##### Table of Contents



(WELLS-GARDNER ELECTRONICS CORPORATION LOGO) Annual Report 2003




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CORPORATE PROFILE: Founded in 1925, Wells-Gardner Electronics Corporation® is a global distributor
and manufacturer of color video displays and other related distribution
products for a variety of markets including, but not limited to, gaming machine
manufacturers, casinos, coin-operated video game manufacturers and other
display integrators. The Companys primary business is the distribution,
design, manufacture, assembly, service and marketing of color video monitors,
liquid crystal displays (LCDs), gaming supplies and other components. The
Company successfully formed a 50/50 joint venture named Wells-Eastern Asia
Displays to manufacture video displays in Malaysia. In addition, the Company
owns American Gaming & Electronics, a leading parts distributor, service center
and a seller of refurbished gaming machines to the gaming markets. The Company
has offices in Nevada, New Jersey and Illinois. Wells-Gardner is publicly
traded on the American Stock Exchange under the symbol WGA.




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|                                            |  |  |  |  |  |  |  | 
|------------------------------------------- |  |  |  |  |  |  |  | 
|Agreement dated November 21, 2003          
|Audited Financial Statements               
|Annual Report to Shareholders              
|Consent of Blackman Kallick Bartelstein LLP
|Consent of KPMG LLP                        
|Certification of Chief Executive Officer   
|Certification of Chief Financial Officer   
|906 Certification of CEO and CFO           



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SELECTED FINANCIAL DATA(in $000s except for per
share data)

| |  |                                                         |  |                          |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |   |  | 
| |  | ------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | - |  | 
| |  |                                                         |  |                         
| |  |                                                         |  |                         
| |  |                                                         |  |                         
| |  |                                                         |  | Years
Ended December 31,
| |  |                                                         |  | 2003                     |        | 2002 |  | 2001 |        | 2000 |  | 1999 |        |  
|
|
| |  | Net sales                                               |  | $                        | 46,681 |      |  | $    | 49,309 |      |  | $    | 42,550 |   |  | $ | 46,464 |   |  | $ | 35,714 |   |  | 
| |  | Moving related costs                                    |  |                          |       |      |  |      |       |      |  |      | 1,334  |   |  |   |       |   |  |   |       |   |  | 
| |  | Operating earnings (loss)                               |  |                          | (540   | )    |  |      | 1,097  |      |  |      | (2,372 | ) |  |   | 1,320  |   |  |   | (612   | ) |  | 
| |  | Gain on sale of fixed assets                            |  |                          |       |      |  |      |       |      |  |      |       |   |  |   | 329    |   |  |   |       |   |  | 
| |  | Earnings (loss) from
    continuing operations          |  |                          | (697   | )    |  |      | 763    |      |  |      | (2,894 | ) |  |   | 1,092  |   |  |   | (838   | ) |  | 
| |  | Loss on discontinued operations                         |  |                          |       |      |  |      |       |      |  |      | (2,813 | ) |  |   | (241   | ) |  |   | (352   | ) |  | 
| |  | Cumulative effect of change in
    accounting principle |  |                          |       |      |  |      | 52     |      |  |      |       |   |  |   |       |   |  |   |       |   |  | 
|
| |  | Net earnings (loss)                                     |  | $                        | (697   | )    |  | $    | 815    |      |  | $    | (5,707 | ) |  | $ | 851    |   |  | $ | (1,190 | ) |  | 
|
| |  | Basic net earnings (loss) per
    common share          |  | $                        | (0.12  | )    |  | $    | 0.14   |      |  | $    | (1.01  | ) |  | $ | 0.15   |   |  | $ | (0.22  | ) |  | 
| |  | Diluted net earnings (loss) per
    common share        |  | $                        | (0.12  | )    |  | $    | 0.14   |      |  | $    | (1.01  | ) |  | $ | 0.15   |   |  | $ | (0.22  | ) |  | 
|
| |  | Total assets                                            |  | $                        | 19,095 |      |  | $    | 22,909 |      |  | $    | 21,575 |   |  | $ | 26,076 |   |  | $ | 18,789 |   |  | 
| |  | Long-term liabilities                                   |  | $                        | 5,968  |      |  | $    | 8,352  |      |  | $    | 8,925  |   |  | $ | 7,852  |   |  | $ | 3,576  |   |  | 
| |  | Working capital                                         |  | $                        | 10,052 |      |  | $    | 12,269 |      |  | $    | 11,607 |   |  | $ | 15,377 |   |  | $ | 10,481 |   |  | 
|

COMMON SHARE MARKET PRICE

The Companys common shares are traded on
the American Stock Exchange under the symbol WGA. On
December 31, 2003, there were approximately 614 holders of
record of the common shares. A five percent (5%) stock dividend
was issued in 2003 and 2002. High and low prices for the last
two years were:


| |  |                |  |             |      |     |  |      |      |     |  |   |      |  |  |   |      |  |  | 
| |  | -------------- |  | ----------- | ---- | --- |  | ---- | ---- | --- |  | - | ---- |  |  | - | ---- |  |  | 
|
| |  |                |  |             |      |    
| |  | 2003 Prices    |  | 2002 Prices |      |    
| |  |                |  | High        |      | Low |  | High |      | Low |  |  
|
|
| |  | Quarter ended: |  |             |      |     |  |      |      |     |  |   |      |  |  |   |      |  |  | 
| |  | March 31       |  | $           | 2.33 |     |  | $    | 1.42 |     |  | $ | 3.15 |  |  | $ | 2.75 |  |  | 
| |  | June 30        |  | $           | 2.62 |     |  | $    | 1.80 |     |  | $ | 2.84 |  |  | $ | 2.01 |  |  | 
| |  | September 30   |  | $           | 4.15 |     |  | $    | 2.02 |     |  | $ | 2.04 |  |  | $ | 1.51 |  |  | 
| |  | December 31    |  | $           | 3.95 |     |  | $    | 2.85 |     |  | $ | 1.95 |  |  | $ | 1.29 |  |  | 
|

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2003 PRESIDENTS REPORT

TO OUR SHAREHOLDERS, CUSTOMERS, SUPPLIERS &
EMPLOYEES:





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys 2003 revenue decreased by 5.3% to
    $46.7 million from $49.3 million in the prior year.
    The decline was due primarily to the approximately 30% decline
    in the amusement market offset by the Companys further
    penetration of the gaming market. We are pleased with this level
    of revenue in 2003 as some of our major gaming customers
    experienced decreased sales but these same customers are
    predicting strong sales in 2004 and beyond.
| |  | Wells-Gardners 2003 EBITDA was $996,000. The 2003 results
    included a non-recurring charge for the write down of inventory
    and other costs of $797,000. The EBITDA generated, prior to the
    non-recurring charge, was in line with expectations expressed by
    management in the third quarter when the Company presented to
    investors at the Global Gaming Expo.                                                                                                   
| |  | The Companys 2003 net loss was $697,000 compared to a
    profit of $815,000 in 2002. This included the non-recurring
    charge of $797,000 referred to above.                                                                                                                                                                                                                                                                                                                     
| |  | The Company generated positive cash flow of over
    $2.5 million in 2003.                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Production at our joint venture in Malaysia was over 59,000
    monitors, an increase of over 13% from the 2002 production.                                                                                                                                                                                                                                                                                                                                                          
| |  | The Companys stock price increased 125%, as adjusted to
    account for the Companys 5% stock dividend while average
    trading volume increased 500%.                                                                                                                                                                                                                                                                                                                            

Strategic Plan

Gaming sales continue to increase and account for 75% of the
Companys revenue in 2003 up from 69% in 2002.


Gaming Strategy

The Company is now participating in six areas of the
gaming market




| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Monitor manufacturing in Malaysia and the US for the gaming
    market                                                                                   
| |  | Distributing Wells-Gardners and other manufacturers
    parts to casinos throughout North America                                                      
| |  | Servicing games and games parts for casinos throughout North
    America                                                                                 
| |  | Installing and servicing new gaming equipment into casinos in
    North America                                                                          
| |  | Refurbishing and selling used gaming equipment to customers
    worldwide                                                                                
| |  | Started in 2003, the Company now represents 12 gaming design
    groups in selling their game designs to either manufacturers or
    major casino groups.

The strategy is proving successful as gaming revenue
accounted for approximately 75% of the Companys total
revenue in 2003, compared to 69% in 2002, 60% in 2001 and 52% in
2000.

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American Gaming & Electronics (AGE)

AGE sells to over 700
casinos in North America.


Wells Eastern Asia (WEA)

We manufacture over 90% of our monitors for the gaming market
at WEA.


Wells-Gardner is Second Largest Monitor Manufacturer in
the Global Gaming Industry.

The Company estimates its
market share of monitors at 26%, which makes it second in the
worldwide gaming industry.


Flat Panel & LCD Sales



2004 Global Gaming Outlook

Gaming is
the Finest Form of Non-Invasive Taxation Known to the Mind of
Man.


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2004 Wells-Gardner Outlook



Quality Continues To Be The Top Priority

best-in-class certified
supplier


I thank all of you for your continued support as we complete the
implementation of our strategic plan. I am confident that this
will lead to increased profitability and improved shareholder
value.

