware LLC earnings arereported on the accrual basis, while distributions are based on cashavailable.  During fiscal year 2002, thereported earnings exceeded cash distributions.

 

6.             JOINT VENTURE ACQUISITION

 

On March 30, 2001,we acquired GTECH’s 50% interest in three joint venture projects that had beenequally owned by the two companies: Gaming Entertainment, LLC, owner of anagreement continuing through August 2002, with the Coquille Indian Tribe(“Oregon Tribe”), which conducts gaming at The Mill Casino in Oregon; GamingEntertainment (Michigan), LLC, owner of a Management Agreement with theNottawaseppi Huron Band of Potawatomi (“Michigan Tribe”) to develop and managea gaming facility near Battle Creek; and Gaming Entertainment (California), LLCowner of a Management Agreement with the Torres-Martinez Band of DesertCahuilla Indians (“California Tribe”) to develop and manage a gaming facilitynear Palm Springs.

 

The purchase pricewas $1,800,000, and was funded through our existing credit facility.  As part of this transaction, GTECH extendedthe due date of our $3,000,000 promissory note from January 25, 2001 untilJanuary 25, 2002, with interest at prime. The note was paid in February 2002. Also as part of this transaction, GTECH is no longer required to providethe necessary financing for the two development projects (Michigan andCalifornia) that we acquired.

 

In addition to thegaming and contract rights, we acquired the other 50% interest in a notereceivable from the Michigan Tribe in the amount of $396,146.  The excess purchase price over the fairvalue of assets acquired was allocated to the gaming and contract rightsacquired based on the discounted present value of expected future cashflows.  The excess purchase price of$1,403,854 was allocated as follows:

 
|                |   | **Value** |      | **Amortization  Term** |      |
|---------------------|--------|-----------|-----------|------------------------|-----------|
| Michigan contract   |   | $         | 1,141,682 |                   | 8.0 years |   |
| California contract |   | 182,776   |      | 8.0 years              |      |
| Oregon Contract     |   | 79,396    |      | 1.4 years              |      |
|                |   | $         | 1,403,854 |                   |      |   |

 

The followingsummary pro forma results of operations assume that the acquisition occurred asof the beginning of the period ended December 31, 2001:

 
|                                 |   | **2001**   |      |
|--------------------------------------|--------|------------|-----------|
| Operating revenues                   |   | $          | 5,278,193 |   |
| Income (loss) before income taxes    |   | (3,229,008 | )         |
| Net income (loss)                    |   | (2,425,095 | )    |
| Net loss applicable to common shares |   | (2,635,095 | )         |
| Net loss per common share            |   | (0.25      | )         |
|                                      |        |            |           |  |

 

F-9

----

 

GAMINGENTERTAINMENT, LLC

 

Oregon leasedapproximately 12.5 acres of tribal trust lands from an entity owned by theOregon Tribe on which the gaming facility is located and subleased a portion ofthe land back to the same entity. The master lease expires in 2019 and thesublease expired in August 2002 with options to renew.   The sublease was not renewed, and thisserved to automatically terminate the master lease.  During 1995, the facility began operations.

 

Lease and debt payments started in 1995.  In 1996, the Tribe received a new $17.5 million loan to refinancecertain outstanding indebtedness and finance the acquisition of gamingequipment and improvements to the gaming facility.  The initial development loan was repaid 100% from therefinancing.  Rental payments for thesublease were originally 13% of gaming revenue, but have decreased to 10% underthe terms of our agreement. Also, if gross gaming revenue for any twelve-monthperiod exceeds $20,000,000, then only 10% of amounts in excess of suchthreshold will be paid as rent under the sublease.  No Fees were paid after August 19, 2002 when the contractexpired according to its terms.

 

GAMINGENTERTAINMENT (MICHIGAN), LLC

 

In late 1996, werenegotiated the management contract with the Michigan Tribe and with the 15%owner of the interests in the agreements. Under the new contract, the jointventure will finance, develop and manage gaming operations on reservation landsto be acquired near Battle Creek, Michigan. The 15% owner will be paid a royalty fee in lieu of its original 15%ownership in earlier contracts.