/s/ ANTHONY SPIER







March 5, 2004

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MANAGEMENTS DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION 
 & RESULTS OF OPERATIONS

Year Ended December 31, 2003 Compared
to Year Ended December 31, 2002

Net sales from continuing operations decreased
5.3% to $46.7 million in 2003 compared to
$49.3 million in 2002, as gross margin for 2003 decreased
to $8.0 million or 17.2% of sales compared to $9.4 million
or 19.0% of sales in 2002. The decrease in 2003 net sales was
primarily caused by lower revenues from the Companys two
largest customers and the fourth quarter one-time charge of
$797,000 to consolidate operations and exit non-core product
lines. Engineering, selling and administrative expenses
increased to $8.6 million in 2003 compared to
$8.3 million in 2002. The increase is attributed to the
Companys ongoing global expansion of its international
sales capabilities and new product development, particularly for
the gaming industry. Operating loss from continuing operations
for 2003 was $540,000 compared to operating income of
$1.1 million in 2002. Other expense, net was $143,000 in
2003 compared to $332,000 in 2002 as the Company recorded lower
interest expense on its reduced borrowings and the
Companys share of profits from its joint venture. The
Company did not recognize any material income tax expense as the
Company has available a net operating loss carryforward of
approximately $8.9 million as of December 31, 2003.
During the first quarter of 2002, the Company recorded a $52,000
benefit from the reversal of negative goodwill relating to the
Companys joint venture upon the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. Net loss for 2003 was $697,000
compared to net earnings of $815,000 for 2002. For 2003, basic
and diluted loss per share was $0.12 compared to basic and
diluted earnings per share of $0.14 for 2002.


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

Net sales from continuing operations increased
15.9% to $49.3 million in 2002 compared to
$42.6 million in 2001, as gross margin for 2002 increased
to $9.4 million or 19.0% of sales compared to $7.4 million
or 17.4% of sales in 2001. The increase was primarily caused by
additional revenue and margin produced from production at the
Companys Malaysian joint venture. Engineering, selling and
administrative expenses decreased to $8.3 million in 2002
compared to $8.4 million in 2001. The decrease is attributed to
the Companys focus on minimizing operating expenses.
During the second quarter of 2001, the Company moved its
Chicago-based operations to McCook, Illinois, which resulted in
a charge to operations of $1.3 million. Operating earnings
from continuing operations for 2002 were $1.1 million
compared to an operating loss from continuing operations of
$2.4 million in 2001. Other expense, net was $332,000 in
2002 compared to $522,000 in 2001 as the Company recorded lower
interest expense on its reduced borrowings. The Company did not
recognize any material income tax expense for 2002 as the
Company has available a net operating loss carryforward of
approximately $8.3 million as of December 31, 2002.
During the fourth quarter of 2001, the Company discontinued its
coin door business and recorded a loss on discontinued
operations of $2.8 million, which included a loss on
disposal of assets of $2.4 million. During the first
quarter of 2002, the Company recorded a $52,000 benefit from the
reversal of negative goodwill relating to the Companys
joint venture upon the adoption of Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets. Net earnings for 2002 were $815,000
compared to a net loss of $5.7 million for 2001. For 2002,
basic and diluted earnings per share were $0.14 compared to
basic and diluted loss per share of $1.01 for 2001.


Market & Credit Risks

The Company is subject to certain market risks,
mainly interest rates. During 2003, the Company entered into a
three-year, $12 million, secured credit facility with
LaSalle Bank National Association. Substantially all assets of
the Company are used as collateral for this credit facility. As
of December 31, 2003, the Company had total outstanding
bank debt of $6.0 million at a variable interest rate of
4.50%. All bank debt is due and payable on June 30, 2006.
The Company believes that its exposure to interest rate
fluctuations will be limited due to the Companys current
practice of maintaining a minimal cash balance in an effort to
effectively use any excess cash flows to reduce outstanding
debt. All of the Companys debt is subject to variable
interest rates. An adverse change in interest rates during the
time that this debt is outstanding would cause an increase in
the amount of interest paid. The Company may pay down the loans
at any time without penalty. However, a 100 basis point increase
in interest rates would result in an annual increase of
approximately $60,000 in interest expense recognized in the
consolidated financial statements.


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Critical Accounting Policies

The preparation of the Companys
consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America
requires the Companys management to adopt accounting
policies and to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of
revenue and expenses. Management periodically evaluates its
policies, estimates and assumptions related to, among others:
revenue recognition, inventory obsolescence and costing methods,
provision for bad debts, provision for warranty and
contingencies. The Companys management bases its estimates
on historical experience and expectations of the future. Actual
reported and future amounts could differ from those estimates
under different conditions and assumptions.


Revenue Recognition

In general, the Company recognizes revenue when
the following criteria are met: evidence of an arrangement
between the Company and its customer exists, shipment has
occurred or services have been rendered, the sales price is
fixed and determinable and collectibility is reasonably assured.


Inventory Obsolescence & Costing
Methods

Inventory is stated at the lower of cost
(first-in, first-out) or market. The Company provides an
allowance for estimated obsolete or excess inventory based on
assumptions about future demands for its products.


Provision For Bad Debts

The Company is exposed to credit risk on certain
assets, primarily accounts receivable. The Company provides
credit to customers in the ordinary course of business and
performs ongoing credit evaluations. Concentrations of credit
risk with respect to trade receivables are somewhat limited due
to the large number of customers comprising the Companys
customer base. The Company currently believes its allowance for
doubtful accounts is sufficient to cover customer credit risks.


Provision For Warranty

The Company offers certain warranties on its
products and has a general reserve for potential future charges
incurred in connection with in-warranty repairs and services.
This reserve is based on historical actual repairs. If the
actual charges incurred exceed managements estimates,
operating results could be impacted.


Contingencies

When applicable, the Company assesses its
exposures to loss contingencies including legal and other
matters and provides for an exposure if it is judged to be
probable and estimable. If the actual loss from a contingency
differs from managements estimates, operating results
could be impacted.


Liquidity & Capital
Resources

Accounts receivable decreased to
$4.7 million in 2003 compared to $7.8 million in 2002.
This decrease is attributed to lower sales in the fourth quarter
of 2003 compared to 2002 with some offset for improved
collections. Inventory decreased to $8.9 million in 2003
compared to $9.0 million in 2002. Current liabilities decreased
to $4.9 million in 2003 compared to $6.3 million in
2002. This decrease is attributed to the Companys new
credit agreement, which classifies all debt as long-term.
Long-term liabilities decreased to $6.0 million in 2003
compared to $8.4 million in 2002. This decrease is
attributed to lower borrowings on the Companys line of
credit. Shareholders equity was $8.3 million in 2003
compared to $8.2 million in 2002. The Company is dependent
on its credit facility to fund operations, as some critical
inventory requires long lead times. Under its current credit
facility, the Company is required to maintain certain financial
covenants. While the Company currently expects to meet these
financial covenants during 2004, its liquidity could be
adversely affected if it is unable to do so. Overall, the
Company currently believes that its future financial
requirements can be met with funds generated from operating
activities and from its credit facility during the foreseeable
future.


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Contractual Obligations

The following table summarizes the Companys
contractual commitments as of December 31, 2003. The
commitments are discussed in the indicated notes to the
Companys consolidated financial statements:


|                           |  |                                          |       |      |  |      |     |      |  |      |     |      |  |      |       |  |  |   |     |  |  |   |     |  |  |   |   |  |  | 
|-------------------------- |  | ---------------------------------------- | ----- | ---- |  | ---- | --- | ---- |  | ---- | --- | ---- |  | ---- | ----- |  |  | - | --- |  |  | - | --- |  |  | - | - |  |  | 
|                          
|                          
|                           |  |                                          |       |     
|                           |  | Payments Due In Year Ending December 31, |       |     
|                           |  |                                         
|                           |  |                                         
|(in $000s)                |  | Total                                    |       | 2004 |  | 2005 |     | 2006 |  | 2007 |     | 2008 |  | 2009 |       | 
|                          
|                          
|Note Payable (Note 5)      |  | $                                        | 5,968 |      |  | $    |    |      |  | $    |    |      |  | $    | 5,968 |  |  | $ |    |  |  | $ |    |  |  | $ |  |  |  | 
|Operating Leases (Note 14) |  | $                                        | 2,952 |      |  | $    | 863 |      |  | $    | 723 |      |  | $    | 649   |  |  | $ | 529 |  |  | $ | 182 |  |  | $ | 6 |  |  | 
|                          
|                           |  | $                                        | 8,920 |      |  | $    | 863 |      |  | $    | 723 |      |  | $    | 6,617 |  |  | $ | 529 |  |  | $ | 182 |  |  | $ | 6 |  |  | 
|                          

Inflation

To date, inflation has not had a material effect
on the Companys results of operations.


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CONSOLIDATED BALANCE SHEETS

As of December 31,


(in $000s except for share
information)


| |  |                                              |                                                                                                                                               |      |        |        |   |   |        |        |   |  | 
| |  | -------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------ | ------ | - | - | ------ | ------ | - |  | 
| |  |                                              |                                                                                                                                               | 2003 |        | 2002   |   |  
|
|
| |  | ASSETS                                       |                                                                                                                                               |      |        |        |   |   |        |        |   | 
| |  | Current Assets:                              |                                                                                                                                               |      |        |        |   |   |        |        |   | 
| |  |                                              | Cash                                                                                                                                          |      | $      | 283    |   |   | $      | 782    |   |  | 
| |  |                                              | Accounts receivable, net of allowances of $146 in
    2003 & $147 in 2002                                                                     |      |        | 4,690  |   |   |        | 7,835  |   |  | 
| |  |                                              | Inventory                                                                                                                                     |      |        | 8,904  |   |   |        | 8,995  |   |  | 
| |  |                                              | Prepaid expenses & other assets                                                                                                               |      |        | 1,041  |   |   |        | 974    |   |  | 
|
| |  | Total current assets                         |                                                                                                                                               | $    | 14,918 |        |   | $ | 18,586 |        |   | 
|
| |  | Property, Plant & Equipment (at cost):       |                                                                                                                                               |      |        |        |   |   |        |        |   | 
| |  |                                              | Leasehold improvements                                                                                                                        |      |        | 279    |   |   |        | 279    |   |  | 
| |  |                                              | Machinery, equipment & software                                                                                                               |      |        | 8,478  |   |   |        | 8,384  |   |  | 
| |  |                                              | less: Accumulated
    depreciation & amortization                                                                                             |      |        | (6,707 | ) |   |        | (6,205 | ) |  | 
|
| |  | Property, plant & equipment, net             |                                                                                                                                               | $    | 2,050  |        |   | $ | 2,458  |        |   | 
|
| |  | Other Assets:                                |                                                                                                                                               |      |        |        |   |   |        |        |   | 
| |  |                                              | Investment in joint venture                                                                                                                   |      |        | 798    |   |   |        | 536    |   |  | 
| |  |                                              | Goodwill                                                                                                                                      |      |        | 1,329  |   |   |        | 1,329  |   |  | 
|
| |  | Total other assets                           |                                                                                                                                               | $    | 2,127  |        |   | $ | 1,865  |        |   | 
|
| |  | Total Assets                                 |                                                                                                                                               | $    | 19,095 |        |   | $ | 22,909 |        |   | 
|
| |  | LIABILITIES & SHAREHOLDERS
    EQUITY       |                                                                                                                                               |      |        |        |   |   |        |        |   | 
| |  | Current Liabilities:                         |                                                                                                                                               |      |        |        |   |   |        |        |   | 
| |  |                                              | Accounts payable                                                                                                                              |      |        | 4,237  |   |   |        | 4,384  |   |  | 
| |  |                                              | Accrued expenses                                                                                                                              |      |        | 629    |   |   |        | 733    |   |  | 
| |  |                                              | Installment note payable                                                                                                                      |      |        |       |   |   |        | 1,200  |   |  | 
|
| |  | Total current liabilities                    |                                                                                                                                               | $    | 4,866  |        |   | $ | 6,317  |        |   | 
|
| |  | Long-Term Liabilities:                       |                                                                                                                                               |      |        |        |   |   |        |        |   | 
| |  |                                              | Installment note payable                                                                                                                      |      |        |       |   |   |        | 1,813  |   |  | 
| |  |                                              | Note payable                                                                                                                                  |      |        | 5,968  |   |   |        | 6,539  |   |  | 
|
| |  | Total long-term liabilities                  |                                                                                                                                               | $    | 5,968  |        |   | $ | 8,352  |        |   | 
|
| |  | Total Liabilities                            |                                                                                                                                               | $    | 10,834 |        |   | $ | 14,669 |        |   | 
|
| |  | Shareholders Equity:                        |                                                                                                                                               |      |        |        |   |   |        |        |   | 
| |  |                                              | Common shares:                                                                                                                                |      |        |        |   |   |        |        |   |  | 
| |  |                                              | $1 par value; 25,000,000 shares authorized;
    6,220,898 shares issued at December 31, 2003 5,583,446
    shares issued at December 31, 2002 |      |        | 6,221  |   |   |        | 5,583  |   |  | 
| |  |                                              | Capital in excess of par value                                                                                                                |      |        | 4,531  |   |   |        | 3,827  |   |  | 
| |  |                                              | Accumulated deficit                                                                                                                           |      |        | (2,334 | ) |   |        | (1,032 | ) |  | 
| |  |                                              | Unearned compensation                                                                                                                         |      |        | (157   | ) |   |        | (138   | ) |  | 
|
| |  | Total Shareholders Equity                   |                                                                                                                                               | $    | 8,261  |        |   | $ | 8,240  |        |   | 
|
| |  | Total Liabilities &
    Shareholders Equity |                                                                                                                                               | $    | 19,095 |        |   | $ | 22,909 |        |   | 
|

See accompanying notes to the consolidated
financial statements.

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CONSOLIDATED STATEMENTS OF
OPERATIONS

Years ended December 31,


(in $000s except for share & per
share data)


|                                                                                   |                                                         |      |        |        |   |      |        |        |  |   |        |        |   |  | 
|---------------------------------------------------------------------------------- | ------------------------------------------------------- | ---- | ------ | ------ | - | ---- | ------ | ------ |  | - | ------ | ------ | - |  | 
|                                                                                   |                                                         |     
|                                                                                   |                                                         |     
|                                                                                   |                                                         | 2003 |        | 2002   |   | 2001 |        |       
|                                                                                  
|                                                                                  
|Net sales                                                                          |                                                         | $    | 46,681 |        |   | $    | 49,309 |        |  | $ | 42,550 |        |   | 
|Cost & expenses:                                                                   |                                                         |      |        |        |   |      |        |        |  |   |        |        |   | 
|                                                                                   | Cost of sales                                           |      |        | 38,664 |   |      |        | 39,929 |  |   |        | 35,136 |   |  | 
|                                                                                   | Engineering,
    selling & administrative               |      |        | 8,557  |   |      |        | 8,283  |  |   |        | 8,352  |   |  | 
|                                                                                   | Goodwill amortization                                   |      |        |       |   |      |        |       |  |   |        | 100    |   |  | 
|                                                                                   | Moving related costs                                    |      |        |       |   |      |        |       |  |   |        | 1,334  |   |  | 
|                                                                                  
|Operating earnings (loss)                                                          |                                                         |      | (540   | )      |   |      | 1,097  |        |  |   | (2,372 | )      |   | 
|                                                                                   | Other expense, net                                      |      |        | 143    |   |      |        | 332    |  |   |        | 522    |   |  | 
|                                                                                  
|Earnings (loss) from continuing operations
    before income tax                   |                                                         |      | (683   | )      |   |      | 765    |        |  |   | (2,894 | )      |   | 
|Income tax                                                                         |                                                         |      | 14     |        |   |      | 2      |        |  |   |       |        |   | 
|                                                                                  
|Earnings (loss) from
    continuing operations                                     |                                                         |      | (697   | )      |   |      | 763    |        |  |   | (2,894 | )      |   | 
|Loss on discontinued operations (including loss
    on disposal of $2,394 in 2001) |                                                         |      |       |        |   |      |       |        |  |   | (2,813 | )      |   | 
|Cumulative effect of change in
    accounting principle                            |                                                         |      |       |        |   |      | 52     |        |  |   |       |        |   | 
|                                                                                  
|Net earnings (loss)                                                                |                                                         | $    | (697   | )      |   | $    | 815    |        |  | $ | (5,707 | )      |   | 
|                                                                                  
|Basic earnings (loss) per common share:                                            |                                                         |      |        |        |   |      |        |        |  |   |        |        |   | 
|                                                                                   | Continuing operations                                   |      | $      | (0.12  | ) |      | $      | 0.13   |  |   | $      | (0.51  | ) |  | 
|                                                                                   | Discontinued operations                                 |      |        |       |   |      |        |       |  |   | $      | (0.50  | ) |  | 
|                                                                                   | Cumulative effect of change in
    accounting principle |      |        |       |   |      | $      | 0.01   |  |   |        |       |   |  | 
|                                                                                  
|Basic net earnings (loss) per
    common share                                     |                                                         | $    | (0.12  | )      |   | $    | 0.14   |        |  | $ | (1.01  | )      |   | 
|                                                                                  
|Diluted earnings (loss) per common share:                                          |                                                         |      |        |        |   |      |        |        |  |   |        |        |   | 
|                                                                                   | Continuing operations                                   |      | $      | (0.12  | ) |      | $      | 0.13   |  |   | $      | (0.51  | ) |  | 
|                                                                                   | Discontinued operations                                 |      |        |       |   |      |        |       |  |   | $      | (0.50  | ) |  | 
|                                                                                   | Cumulative effect of change in
    accounting principle |      |        |       |   |      | $      | 0.01   |  |   |        |       |   |  | 
|                                                                                  
|Diluted net earnings (loss) per
    common share                                   |                                                         | $    | (0.12  | )      |   | $    | 0.14   |        |  | $ | (1.01  | )      |   | 
|                                                                                  

|                                  |  |  |           |  |  |  |           |  |  |  |           |  |  | 
|--------------------------------- |  |  | --------- |  |  |  | --------- |  |  |  | --------- |  |  | 
|Basic common shares outstanding   |  |  | 6,038,014 |  |  |  | 5,742,154 |  |  |  | 5,644,144 |  |  | 
|Diluted common shares outstanding |  |  | 6,038,014 |  |  |  | 5,817,169 |  |  |  | 5,644,144 |  |  | 
|                                 

See accompanying notes to the consolidated
financial statements.