 

The Tribe achieved final federal recognition as a tribe in April1996.  The Tribe obtained a GamingCompact from Michigan’s governor early in 1997 to operate an unlimited numberof electronic gaming devices as well as roulette, keno, dice and banking cardgames.  The Michigan Legislatureratified the Compact by resolution in December 1998, along with compacts forthree other tribes.  A lawsuit was filedin 1999 by “Taxpayers of Michigan Against Casinos” in Ingham County CircuitCourt.  The lawsuit challenged theconstitutionality of the approval process of these gaming compacts.  On January 18, 2000, Judge Peter D.Houk ruled that the compacts must be approved by a legislative bill rather thanby resolution.  The State of Michiganfiled an appeal to the Michigan Court of Appeals on February 4, 2000.  We joined in the appeal filing as anintervening defendant.  On November 12,2002, the Michigan Court of Appeals unanimously overturned the lower courtdecision; ruling that the compacts were valid. The plaintiff filed an appeal with the Michigan Supreme Court onDecember 3, 2002.  The parties havefiled their initial briefs.

 

In December 1999, the management agreements, along with the requiredlicensing applications were submitted to the National Indian Gaming Commission,which we refer to as the NIGC.  We metwith the NIGC several times to review suggested revisions to the management agreementsand, working with the Tribe, have incorporated all the appropriate changes.

 

The parties selected a parcel of land for the gaming enterprise, whichis under option, and completed a Fee-to-Trust application that was submitted tothe Bureau of Indian Affairs in Washington, D.C. in February 2002.  On August 9, 2002, the United StatesDepartment of Interior issued its notice to take the land into trust for thebenefit of the Tribe.  On August 30,2002 “Citizens Exposing Truth About Casinos” filed a complaint in FederalDistrict Court for the District of Columbia, seeking to prevent this land frombeing taken into trust.   The partieshave filed their initial briefs and are awaiting the scheduling of oral arguments.

 

GAMINGENTERTAINMENT (CALIFORNIA), LLC

 

Pursuant to anagreement with the California Tribe, we have certain rights to develop, manageand operate gaming activities for them.

 

During 1996, theTribe reached a settlement in its litigation with the Department of Justice andtwo water districts, pursuant to which the Tribe will be paid $14.0 million incompensation, and will have the right to select up to 11,200 acres of newreservation land to be taken into trust in replacement for the same quantity ofland which was flooded by the rising level of the Salton Sea.  That settlement, which required legislativeenactment, was approved by the U. S. House of Representatives and the Senate inDecember 2000.   Under the settlement,the Tribe may acquire land in a specifically defined area (generally in thePalm Springs, California area) for purposes of conducting a gaming enterprise.

 

F-10

----

 

The Tribe requestedthat the California governor negotiate a compact to allow them to conductgaming on their current reservation.  Todate the request has not been honored. In February 2001, an action was filed in U.S. District Court by severalCard Club owners that challenges the Tribal compacts.  The litigation claims that awarding exclusive monopoly rights toIndian Tribes violates federal statutory and constitutional law.   The governor has indicated that he willawait action by the courts before taking any further action with respect topending compact requests.

 

In August 2001, wereceived a notice from the California Tribe purporting to sever ourrelationship.  We are in the process ofdiscussing an appropriate resolution of this matter that includes reimbursementfor costs that we incurred on their behalf. The Notes Receivable on the balance sheet includes a $25,000 advance duefrom the California Tribe and Gaming and Contract Rights include approximately$140,000 attributable to this contract. We have incurred an aggregate of approximately $1 million, includinginterest, on behalf of this Tribe.  Webelieve that the balance sheet amounts are recoverable based upon the expressedintentions of the Tribe, as well as the contractual rights that we continue tohold.