9



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##### Table of Contents



CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

(in $000s)


|                                            |  |        |       |            |  |           |       |              |  |               |        |   |  |   |      |   |  |   |        |   |  | 
|------------------------------------------- |  | ------ | ----- | ---------- |  | --------- | ----- | ------------ |  | ------------- | ------ | - |  | - | ---- | - |  | - | ------ | - |  | 
|                                            |  |       
|                                            |  |       
|                                            |  |        |       | Capital In |  | Retained  |       |              |  | Total         |        |  
|                                            |  | Common |       | Excess Of  |  | Earnings  |       | Unearned     |  | Shareholders |        |  
|                                            |  | Shares |       | Par Value  |  | (Deficit) |       | Compensation |  | Equity        |        |  
|                                           
|                                           
|December 31, 2000                           |  | $      | 4,898 |            |  | $         | 2,763 |              |  | $             | 5,213  |   |  | $ | (165 | ) |  | $ | 12,709 |   |  | 
|                                           
|Net loss                                    |  |        |      |            |  |           |      |              |  |               | (5,707 | ) |  |   |     |   |  |   | (5,707 | ) |  | 
|Stock dividend issued                       |  |        | 242   |            |  |           | 399   |              |  |               | (641   | ) |  |   |     |   |  |   |       |   |  | 
|Issuance/cancellation of stock awards (net) |  |        | 76    |            |  |           | 103   |              |  |               |       |   |  |   | (126 | ) |  |   | 53     |   |  | 
|Shares issued from stock purchase plan      |  |        | 12    |            |  |           | 22    |              |  |               |       |   |  |   |     |   |  |   | 34     |   |  | 
|Stock options exercised                     |  |        | 44    |            |  |           | 32    |              |  |               |       |   |  |   |     |   |  |   | 76     |   |  | 
|Amortization of unearned compensation       |  |        |      |            |  |           |      |              |  |               |       |   |  |   | 40   |   |  |   | 40     |   |  | 
|                                           
|December 31, 2001                           |  | $      | 5,272 |            |  | $         | 3,319 |              |  | $             | (1,135 | ) |  | $ | (251 | ) |  | $ | 7,205  |   |  | 
|                                           
|Net earnings                                |  |        |      |            |  |           |      |              |  |               | 815    |   |  |   |     |   |  |   | 815    |   |  | 
|Stock dividend issued                       |  |        | 260   |            |  |           | 452   |              |  |               | (712   | ) |  |   |     |   |  |   |       |   |  | 
|Issuance/cancellation of stock awards (net) |  |        | (13   | )          |  |           | (24   | )            |  |               |       |   |  |   | 74   |   |  |   | 37     |   |  | 
|Shares issued from stock purchase plan      |  |        | 9     |            |  |           | 10    |              |  |               |       |   |  |   |     |   |  |   | 19     |   |  | 
|Stock options exercised                     |  |        | 55    |            |  |           | 70    |              |  |               |       |   |  |   |     |   |  |   | 125    |   |  | 
|Amortization of unearned compensation       |  |        |      |            |  |           |      |              |  |               |       |   |  |   | 39   |   |  |   | 39     |   |  | 
|                                           
|December 31, 2002                           |  | $      | 5,583 |            |  | $         | 3,827 |              |  | $             | (1,032 | ) |  | $ | (138 | ) |  | $ | 8,240  |   |  | 
|                                           
|Net loss                                    |  |        |      |            |  |           |      |              |  |               | (697   | ) |  |   |     |   |  |   | (697   | ) |  | 
|Stock dividend issued                       |  |        | 290   |            |  |           | 315   |              |  |               | (605   | ) |  |   |     |   |  |   |       |   |  | 
|Issuance/cancellation of stock awards (net) |  |        | 61    |            |  |           | 33    |              |  |               |       |   |  |   | (52  | ) |  |   | 42     |   |  | 
|Shares issued from stock purchase plan      |  |        | 6     |            |  |           | 7     |              |  |               |       |   |  |   |     |   |  |   | 13     |   |  | 
|Stock options exercised                     |  |        | 281   |            |  |           | 349   |              |  |               |       |   |  |   |     |   |  |   | 630    |   |  | 
|Amortization of unearned compensation       |  |        |      |            |  |           |      |              |  |               |       |   |  |   | 33   |   |  |   | 33     |   |  | 
|                                           
|December 31, 2003                           |  | $      | 6,221 |            |  | $         | 4,531 |              |  | $             | (2,334 | ) |  | $ | (157 | ) |  | $ | 8,261  |   |  | 
|                                           

See accompanying notes to the consolidated
financial statements.

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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years ended December 31,


(in $000s)


|                                                        |                                                                                                              |                                                         |        |        |       |      |       |        |        |   |        |        |       |   |  | 
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------- | ------ | ------ | ----- | ---- | ----- | ------ | ------ | - | ------ | ------ | ----- | - |  | 
|                                                        |                                                                                                              |                                                        
|                                                        |                                                                                                              |                                                        
|                                                        |                                                                                                              | 2003                                                    |        | 2002   |       | 2001 |       |       
|                                                       
|                                                       
|Cash flows from operating activities:                   |                                                                                                              |                                                         |        |        |       |      |       |        |        |   |        |        |       |  
|                                                        | Net earnings (loss)                                                                                          |                                                         | $      | (697   | )     |      | $     | 815    |        |   | $      | (5,707 | )     |   | 
|                                                        | Adjustments to reconcile net earnings
    (loss) to net cash provided by (used in) operating
    activities: |                                                         |        |        |       |      |       |        |        |   |        |        |       |   | 
|                                                        |                                                                                                              | Loss on sale of discontinued operations                 |        |        |      |      |       |        |       |   |        |        | 2,394 |   |  | 
|                                                        |                                                                                                              | Depreciation & amortization                             |        |        | 521   |      |       |        | 555    |   |        |        | 764   |   |  | 
|                                                        |                                                                                                              | Amortization of unearned compensation                   |        |        | 33    |      |       |        | 39     |   |        |        | 40    |   |  | 
|                                                        |                                                                                                              | Cumulative effect of change in
    accounting principle |        |        |      |      |       |        | (52    | ) |        |        |      |   |  | 
|                                                        |                                                                                                              | Share of gain in joint venture                          |        |        | (262  | )    |       |        | (188   | ) |        |        | (154  | ) |  | 
|                                                        | Changes in current assets & liabilities:                                                                     |                                                         |        |        |       |      |       |        |        |   |        |        |       |   | 
|                                                        |                                                                                                              | Accounts receivable                                     |        |        | 3,145 |      |       |        | (1,911 | ) |        |        | 1,822 |   |  | 
|                                                        |                                                                                                              | Inventory                                               |        |        | 91    |      |       |        | 1,016  |   |        |        | 1,435 |   |  | 
|                                                        |                                                                                                              | Prepaid expenses & other                                |        |        | (67   | )    |       |        | (16    | ) |        |        | 554   |   |  | 
|                                                        |                                                                                                              | Accounts payable                                        |        |        | (147  | )    |       |        | 570    |   |        |        | (359  | ) |  | 
|                                                        |                                                                                                              | Accrued expenses                                        |        |        | (104  | )    |       |        | 302    |   |        |        | (241  | ) |  | 
|                                                       
|Net cash provided by operating activities               |                                                                                                              | $                                                       | 2,513  |        |       | $    | 1,130 |        |        | $ | 548    |        |       |  
|                                                       
|                                                       
|Cash flows from investing activities:                   |                                                                                                              |                                                         |        |        |       |      |       |        |        |   |        |        |       |  
|                                                        | Payments for acquisitions, net of
    cash acquired                                                          |                                                         |        |       |       |      |       |       |        |   |        | (700   | )     |   | 
|                                                        | Net proceeds from sale of
    discontinued operations                                                        |                                                         |        |       |       |      |       |       |        |   |        | 152    |       |   | 
|                                                        | Additions to property, plant &
    equipment, net                                                            |                                                         |        | (113   | )     |      |       | (115   | )      |   |        | (1,692 | )     |   | 
|                                                       
|Net cash used in investing activities                   |                                                                                                              | $                                                       | (113   | )      |       | $    | (115  | )      |        | $ | (2,240 | )      |       |  
|                                                       
|                                                       
|Cash flows from financing activities:                   |                                                                                                              |                                                         |        |        |       |      |       |        |        |   |        |        |       |  
|                                                        | Borrowings (repayments) from
    note payable                                                                |                                                         |        | (2,984 | )     |      |       | 627    |        |   |        | 2,803  |       |   | 
|                                                        | Repayment from installment note payable                                                                      |                                                         |        | (600   | )     |      |       | (1,200 | )      |   |        | (1,200 | )     |   | 
|                                                        | Proceeds from options exercised &
    purchase plan                                                          |                                                         |        | 685    |       |      |       | 181    |        |   |        | 163    |       |   | 
|                                                       
|                                                       
|Net cash provided by (used in)
    financing activities |                                                                                                              | $                                                       | (2,899 | )      |       | $    | (392  | )      |        | $ | 1,766  |        |       |  
|                                                       
|                                                       
|Net increase (decrease) in cash &
    cash equivalents  |                                                                                                              |                                                         | (499   | )      |       |      | 623   |        |        |   | 74     |        |       |  
|Cash at beginning of year                               |                                                                                                              |                                                         | 782    |        |       |      | 159   |        |        |   | 85     |        |       |  
|                                                       
|Cash at end of year                                     |                                                                                                              | $                                                       | 283    |        |       | $    | 782   |        |        | $ | 159    |        |       |  
|                                                       
|Supplemental cash flows disclosure:                     |                                                                                                              |                                                         |        |        |       |      |       |        |        |   |        |        |       |  
|                                                        | Income taxes paid                                                                                            |                                                         | $      | 14     |       |      | $     | 2      |        |   |        |       |       |   | 
|                                                        | Interest paid                                                                                                |                                                         | $      | 328    |       |      | $     | 483    |        |   | $      | 625    |       |   | 
|                                                       

See accompanying notes to the consolidated
financial statements.

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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS

Note 1. DESCRIPTION OF THE BUSINESS

Wells-Gardner Electronics is a global distributor
and manufacturer of color video displays and other related
distribution products for a variety of markets including, but
not limited to, gaming machine manufacturers, casinos,
coin-operated video game manufacturers and other display
integrators. The Companys primary business is the
distribution, design, manufacture, assembly, service and
marketing of color video monitors, liquid crystal displays
(LCDs), gaming supplies and other components, with
facilities in the United States and a manufacturing joint
venture in Malaysia.


Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Principles of Consolidation

The consolidated financial statements of the
Company include the accounts of Wells-Gardner Electronics
Corporation and its wholly-owned subsidiary, American Gaming
& Electronics. All significant intercompany accounts and
transactions have been eliminated in consolidation.


Revenue Recognition

In general, the Company recognizes revenue when
the following criteria are met: evidence of an arrangement
between the Company and its customer exists, shipment has
occurred or services have been rendered, the sales price is
fixed and determinable and collectibility is reasonably assured.


Financial Instruments

The fair value of the Companys financial
instruments does not materially vary from the carrying value of
such instruments.


Inventory Obsolescence & Costing
Methods

Inventory is stated at the lower of cost
(first-in, first-out) or market. The Company provides an
allowance for estimated obsolete or excess inventory based on
assumptions about future demands for its products.


Provision For Warranty

The Company offers certain warranties on its
products and has a general reserve for potential future charges
incurred in connection with in-warranty repairs and services.
This reserve is based on historical actual repairs. If the
actual charges incurred exceed managements estimates,
operating results could be impacted:


|                       |  |              |      |      |  |      |      |   |  |   |      |   |  | 
|---------------------- |  | ------------ | ---- | ---- |  | ---- | ---- | - |  | - | ---- | - |  | 
|                      
|                      
|                       |  |              |      |     
|                       |  | December 31, |      |     
|                       |  |             
|                       |  |             
|(in $000s)            |  | 2003         |      | 2002 |  | 2001 |      |  
|                      
|                      
|Beginning Balance      |  | $            | 100  |      |  | $    | 60   |   |  | $ | 90   |   |  | 
|Increases To Provision |  | $            | 313  |      |  | $    | 276  |   |  | $ | 237  |   |  | 
|Charges To Provision   |  | $            | (229 | )    |  | $    | (236 | ) |  | $ | (267 | ) |  | 
|                      
|Ending Balance         |  | $            | 184  |      |  | $    | 100  |   |  | $ | 60   |   |  | 
|                      

Property, Plant &
Equipment

Property, plant and equipment are stated at cost
and are depreciated and amortized for financial reporting
purposes over the estimated useful lives on a straight-line
basis as follows: machinery & equipment  five to
fifteen years & leasehold improvements  shorter
of lease term or estimated useful life.


Internal Use Software

The Company has adopted the provisions of
Statement of Position 98-1, Accounting for the Costs of
Software Developed or Obtained for Internal Use.
Accordingly, certain costs incurred in the planning and
development stage of internal use computer software projects are
expensed, while costs incurred during the application
development stage are capitalized. Capitalized software costs
are amortized over the expected economic life of the software.
Total capitalized costs as of December 31, 2003 and 2002
were $1.6 million and


12



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##### Table of Contents



are included in property, plant & equipment
on the face of the consolidated balance sheets. During the years
ended December 31, 2003 and 2002, amortization expense
related to the capitalized software was $241,000 and $229,000,
respectively.


Investments

The Companys joint venture is accounted for
under the equity method of accounting in accordance with
Accounting Principles Board (APB) Opinion No. 18,
The Equity Method of Accounting for Investments in Common
Stock. Under this method, the investment is adjusted to
recognize the Companys share of the income or losses in
the joint venture. Write downs are recognized when the Company
believes that a permanent impairment in value has occurred.


Engineering Research &
Development

Engineering research and development costs for
the years ended December 31, 2003, 2002 and 2001 were
approximately $1,007,000, $1,067,000 and $1,260,000,
respectively, which were 2.2%, 2.2% and 3.0% of annual sales
from continuing operations, respectively. These costs are
recorded in engineering, selling & administrative expenses
on the consolidated statement of operations.


Earnings (Loss) Per Share

Basic earnings (loss) per share is based on
the weighted-average number of common shares outstanding whereas
diluted earnings per share includes the dilutive effect of
unexercised common stock options. Potentially dilutive
securities are excluded from diluted earnings per share
calculations for periods with a net loss. For all periods
reported, earnings per share have been retroactively restated to
reflect the stock dividends issued in 2003, 2002 and 2001.


Stock Based Compensation

At December 31, 2003, the Company has two
stock-based compensation plans, which are described more fully
in Note 6. The Company accounts for these plans under the
recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based
compensation costs are reflected in net income, as all options
granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No 123,
Accounting for Stock-Based Compensation, to
stock-based employee compensation:


|                                                                 |                     |             |           |       |      |      |     |      |     |     |     |       |        |        |   |  | 
|---------------------------------------------------------------- | ------------------- | ----------- | --------- | ----- | ---- | ---- | --- | ---- | --- | --- | --- | ----- | ------ | ------ | - |  | 
|                                                                
|                                                                
|(in $000s except per share data)                                |                     | 2003        |           | 2002  |      | 2001 |     |     
|                                                                 |                     |             |           |       |      |      |     |     
|                                                                
|                                                                
|Net earnings (loss):                                             |                     |             |           |       |      |      |     |      |     |     |     |       |        |       
|                                                                 |                     | As reported |           | $     | (697 | )    |     | $    | 815 |     |     | $     | (5,707 | )      |   | 
|Total stock-based employee compensation expense
    (fair value) |                     | $           | (99       | )     |      | $    | (21 | )    |     | $   | (19 | )     |        |       
|                                                                
|                                                                 |                     |             | Pro forma |       | $    | (796 | )   |      | $   | 794 |     |       | $      | (5,726 | ) |  | 
|Net earnings (loss) per common and common
    equivalent share:  |                     |             |           |       |      |      |     |      |     |     |     |       |        |       
|                                                                 | Basic as reported   |             | $         | (0.12 | )    |      | $   | 0.14 |     |     | $   | (1.01 | )      |        |  
|                                                                 | Diluted as reported |             | $         | (0.12 | )    |      | $   | 0.14 |     |     | $   | (1.01 | )      |        |  
|                                                                 | Pro forma  Basic   |             | $         | (0.13 | )    |      | $   | 0.14 |     |     | $   | (1.01 | )      |        |  
|                                                                 | Pro forma  Diluted |             | $         | (0.13 | )    |      | $   | 0.14 |     |     | $   | (1.01 | )      |        |  
|                                                                

Reclassifications

Certain amounts in previously issued financial
statements have been reclassified to conform to the current
years presentation.


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##### Table of Contents



Recently Issued Accounting
Pronouncements

Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). The new standard requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least
annually. The standard also specifies criteria that intangible
assets must meet to be recognized and reported apart from
goodwill. As of the date of adoption of SFAS 142, the Company
has discontinued amortization of all existing goodwill. The SFAS
142 transitional and annual impairment evaluations did not
indicate any goodwill impairment. In addition, the Company has
not identified any intangible assets, which must be recognized
apart from goodwill. Upon adoption of SFAS 142, the Company
recorded a $52,000 cumulative effect of change in accounting
principle benefit from the reversal of negative goodwill
associated with the Companys joint venture. The following
table shows the impact on the Companys consolidated
financial statements as if SFAS 142 was adopted as of
January 1, 2001:


|                                              |  |      |       |      |  |      |      |  |  |   |        |   |  | 
|--------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ---- |  |  | - | ------ | - |  | 
|                                             
|                                             
|(in $000s)                                   |  | 2003 |       | 2002 |  | 2001 |      | 
|                                             
|                                             
|Net earnings (loss) as reported               |  | $    | (697  | )    |  | $    | 815  |  |  | $ | (5,707 | ) |  | 
|Add back  goodwill amortization              |  |      |      |      |  |      |     |  |  |   | 232    |   |  | 
|                                             
|Adjusted net earnings (loss)                  |  | $    | (697  | )    |  | $    | 815  |  |  | $ | (5,475 | ) |  | 
|                                             
|Basic net earnings (loss) per share:          |  |      |       |      |  |      |      |  |  |   |        |   |  | 
|Net earnings (loss) per share
    as reported |  | $    | (0.12 | )    |  | $    | 0.14 |  |  | $ | (1.01  | ) |  | 
|Add back  goodwill amortization              |  |      |      |      |  |      |     |  |  | $ | 0.04   |   |  | 
|                                             
|Adjusted net earnings (loss) per share        |  | $    | (0.12 | )    |  | $    | 0.14 |  |  | $ | (0.97  | ) |  | 
|                                             
|Diluted net earnings (loss) per share:        |  |      |       |      |  |      |      |  |  |   |        |   |  | 
|Net earnings (loss) per share
    as reported |  | $    | (0.12 | )    |  | $    | 0.14 |  |  | $ | (1.01  | ) |  | 
|Add back  goodwill amortization              |  |      |      |      |  |      |     |  |  | $ | 0.04   |   |  | 
|                                             
|Adjusted net earnings (loss) per share        |  | $    | (0.12 | )    |  | $    | 0.14 |  |  | $ | (0.97  | ) |  | 
|                                             