 

The following is asummary of condensed financial information for the joint ventures as ofDecember 31, 2002 and 2001 and for the years then ended:

 

**2002**

 

**CONDENSED BALANCE SHEETINFORMATION**

 
|                                               |   | **DELAWARE** |       | **OREGON** |       | **MICHIGAN** |       | **CALIFORNIA** |       | **TOTAL** |       |
|----------------------------------------------------|--------|--------------|------------|------------|------------|--------------|------------|----------------|------------|-----------|------------|
| Total assets                                       |   | $            | 760,455    |       | $          | —       |       | $              | —     |      | $          | — |   | $ | 760,455 |   |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Total liabilities                                  |   | 704,702      |       | —     |       | —       |       | —         |       | 704,702   |       |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Members’ capital                              |   | 55,753       |       | —     |       | —       |       | —         |       | 55,753    |       |
|                                               |   |
| **CONDENSED STATEMENT  OF OPERATIONS INFORMATION** |   |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Revenues                                           |   | $            | 19,671,970 |       | $          | —       |       | $              | —     |      | $          | — |   | $ | 19,671,970 |   |
|                                               |   |         | ** ** |       | ** ** |         | ** ** |           | ** ** |      | ** ** |
| Income from operations                             |   | 6,576,244    |       | —     |       | —       |       | —         |       | 6,576,244 |       |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Net income                                         |   | 6,576,244    |       | —     |       | —       |       | —         |       | 6,576,244 |       |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Company’s equity in net income                |   | 3,288,122    |       | —     |       | —       |       | —         |       | 3,288,122 |       |
|                                                    |        |              |            |            |            |              |            |                |            |           |            |  |  |  |  |  |  |

 

**2001**

 

**CONDENSED BALANCE SHEETINFORMATION**

 
|                                               |   | **DELAWARE** |       | **OREGON** |       | **MICHIGAN** |       | **CALIFORNIA** |       | **TOTAL** |       |
|----------------------------------------------------|--------|--------------|------------|------------|------------|--------------|------------|----------------|------------|-----------|------------|
| Total assets                                       |   | $            | 667,264    |       | $          | —       |       | $              | —     |      | $          | — |   | $ | 667,264 |   |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Total liabilities                                  |   | 763,328      |       | —     |       | —       |       | —         |       | 763,328   |       |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Members’ capital                              |   | (96,064      | )          | —     |       | —       |       | —         |       | (96,064   | )          |
|                                               |   |
| **CONDENSED STATEMENT  OF OPERATIONS INFORMATION** |   |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Revenues                                           |   | $            | 18,407,301 |       | $          | 570,137      |       | $              | —     |      | $          | — |   | $ | 18,977,438 |   |
|                                               |   |         | ** ** |       | ** ** |         | ** ** |           | ** ** |      | ** ** |
| Income (loss) from operations                      |   | 5,949,348    |       | 564,734    |       | (197,522     | )          | (47,360        | )          | 6,269,200 |       |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Net income (loss)                                  |   | 5,949,348    |       | 564,734    |       | (197,522     | )          | (47,360        | )          | 6,269,200 |       |
|                                               |   |         |       |       |       |         |       |           |       |      |       |
| Company’s equity in net income (loss)         |   | 2,974,674    |       | 282,367    |       | (98,761      | )          | (23,680        | )          | 3,134,600 |       |
|                                                    |        |              |            |            |            |              |            |                |            |           |            |  |  |  |  |  |  |

 

F-11

----

 

The joint ventureentities are treated as partnerships for tax purposes and consequently, no taxprovision or tax benefit is recognized at the venture level.

 

7.             GAMING AND CONTRACT RIGHTS

 

As a result of theGTECH acquisition, the three joint ventures that had previously been accountedfor using the equity method are now wholly-owned consolidated entities.  A substantial portion of our investment inthese joint ventures was comprised of previously contributed Michigan gamingrights of $4,155,213 that we acquired in 1995 and which represent the Company'sacquisition of a 50% ownership of the right to manage the planned facilitythrough the management agreement held by the joint ventures.  Amortization of the contributed Michigangaming rights asset will commence when the associated facility is developed andbecomes operational and will be on a straight-line basis over seven years, orthe term of the related management contract. Now that these are wholly-owned consolidated entities, these previouslycontributed rights are reflected in Gaming and Contract Rights, along with thecontract rights acquired in the GTECH acquisition of $1,403,854.  The contract rights acquired in the GTECHacquisition represent the Company's acquisition of 100% ownership andmanagement's ability to control the operations of these three entities.  Therefore, amortization of the acquiredcontract rights commenced as of April 1, 2001. Gaming and contract rights, net, as of December 31, 2002 is comprised ofthe following:

 
| Contributed  Michigan gaming rights |   | $         | 4,155,213 |   |
|-------------------------------------|--------|-----------|-----------|--------|
| Acquired contract rights            |   | 1,403,854 |      |
| Less accumulated amortization       |   | (369,120  | )         |
| Gaming and Contract Rights, net     |   | $         | 5,189,947 |   |

 

Amortizationexpense related to the acquired contract rights for 2002 was $200,292.  The annual amortization expense wil1 be$165,560 through 2008, with the then remaining balance of $41,374 expensed in2009.  The decrease from 2002 isattributable to the termination of the Oregon contract in August 2002 accordingto its terms.  As of December 31, 2002,the weighted average amortization period for acquired contract rights is 6.25years.

 

The Michigan andCalifornia ventures are in the development stage.  Successful development and, ultimately, sustaining profitableoperations is dependent on future events, including appropriate regulatoryapprovals and adequate market demand. These two ventures have not generated any revenues, and the costsincurred to date relate to pre-opening expenses such as payroll, legal andconsulting.

 

8.             LONG-TERM DEBT

 
|                                                                                                                                                                                                                                                                                                                                     |   | **2002**  |      | **2001**  |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Long-term debt consists of the following:                                                                                                                                                                                                                                                                                                |   |      |      |      |   |
|                                                                                                                                                                                                                                                                                                                                     |   |      |      |      |   |
| Note payable to RAM Entertainment, LLC; interest at the  prime rate (4.25% at December 31, 2002) due monthly through August 15, 2003, at which  time principal will be due or waived.                                                                                                                                                    |   | $         | 2,381,260 |      | $      | **—** |   |
|                                                                                                                                                                                                                                                                                                                                     |   |      |      |      |   |
| Unsecured note payable to GTECH Corporation; interest at the prime rate due  monthly through January 25, 2002, at which time all unpaid principal and  interest was due.                                                                                                                                                                 |   | —    |      | 3,000,000 |   |
|                                                                                                                                                                                                                                                                                                                                     |   |      |      |      |   |
| Line of credit; interest at prime plus 1⁄2% (4.75% at December 31,  2002), payable monthly, principal due May 12, 2003. Amount represents the  balance outstanding at December 31, under a $1,000,000 line of credit from  Coast Community Bank, which provided the initial loan for the acquisition of  Land in Biloxi, Mississippi. |   | —    |      | 600,000   |   |
|                                                                                                                                                                                                                                                                                                                                     |   |      |      |      |   |
| Total                                                                                                                                                                                                                                                                                                                                    |   | 2,381,260 |      | 3,600,000 |   |
| Less current portion                                                                                                                                                                                                                                                                                                                     |   | 2,381,260 |      | 3,000,000 |   |
|                                                                                                                                                                                                                                                                                                                                     |   |      |      |      |   |
| Long-term portion                                                                                                                                                                                                                                                                                                                        |   | $         | —    |      | $      | 600,000 |   |
|                                                                                                                                                                                                                                                                                                                                          |        |           |           |           |        |  |  |  |  |

 

The scheduledmaturities of debt are as follows:

 
| 2003   |   | $      | 2,381,260 |   |
|--------|--------|--------|-----------|--------|
| 2004   |   | — |      |
|   |   |   |      |
| Total  |   | $      | 2,381,260 |   |

 

On February 15,2002, we entered into an agreement with RAM Entertainment, LLC (“RAM”), aprivately held investment company, whereby RAM will acquire a 50% interest inthe California and Michigan projects and provide the necessary funding fortheir development.  RAM advanced $2,381,260to us in the form of a loan, to be forgiven upon receipt by the HuronPotawatomi Tribe of federal approvals for its proposed casino near BattleCreek, Michigan.  The loan bearsinterest adjustable daily at prime and requires interest payments monthly.  The principal is due at maturity on February15, 2003

 

F-12

----

 

unless earlierforgiven pursuant to its terms.  OnFebruary 15, 2003, we entered into an agreement with RAM Entertainment, LLC toextend the due date until August 15, 2003 for the receipt of regulatoryapprovals, or the repayment of the $2,381,260 note.  The loan continues to bear interest adjustable daily at prime andrequires interest payments monthly, with the principal now due at the extendedmaturity date of August 15, 2003 unless earlier forgiven pursuant to its terms,or extended by mutual agreement of the parties.