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, this
statement, which is effective for the years ending after
December 15, 2003 which amends Statement No. 123
Accounting for Stock-Based Compensation and provides
alternative methods of transition for voluntary change to the
fair value-based method of accounting for stock-based employee
compensation. In addition, Statement No. 148 amends the
disclosure requirements of Statement No. 123 regardless of
the accounting method used to account for stock-based
compensation. The Company has chosen to continue to account for
stock-based compensation of employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion
No. 25 Accounting for Stock Issued to Employees
and related interpretations. However, the enhanced disclosure
provisions are defined in SFAS No. 148, which the Company
has adopted.

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN No. 46)
Consolidation of Variable Interest Entities. In
general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables,
real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of
another company. Until now, a company generally has included
another entity in its consolidated financial statements only if
it controlled the entity through voting interests. FIN
No. 46 changes that by requiring a variable interest entity
to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of
the entitys residual returns or both. FIN
No. 46s consolidation requirements apply immediately
to variable interest entities created or acquired after
January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim

14



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##### Table of Contents



period beginning after December 15, 2003. Certain
disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable
interest entity was established. FIN No. 46 did not impact
the Companys consolidated financial statements.


Note 3. RELATED-PARTY TRANSACTIONS

During 2003, 2002 and 2001, a portion of the
Companys sales were made through a sales representative
firm, James Industries Inc., whose Chairman and principal
shareholder is a beneficial shareholder of the Company.
Commissions earned by James Industries Inc. for the years ended
December 31, 2003, 2002 and 2001 were approximately
$317,000, $417,000 and $587,000, respectively. Commissions owed
to James Industries Inc. as of December 31, 2003, 2002 and
2001 were approximately $32,000, $43,000 and $61,000,
respectively. Total commissions as a percentage of sales from
continuing operations for the years ended December 31,
2003, 2002 and 2001 were 0.7%, 0.8% and 1.4%, respectively.
Sales of products to James Industries Inc. for the years ended
December 31, 2003, 2002 and 2001 were approximately $0,
$22,000 and $16,000, respectively. Outstanding accounts
receivable due from James Industries Inc. as of December 31,
2003 and 2002 were $0 and approximately $1,000, respectively.


Note 4. INVENTORY

Net inventory, which includes a valuation reserve
of $193 and $385 in 2003 and 2002, respectively, consisted of
the following components:


|                 |  |              |       |      |  |   |       |  |  | 
|---------------- |  | ------------ | ----- | ---- |  | - | ----- |  |  | 
|                
|                
|                 |  |              |       |     
|                 |  | December 31, |       |     
|                 |  |             
|                 |  |             
|(in $000s)      |  | 2003         |       | 2002 |  |  
|                
|                
|Raw materials    |  | $            | 4,637 |      |  | $ | 5,438 |  |  | 
|Work in progress |  | $            | 516   |      |  | $ | 585   |  |  | 
|Finished goods   |  | $            | 3,751 |      |  | $ | 2,972 |  |  | 
|                
|Total            |  | $            | 8,904 |      |  | $ | 8,995 |  |  | 
|                

Note 5. DEBT

During 2003, the Company entered into a
three-year, $12 million, secured credit facility with
LaSalle Bank National Association and refinanced its entire debt
due to Bank One of approximately $7.7 million.
Substantially all assets of the Company are used as collateral
for this credit facility and the Company must maintain certain
financial covenants. At December 31, 2003, the Company had
total outstanding bank debt of $6.0 million at a variable
interest rate of 4.50%. All bank debt is due and payable on
June 30, 2006.


Prior to its new credit agreement with LaSalle
Bank, the Company had a $15.7 million, secured credit facility
with Bank One (formerly American National Bank). Substantially
all assets of the Company were used as collateral for this
credit facility. At December 31, 2002, the Company had
total outstanding bank debt of $9.6 million, which
consisted of $6.6 million on a revolving line of credit at
an interest rate of 4.25% and $3.0 million on an
installment term note at an interest rate of 5.75%. The
installment term note was being repaid with monthly principal
payments of $100,000 prior to the refinancing described above.

Note 6. STOCK PLANS

The Company maintains an Incentive Stock Option
and Stock Award Plan under which officers and key employees may
acquire up to a maximum of 1,831,538 common shares and a
Nonemployee Director Stock Plan under which non-employee
directors may acquire up to 319,070 common shares. Options may
be granted through December 31, 2008 at an option price not
less than fair market value on the date of grant and are
exercisable not earlier than six months nor later than ten years
from the date of grant. Options vest over two and three year
periods. As of December 31, 2003, 35 persons held
outstanding options and were eligible to participate in the
plans. Such options expire on various dates through
November 30, 2013.


Under the stock option plans, the exercise price
of each option equals the market price of the Companys
stock on the date of grant. For purposes of calculating the
compensation cost consistent with FAS 123, the fair value of
each grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the

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##### Table of Contents



following weighted-average assumptions used for
grants in fiscal 2003, 2002 and 2001, respectively: expected
volatility of 33%; risk free interest rates ranging from 7.85%
to 3.71%; 5% dividend rate; and expected lives of 5 years.
Additional information on shares subject to options is as
follows:


|                                 |  |         |           |          |  |         |      |          |  |         |           |          |  |   |      |  |  |  |           |   |  |   |      |  |  | 
|-------------------------------- |  | ------- | --------- | -------- |  | ------- | ---- | -------- |  | ------- | --------- | -------- |  | - | ---- |  |  |  | --------- | - |  | - | ---- |  |  | 
|                                
|                                
|                                 |  |         |           |          |  |         |      |         
|                                 |  | 2003    |           | 2002     |  | 2001    |      |         
|                                 |  |         |           | Weighted |  |         |      | Weighted |  |         |           | Weighted |  |  
|                                 |  |         |           | average  |  |         |      | average  |  |         |           | average  |  |  
|                                 |  |         |           | exercise |  |         |      | exercise |  |         |           | exercise |  |  
|                                 |  | Options |           | price    |  | Options |      | price    |  | Options |           | price    |  |  
|                                
|                                
|Outstanding at beginning of year |  |         | 1,240,729 |          |  | $       | 2.87 |          |  |         | 1,300,666 |          |  | $ | 3.11 |  |  |  | 1,337,470 |   |  | $ | 3.32 |  |  | 
|Granted                          |  |         | 82,303    |          |  | $       | 2.20 |          |  |         | 219,414   |          |  | $ | 2.64 |  |  |  | 230,379   |   |  | $ | 2.69 |  |  | 
|Forfeited                        |  |         | (124,975  | )        |  | $       | 2.76 |          |  |         | (223,857  | )        |  | $ | 3.35 |  |  |  | (223,130  | ) |  | $ | 3.17 |  |  | 
|Exercised                        |  |         | (319,038  | )        |  | $       | 2.45 |          |  |         | (55,494   | )        |  | $ | 2.20 |  |  |  | (44,053   | ) |  | $ | 2.77 |  |  | 
|                                
|Outstanding at end of year       |  |         | 879,019   |          |  | $       | 2.82 |          |  |         | 1,240,729 |          |  | $ | 2.87 |  |  |  | 1,300,666 |   |  | $ | 3.11 |  |  | 
|                                

Stock options exercisable at December 31,
2003, 2002 and 2001 were 775,292, 1,040,454 and 995,935,
respectively. The weighted average fair value of options granted
at December 31, 2003, 2002 and 2001 were $0.91, $1.51 and
$1.58, respectively.

The following table summarizes information about
stock options outstanding as of December 31, 2003:

|                    |  |                     |         |                  |  |                  |     |             |  |                  |      |  |  |  |         |  |  |   |      |  |  | 
|------------------- |  | ------------------- | ------- | ---------------- |  | ---------------- | --- | ----------- |  | ---------------- | ---- |  |  |  | ------- |  |  | - | ---- |  |  | 
|                   
|                   
|                    |  |                     |         |                 
|Options Outstanding |  | Options Exercisable |         |                 
|                   
|                   
|                    |  | Weighted average    |         |                 
|Range of            |  | Options             |         | remaining        |  | Weighted average |     | Options     |  | Weighted average |      | 
|exercise prices     |  | outstanding         |         | contractual life |  | exercise price   |     | exercisable |  | exercise price   |      | 
|                   
|                   
|$2.04  $2.55       |  |                     | 381,624 |                  |  |                  | 6.4 |             |  | $                | 2.33 |  |  |  | 282,897 |  |  | $ | 2.28 |  |  | 
|$2.56  $2.92       |  |                     | 250,157 |                  |  |                  | 5.1 |             |  | $                | 2.88 |  |  |  | 250,157 |  |  | $ | 2.88 |  |  | 
|$2.93  $3.45       |  |                     | 69,423  |                  |  |                  | 7.2 |             |  | $                | 3.20 |  |  |  | 64,423  |  |  | $ | 3.18 |  |  | 
|$3.46  $4.20       |  |                     | 177,815 |                  |  |                  | 5.1 |             |  | $                | 3.65 |  |  |  | 177,815 |  |  | $ | 3.65 |  |  | 
|                   
|                    |  |                     | 879,019 |                  |  |                  | 5.8 |             |  | $                | 2.82 |  |  |  | 775,292 |  |  | $ | 2.86 |  |  | 
|                   

In February 2003, the Company granted 82,000
restricted shares of common stock to eight employees of the
Company and recorded deferred compensation in the amount of
$131,200, equal to the market value of the restricted shares on
the date of grant. In November 2001, the Company granted
60,000 restricted shares of common stock to seven employees of
the Company and recorded deferred compensation in the amount of
$135,000, equal to the market value of the restricted shares on
the date of grant. In July 2000, the Company granted 60,000
restricted shares of common stock to seven employees of the
Company and recorded deferred compensation in the amount of
$180,000, equal to the market value of the restricted shares on
the date of grant. The employees will earn the restricted shares
in exchange for services to be provided to the Company over a
five-year period. All shares granted are governed by the
Companys Stock Award Plan, which was approved by
shareholders in 2000. The Company recorded $33,000, $39,000 and
$40,000 in related net compensation expense for the years ended
December 31, 2003, 2002 and 2001, respectively. As of
December 31, 2003, 111,140 restricted shares are
outstanding.

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Note 7. ACCRUED EXPENSES

Accrued expenses consisted of the following
components:


|                        |       |              |     |      |  |   |     |     |  |  | 
|----------------------- | ----- | ------------ | --- | ---- |  | - | --- | --- |  |  | 
|                       
|                       
|                        |       |              |     |     
|                        |       | December 31, |     |     
|                        |       |             
|                        |       |             
|(in $000s)             |       | 2003         |     | 2002 |  |  
|                       
|                       
|Payroll & related costs |       | $            | 185 |      |  | $ | 368 |     |  | 
|Sales commissions       |       | $            | 30  |      |  | $ | 43  |     |  | 
|Warranty                |       | $            | 184 |      |  | $ | 100 |     |  | 
|Other accrued expenses  |       | $            | 230 |      |  | $ | 222 |     |  | 
|                       
|                        | Total |              | $   | 629  |  |   | $   | 733 |  |  | 
|                       

Note 8. OTHER EXPENSE, NET

Other expense, net consisted of the following
components:


|                                      |                    |      |      |      |  |      |      |     |  |   |      |     |  |  | 
|------------------------------------- | ------------------ | ---- | ---- | ---- |  | ---- | ---- | --- |  | - | ---- | --- |  |  | 
|                                     
|                                     
|(in $000s)                           |                    | 2003 |      | 2002 |  | 2001 |      |    
|                                     
|                                     
|Interest expense                      |                    | $    | 328  |      |  | $    | 483  |     |  | $ | 625  |     |  | 
|Other expense                         |                    | $    | 78   |      |  | $    | 36   |     |  | $ | 55   |     |  | 
|Other income, primarily joint venture |                    | $    | (263 | )    |  | $    | (187 | )   |  | $ | (158 | )   |  | 
|                                     
|                                      | Other expense, net |      | $    | 143  |  |      | $    | 332 |  |   | $    | 522 |  |  | 
|                                     

Note 9. INCOME TAXES

The effective income tax rates differed from the
expected Federal income tax rate (34%) for the following reasons:


|                                                                  |  |      |      |      |  |      |      |   |  |   |        |   |  | 
|----------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ------ | - |  | 
|                                                                 
|                                                                 
|(in $000s)                                                       |  | 2003 |      | 2002 |  | 2001 |      |  
|                                                                 
|                                                                 
|Computed expected tax expense (benefit)                           |  | $    | (241 | )    |  | $    | 278  |   |  | $ | (1,937 | ) |  | 
|State income tax expense (benefit), net of
    Federal tax effect |  | $    | (33  | )    |  | $    | 21   |   |  | $ | (205   | ) |  | 
|Other, net                                                        |  | $    | (26  | )    |  | $    | (70  | ) |  | $ | (19    | ) |  | 
|Change in valuation allowance                                     |  | $    | 314  |      |  | $    | (227 | ) |  | $ | 2,161  |   |  | 
|                                                                 
|                                                                  |  | $    | 14   |      |  | $    | 2    |   |  |   |       |   |  | 
|                                                                 

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Deferred income taxes reflect the impact of
temporary differences between the amounts of assets and
liabilities for financial reporting purposes and as measured by
income tax regulations. Temporary differences which gave rise to
deferred tax assets and deferred tax liabilities consisted of:

|                          |                                                                       |                                 |   |       |        |   |   |       |        |   |  | 
|------------------------- | --------------------------------------------------------------------- | ------------------------------- | - | ----- | ------ | - | - | ----- | ------ | - |  | 
|                         
|                         
|                          |                                                                       |                                 |   |      
|                          |                                                                       | December 31,                    |   |      
|                          |                                                                       |                                
|                          |                                                                       |                                
|(in $000s)               |                                                                       | 2003                            |   | 2002  |        |  
|                         
|                         
|Deferred tax assets:      |                                                                       |                                 |   |       |        |   |   |       |        |  
|                          | Allowance for doubtful accounts                                       |                                 | $ | 56    |        |   | $ | 57    |        |   | 
|                          | Warranty reserve                                                      |                                 | $ | 71    |        |   | $ | 39    |        |   | 
|                          | Inventory reserve                                                     |                                 | $ | 75    |        |   | $ | 149   |        |   | 
|                          | Net operating loss carryforwards                                      |                                 | $ | 3,517 |        |   | $ | 3,149 |        |   | 
|                          | Alternative minimum tax credit carryforwards                          |                                 | $ | 73    |        |   | $ | 73    |        |   | 
|                          | General business credit carryforwards                                 |                                 | $ | 129   |        |   | $ | 129   |        |   | 
|                          | Other                                                                 |                                 | $ | 11    |        |   | $ | 14    |        |   | 
|                         
|                          |                                                                       | Total gross deferred tax assets |   | $     | 3,932  |   |   | $     | 3,610  |   |  | 
|                          |                                                                       | Less valuation allowance        |   | $     | (3,338 | ) |   | $     | (3,024 | ) |  | 
|                         
|                          |                                                                       | Total deferred tax assets       |   | $     | 594    |   |   | $     | 586    |   |  | 
|Deferred tax liabilities: |                                                                       |                                 |   |       |        |   |   |       |        |  
|                          | Deferred compensation                                                 |                                 | $ | 12    |        |   | $ | 6     |        |   | 
|                          | Property, plant, equipment and software,
    principally depreciation |                                 | $ | 510   |        |   | $ | 548   |        |   | 
|                          | Goodwill                                                              |                                 | $ | 72    |        |   | $ | 32    |        |   | 
|                         
|                          |                                                                       | Total deferred tax liabilities  |   | $     | 594    |   |   | $     | 586    |   |  | 
|                         
|Net deferred taxes        |                                                                       |                                 |  |       |        |   |  |       |        |  
|                         

A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. The net change in the valuation
allowance for the year ended December 31, 2003 was an
increase of $314,000. At December 31, 2003, the Company has
net operating loss carryforwards for Federal income tax purposes
of approximately $8,883,000, which are available to offset
future Federal taxable income, if any, through 2021. The Company
also has alternative minimum tax credit carryforwards of
approximately $62,000, which are available to reduce future
Federal regular income taxes, if any, over an indefinite period.
In addition, the Company has general business credit
carryforwards of approximately $129,000, which are available to
reduce future Federal regular income taxes, if any. These
general business credits are scheduled to expire in 2007.