 

The proceeds ofthis loan, together with cash on hand, were used to repay the $3,000,000 GTECHnote.

 

9.             STOCKHOLDERS’ EQUITY

 

Options to purchase150,000 shares of common stock at $3.69 per share (market value on date ofgrant) were issued in 1994 to a consultant. These options were repriced in June 1998 at $2.25 per share (marketvalue on the repricing date).  The fairvalue of $43,410 for the options was estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions: expectedvolatility of 97 percent, risk-free interest rate of 5.0 percent, and expectedlife of 2.0 years.  As the options weregranted to a nonemployee in return for services, consulting expense of $43,410was recognized in 1998, along with an equivalent increase in paid incapital.  All of these options wereexercisable at December 31, 2002.

 

On December 20,1996, a consultant, who is also a principal stockholder, was granted an optionto purchase 250,000 common shares at $3.69 in return for consulting services tobe provided over an approximate three-year period.  The options vested immediately. The fair value of $302,826 for the options was estimated on the date ofgrant using the Black-Scholes option-pricing model with the followingassumptions: expected volatility of 80 percent, risk-free interest rate of 6.0percent, and expected life of 2.0 years. As the options were granted to a non-employee in return for services,consulting expense was recognized ratably over the three-year service periodcommencing in 1997.

 

Full House’spreferred stock has a $.30 per share cumulative dividend rate, and has aliquidation preference equal to $3.00 per share plus all unpaid dividends.  If Full House is in default in declaring orsetting apart for payment of dividends on the preferred stock, it is restrictedfrom paying any dividend, making any other distribution, or redeeming any stockranking junior to the preferred stock. The stockholders’ right to the $.30 per share cumulative dividends onthe preferred stock commenced as of June 30, 1992 and totaled $2,205,000 and$1,995,000 at December 31, 2002 and 2001, respectively.  Through December 31, 2002, no dividends havebeen declared or paid.

 

10.           INCOME TAX PROVISION

 

The income taxbenefit (provision) recognized in the consolidated financial statementsconsists of the following:

 
|              |   | **2002**       |   | **2001** |     |
|-------------------|--------|----------------|--------|----------|----------|
| Current:          |   | Federal        |   | $        | —   |   | $ | (20,000 | ) |
|              |   | State          |   | (210,000 | )        | (215,000 | ) |
|              |   | Total current  |   | (210,000 | )        | (235,000 | ) |
| Deferred:         |   | Federal        |   | (638,964 | )   | 1,020,961 |   |
|              |   | State          |   | (24,567  | )        | 60,086 |   |
|              |   | Total deferred |   | (663,531 | )        | 1,081,047 |   |
|              |   |           |   |     |     |   |   |
| Total (Provision) |   | Benefit        |   | $        | (873,531 | ) | $ | 846,047 |   |

 

A reconciliation ofthe income tax provision with amounts determined by applying the statutory U.S.Federal income tax rate of 34% to consolidated income before income taxes is asfollows:

 
|                                            |   | **2002** |     | **2001** |   |
|-------------------------------------------------|--------|----------|----------|----------|--------|
| Tax (provision)  benefit at U.S. statutory rate |   | $        | (621,958 | )        | $      | 1,120,864 |   |
| State taxes                                     |   | (153,981 | )        | (102,234 | )      |
| Amortization                                    |   | (68,099  | )        | (186,504 | )      |
| Other                                           |   | (29,493  | )   | 13,921   |   |
| Total                                           |   | $        | (873,531 | )   | $      | 846,047 |   |

 

F-13

----

 

Full House’sdeferred tax items as of December 31, are as follows:

 
|                                                   |   | **2002**   |    | **2001**   |   |
|--------------------------------------------------------|--------|------------|---------|------------|--------|
| Deferred tax assets:                                   |   |       |    |       |   |
| Net operating loss carryforward                        |   | $          | 157,883 |       | $      | 58,855 |   |
| Tax credit carryforwards                               |   | 51,706     |    | 51,706     |   |
| Intangibles                                            |   | 1,038,854  |    | 1,097,772  |   |
| Accrued expenses                                       |   | 10,668     |    | 7,609      |   |
| Stock option plans                                     |   | 121,182    |    | 165,332    |   |
| Asset impairment                                       |   | 787,385    |    | 1,452,386  |   |
| Total deferred tax assets                              |   | 2,167,678  |    | 2,833,660  |   |
|                                                   |   |       |    |       |   |
| Deferred tax liabilities:                              |   |       |    |       |   |
| Difference between book and tax basis of gaming rights |   | (1,454,325 | )       | (1,454,325 | )      |
| Other                                                  |   | (935       | )       | (3,386     | )      |
| Total deferred tax liabilities                         |   | (1,455,260 | )       | (1,457,711 | )      |
|                                                   |   |       |    |       |   |
| Net                                                    |   | $          | 712,418 |       | $      | 1,375,949 |   |

 

AtDecember 31, 2002, Full House had net operating loss carryforwards forfederal income tax purposes of approximately $464,000, which may be carriedforward to offset future taxable income. The loss carryforwards expire in 2019. The availability of the loss carryforwards may be limited in the eventof a significant change in ownership of Full House or our subsidiaries.

 

11.           SUPPLEMENTAL STATEMENT OFCASH FLOWS INFORMATION

 

Cash payments for interest for the years ended December 31, 2002 and2001 were $144,973 and $286,939, respectively.

 

Income taxes paidfor the years ended December 31, 2002 and 2001 were $173,010 and $291,422,respectively.

 

12.           COMMITMENTS ANDCONTINGENCIES

 

Full House leasesoffice space under a noncancellable lease expiring on March 31, 2007. Futureminimum lease obligations are $36,233 in 2003, and increase 4% each January1st, thereafter.

 

Rent expensepertaining to operating leases was $56,575 and $79,920 for the years endedDecember 31, 2002 and 2001, respectively.

 

In October 1994, wefiled an action for declaratory relief in Mississippi, seeking a determinationby the court that no relationship exists between us and Lone Star CasinoCorporation regarding the potential acquisition of a riverboat casino on theMississippi gulf coast (Full House Resorts, Inc. v. Lone Star CasinoCorporation v. Allen E. Paulson, Second Judicial District of the Chancery Courtof Harrison County, Mississippi).  LoneStar filed a counterclaim alleging breaches of fiduciary duty, breach ofcontract, conspiracy to breach contract and to breach fiduciary duty and commonlaw fraud.  The trial court grantedsummary judgment in favor of all defendants on that counterclaim, and Lone Starappealed that judgment to the Mississippi appellate court.   In April 1998, the Appeals Court affirmedthe dismissal of all counts against all parties, excepting Lone Star’s claimagainst us for breach of contract, which it remanded to the trial court foradditional hearing.  In January 2000, LSCapital, successor entity to Lone Star Casino Corporation, announced that ithad retained counsel to pursue the two remaining claims it had alleged againstus which were not already dismissed by the Mississippi appellate courts.  In April 2000, the trial judge dismissedboth those counts for Lone Star’s failure to prosecute its claims for nearlytwenty months after their remand from the Court of Appeals.  Lone Star appealed that ruling and theMississippi State Court of Appeals reversed the dismissal, and in late 2001again remanded the claims against the Company for breach of contract, back tothe trial court for further proceedings.

 

Management isunable to determine the outcome of this litigation, but does not believe theoutcome will have a material adverse effect on Full House’s consolidated financialcondition.

 

13.           STOCK-BASED COMPENSATIONPLANS

 

At December 31,2002, Full House had three stock-based compensation plans that are describedbelow.  The ability to issue optiongrants under these plans expired on June 30, 2002.  Full House applies APB Opinion No. 25 and related interpretationsin accounting for these plans.  Becauseoptions have been granted with exercise prices equal to market value

 

F-14

----

 

on the grant date,no compensation cost has been recognized for options granted under thenon-employee Director Stock Plan, Incentive Stock Plan (except as disclosedbelow related to options granted under the Incentive Stock Plan to aconsultant/principal shareholder) and an informal director stock plan.  Since all options that are outstanding as ofDecember 31, 2002 have vested, applying the fair value recognition provisionsof SFAS No. 123 results in pro forma net income (loss) that is the same ashistorical reported net income (loss) during the years ended 2002 and 2001.

 

Full House hadreserved 300,000 shares of its common stock for issuance under the non-employeeDirector Stock Plan. The ability to issue options under this Plan expired onJune 30, 2002.  No options were issuedunder this Plan in 2002, and as of December 31, 2002, there were no outstandingoptions under this Plan.

 

Full House hasreserved 3,000,000 shares of its common stock for issuance under the 1992Incentive Plan as amended in June 1999. The ability to issue options under this Plan expired on June 30,2002.  The Plan allowed for the issuanceof options and other forms of incentive awards, including qualified andnon-qualified incentive stock options. Incentive stock options may be granted at prices not less than fairmarket value on the date of grant, while non-qualified incentive stock optionsmay be granted at a price less than fair market value on the date ofgrant.  The persons eligible for suchplan included employees and officers of Full House (whether or not suchofficers are also directors of Full House) and consultants and advisors to FullHouse, who are largely responsible for the management, growth and protection ofthe business of Full House.  Optionsissued under the Incentive Plan are generally exercisable over a term of tenyears.  There were no options issuedunder this plan during either 2002 or 2001.

 

On March 3, 1997 (“the Grant Date”), the Board of Directorsapproved a grant of an option (“Option”)to each of Full House’s three directors, to purchase 250,000 shares of commonstock at an exercise price per share equal to the fair market value.  The Options were granted in consideration ofthe fact that services to Full House by such directors have exceeded and areexpected to continue to exceed the duties of a typical corporate director.  The Options became exercisable in 50,000share increments commencing April 9, 1997 and on each anniversary thereafter.  In addition, the Options for two of thedirectors provide that a 50,000 share increment became exercisable on the GrantDate.  In March 1998, 250,000 of theseshares were forfeited, and in 2002, another 250,000 of these options wereforfeited.  As of December 31, 2002,250,000 of these options are outstanding at an exercise price of $2.25 pershare.

 

The total optionsoutstanding under the 1992 Incentive Plan, including the consulting options atDecember  31, 2002 and 2001 were 586,000. The total options outstanding under the non-employee Director Stock Planat December 31, 2002 and 2001 were zero and 50,000, respectively.  The total options outstanding under theDirector Stock Plan at December 31, 2002 and 2001 were 325,000 and 575,000,respectively.

 

F-15

----

 

A summary of thestatus of Full House’s stock option plans, including consultant options, as ofDecember 31, 2002 and 2001, and changes during the years then ended ispresented below:

 

 
|                                                           |   | **2002**                       |   | **2001**                       |   |
|----------------------------------------------------------------|--------|--------------------------------|--------|--------------------------------|--------|
|                                                           |   | **WEIGHTED-AVERAGE  EXERCISE** |   | **WEIGHTED-AVERAGE  EXERCISE** |   |
|                                                           |   | **SHARES**                     |   | **PRICE**                      |   | **SHARES** |   | **PRICE** |   |
| Outstanding at beginning of year                               |   | 1,211,000                      |   | $                              | 2.54   |   | 1,231,000 |   | $ | 2.54 |   |
| Granted                                                        |   | —                         |   | —                         |   | 10,000 |   | 0.90 |   |
| Exercised                                                      |   | —                         |   | —                         |   | — |   | — |   |
| Forfeited                                                      |   | 300,000                        |   | 2.22                           |   | 30,000 |   | 2.04 |   |
|                                                           |   |                           |   |                           |   |   |   |   |   |
| Outstanding at end of year                                     |   | 911,000                        |   | 2.65                           |   | 1,211,000 |   | 2.54 |   |
| Exercisable at year-end                                        |   | 911,000                        |   | 2.65                           |   | 1,211,000 |   | 2.54 |   |
|                                                           |   |                           |   |                           |   |   |   |   |   |
| Weighted-average fair value of options granted during the year |   |                           |   | $                              | — |   |   |   | $ | 0.42 |   |

 

As of December 31,2002, the 911,000 options outstanding and exercisable have exercise pricesranging between $2.25 and $3.69, and a weighted average remaining contractuallife of 3 years.

 

14.           SEGMENT REPORTING

 

Since the GTECHacquisition transaction, we now view our business in three primary businesssegments.  The Operations segmentincludes the performance of the Delaware and Oregon projects.  The Development segment includes costsassociated with our activities in Michigan, California, and Mississippi.  The Corporate segment reflects themanagement and administrative expenses of the business.  The prior year amounts have beenreclassified to conform with the current year presentation.

 

**SUMMARY INFORMATION FOR THE YEARSENDED DECEMBER 31,**

 

**2002**

 
|                            |   | **Operations** |      | **Development** |   | **Corporate** |   | **Consolidated** |   |
|---------------------------------|--------|----------------|-----------|-----------------|--------|---------------|--------|------------------|--------|
| Revenues                        |   | $              | 4,817,681 |            | $      | —        |   | $                | — |   | $ | 4,817,681 |   |
| Development costs               |   | —         |      | 954,063         |   | —        |   | 954,063          |   |
| Income (loss) from operations   |   | 4,782,947      |      | (1,244,622      | )      | (1,667,316    | )      | 1,871,009        |   |
| Interest expense                |   | (117,068       | )         | (28,999         | )      | —        |   | (146,067         | )      |
| Other income                    |   | —         |      | 100,000         |   | 4,346         |   | 104,346          |   |
| Tax (provision) benefit         |   | (1,795,672     | )         | 400,881         |   | 565,410       |   | (829,381         | )      |
| Net income (loss)               |   | 2,870,207      |      | (772,740        | )      | (1,097,560    | )      | 999,907          |   |
|                            |   |           |      |            |   |          |   |             |   |
| Approximate Identifiable assets |   | 40,000         |      | 9,632,000       |   | 1,475,000     |   | 11,147,000       |   |
|                                 |        |                |           |                 |        |               |        |                  |        |  |  |  |  |

 

**2001**

 
|                            |   | **Operations** |      | **Development** |   | **Corporate** |   | **Consolidated** |   |
|---------------------------------|--------|----------------|-----------|-----------------|--------|---------------|--------|------------------|--------|
| Revenues                        |   | $              | 4,995,826 |            | $      | —        |   | $                | — |   | $ | 4,995,826 |   |
| Development / Impairment        |   | —         |      | 5,799,241       |   | —        |   | 5,799,241        |   |
| Income (loss) from operations   |   | 4,826,353      |      | (6,237,895      | )      | (1,607,438    | )      | (3,018,980       | )      |
| Interest expense                |   | (218,872       | )         | (67,873         | )      | —        |   | (286,745         | )      |
| Other income                    |   | —         |      | —          |   | 9,067         |   | 9,067            |   |
| Tax (provision) benefit         |   | (1,814,341     | )         | 2,119,081       |   | 541,307       |   | 846,047          |   |
| Net income (loss) (a)           |   | 2,793,140      |      | (4,186,687      | )      | (1,057,064    | )      | (2,450,611       | )      |
|                            |   |           |      |            |   |          |   |             |   |
| Approximate Identifiable assets |   | 245,000        |      | 10,220,000      |   | 1,000,000     |   | 11,465,000       |   |
|                                 |        |                |           |                 |        |               |        |                  |        |  |  |  |  |

 

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(a) The operating results of our Development segment were significantlyimpacted in 2001, primarily as a result of the Impairment provision of$4,593,800 discussed in Note 3.

 

F-16

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15.           SUBSEQUENT EVENT

 

On February 15,2003, we entered into an agreement with RAM Entertainment, LLC to extend thedue date until August 15, 2003 for the receipt of regulatory approvals for ourproposed casino near Battle Creek, Michigan, or the repayment of the $2,381,260note.  The loan continues to bearinterest adjustable daily at prime and requires interest payments monthly.  The principal is due at the extendedmaturity date of August 15, 2003 unless earlier forgiven pursuant to its terms,or extended by mutual agreement of the parties.

 

F-17

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**EXHIBIT INDEX**

 

 
| **EXHIBIT** |   | **DESCRIPTION**                                                                                 |
|-------------|--------|-------------------------------------------------------------------------------------------------|
|        |   |                                                                                            |
| 21          |   | List of Subsidiaries  of Full House Resorts, Inc.                                               |
|        |   |                                                                                            |
| 23.1        |   | Consent of  Deloitte & Touche LLP                                                           |
|        |   |                                                                                            |
| 99.1        |   | Certification of principal executive and financial officers pursuant  to 18 U.S.C. section 1350 |

 

F-18

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