Note 10. EARNINGS PER SHARE

During 2003, 2002 and 2001, the Company issued a
five percent (5%) stock dividend payable to all common stock
shareholders. The stock dividend resulted in the issuance of
289,959, 260,310 and 242,151 additional common shares in 2003,
2002 and 2001, respectively. All reported earnings per share
disclosures have been retroactively restated to reflect this
dividend. In accordance with Statement of Financial Accounting


18



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##### Table of Contents



Standards No. 128, Earnings Per
Share, the following table presents a reconciliation of
the numerators and denominators of basic and diluted earnings
per common share for the years ended December 31:


|                                                 |                                                         |      |       |       |   |      |      |       |  |   |       |        |   |  | 
|------------------------------------------------ | ------------------------------------------------------- | ---- | ----- | ----- | - | ---- | ---- | ----- |  | - | ----- | ------ | - |  | 
|                                                
|                                                
|(in $000s except for per share data)            |                                                         | 2003 |       | 2002  |   | 2001 |      |      
|                                                
|                                                
|Basic earnings (loss) per common
    share:      |                                                         |      |       |       |   |      |      |       |  |   |       |        |   | 
|                                                 | Earnings (loss) from
    continuing operations          |      | $     | (697  | ) |      | $    | 763   |  |   | $     | (2,894 | ) |  | 
|                                                 | Loss on discontinued operations                         |      |       |      |   |      |      |      |  |   | $     | (2,813 | ) |  | 
|                                                 | Cumulative effect of change in
    accounting principle |      |       |      |   |      | $    | 52    |  |   |       |       |   |  | 
|                                                
|                                                 | Net earnings (loss)                                     |      | $     | (697  | ) |      | $    | 815   |  |   | $     | (5,707 | ) |  | 
|                                                
|                                                 | Weighted-average common shares outstanding              |      |       | 6,038 |   |      |      | 5,742 |  |   |       | 5,644  |   |  | 
|                                                
|                                                 | Continuing operations                                   |      | $     | (0.12 | ) |      | $    | 0.13  |  |   | $     | (0.51  | ) |  | 
|                                                 | Discontinued operations                                 |      |       |      |   |      |      |      |  |   | $     | (0.50  | ) |  | 
|                                                 | Cumulative effect of change in
    accounting principle |      |       |      |   |      | $    | 0.01  |  |   |       |       |   |  | 
|                                                
|Basic net earnings (loss) per
    common share   |                                                         | $    | (0.12 | )     |   | $    | 0.14 |       |  | $ | (1.01 | )      |   | 
|                                                
|                                                
|Diluted earnings (loss) per common
    share:    |                                                         |      |       |       |   |      |      |       |  |   |       |        |   | 
|                                                 | Earnings (loss) from
    continuing operations          |      | $     | (697  | ) |      | $    | 763   |  |   | $     | (2,894 | ) |  | 
|                                                 | Loss on discontinued operations                         |      |       |      |   |      |      |      |  |   | $     | (2,813 | ) |  | 
|                                                 | Cumulative effect of change in
    accounting principle |      |       |      |   |      | $    | 52    |  |   |       |       |   |  | 
|                                                
|                                                 | Net earnings (loss)                                     |      | $     | (697  | ) |      | $    | 815   |  |   | $     | (5,707 | ) |  | 
|                                                
|                                                 | Weighted-average common shares outstanding              |      |       | 6,038 |   |      |      | 5,742 |  |   |       | 5,644  |   |  | 
|                                                 | Add: Effect of dilutive stock options                   |      |       |      |   |      |      | 75    |  |   |       |       |   |  | 
|                                                
|                                                 | Adjusted weighted-average common
    shares outstanding |      |       | 6,038 |   |      |      | 5,817 |  |   |       | 5,644  |   |  | 
|                                                
|                                                 | Continuing operations                                   |      | $     | (0.12 | ) |      | $    | 0.13  |  |   | $     | (0.51  | ) |  | 
|                                                 | Discontinued operations                                 |      |       |      |   |      |      |      |  |   | $     | (0.50  | ) |  | 
|                                                 | Cumulative effect of change in
    accounting principle |      |       |      |   |      | $    | 0.01  |  |   |       |       |   |  | 
|                                                
|Diluted net earnings (loss) per
    common share |                                                         | $    | (0.12 | )     |   | $    | 0.14 |       |  | $ | (1.01 | )      |   | 
|                                                

Options which had an anti-dilutive effect as of
December 31, 2003, 2002 and 2001 were 177,815, 1,240,729
and 767,148, respectively, and were excluded from the diluted
earnings per share calculation.

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Note 11. OPERATING SEGMENTS

SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information
establishes standards for reporting information about operating
segments. Under this standard, the Company has three reportable
operating segments: Gaming, Amusement and Other. The table below
presents information as to the Companys revenues and
operating income before unallocated administration costs. The
Company is unable to segment its assets as they are commingled
among segments.


|                           |                                  |              |   |        |   |      |   |        |   |  |   |        |   |  | 
|-------------------------- | -------------------------------- | ------------ | - | ------ | - | ---- | - | ------ | - |  | - | ------ | - |  | 
|                          
|                          
|                           |                                  |              |   |       
|                           |                                  | December 31, |   |       
|                           |                                  |             
|                           |                                  |             
|(in $000s)                |                                  | 2003         |   | 2002   |   | 2001 |   |       
|                          
|                          
|Net Sales:                 |                                  |              |   |        |   |      |   |        |   |  |   |        |   | 
|                           | Gaming                           |              | $ | 35,115 |   |      | $ | 34,203 |   |  | $ | 25,530 |   |  | 
|                           | Amusement                        |              | $ | 10,322 |   |      | $ | 14,079 |   |  | $ | 14,467 |   |  | 
|                           | Other                            |              | $ | 1,244  |   |      | $ | 1,027  |   |  | $ | 2,553  |   |  | 
|                          
|                           | Total Net Sales                  |              | $ | 46,681 |   |      | $ | 49,309 |   |  | $ | 42,550 |   |  | 
|                          
|Operating Earnings (Loss): |                                  |              |   |        |   |      |   |        |   |  |   |        |   | 
|                           | Gaming                           |              | $ | 1,487  |   |      | $ | 2,261  |   |  | $ | 926    |   |  | 
|                           | Amusement                        |              | $ | 900    |   |      | $ | 1,730  |   |  | $ | 1,335  |   |  | 
|                           | Other                            |              | $ | 219    |   |      | $ | 174    |   |  | $ | 350    |   |  | 
|                           | Unallocated Administration Costs |              | $ | (3,146 | ) |      | $ | (3,068 | ) |  | $ | (4,983 | ) |  | 
|                          
|                           | Total Operating Earnings (Loss)  |              | $ | (540   | ) |      | $ | 1,097  |   |  | $ | (2,372 | ) |  | 
|                          

Significant Customer

The Companys largest customer accounted for
21%, 24% and 4% of total revenues in 2003, 2002 and 2001,
respectively, and 23% and 39% of total accounts receivable as of
December 31, 2003 and 2002, respectively.


Note 12. JOINT VENTURE

In 2000, the Company entered into a 50/50 joint
venture with Eastern Asia Technology Limited of Singapore to
produce and manufacture video monitors in Malaysia. The Company
is the sole customer to the joint venture and accounts for 100%
of its revenues. The joint venture is accounted for under the
equity method of accounting. As of December 31, 2003 and
2002, the Company had a net payable due to the joint venture of
$1,018,000 and $398,000, respectively. The Company recorded
equity in earnings of the joint venture of $263,000, $187,000
and $153,000 in 2003, 2002 and 2001, respectively.


Due to the timing of the audit of the joint
ventures financial statements, the Company records the
results for a twelve-month period ended November 30th. As
of November 30, 2003 and 2002 total assets of the joint
venture were approximately $7,260,000 and $8,059,000,
respectively, which included current assets of approximately
$6,838,000 and $7,659,000 and non-current and other assets of
$422,000 and $400,000, respectively. Total liabilities were
approximately $5,639,000 and $6,963,000, respectively, of which
all are considered current liabilities. The joint venture has no
long-term liabilities. Sales of products from the joint venture
for the twelve month periods ended November 30, 2003, 2002
and 2001 were approximately $14,052,000, $11,563,000 and
$6,097,000, respectively. Gross profit from operations were
approximately $1,068,000, $695,000 and $560,000, respectively.
Net operating profits were $558,000, $346,000 and $297,000,
respectively.

Note 13. DISCONTINUED OPERATIONS

On December 3, 2001, the Company announced
the sale of assets as of November 30, 2001 of its coin door
division for a purchase price of $315,000. In accordance with
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company recorded a loss on discontinued
operations of $2,813,000, which is comprised of a loss from
operations of $419,000 and a loss on disposal of $2,394,000 in
2001 and $241,000 in 2000. Net sales of the discontinued
operations were $2,006,000 in 2001 and $4,130,000 in 2000.


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Note 14. LEASE COMMITMENTS

The Company leases certain buildings, data
processing and other equipment under operating lease agreements
expiring through the year 2009. The future minimum lease
payments required under operating leases are as follows:


|            |  |              |       |  |  | 
|----------- |  | ------------ | ----- |  |  | 
|           
|           
|            |  | Years ending |       | 
|(in $000s) |  | December 31, |       | 
|           
|           
|2004        |  | $            | 863   |  |  | 
|2005        |  | $            | 723   |  |  | 
|2006        |  | $            | 649   |  |  | 
|2007        |  | $            | 529   |  |  | 
|2008        |  | $            | 182   |  |  | 
|Thereafter  |  | $            | 6     |  |  | 
|           
|            |  | $            | 2,952 |  |  | 
|           

Rent expense related to operating leases was
approximately $884,000, $863,000 and $872,000 during the years
ended December 31, 2003, 2002 and 2001, respectively.

Note 15. UNAUDITED QUARTERLY FINANCIAL
DATA

Selected quarterly data for 2003 and 2002 are as
follows:


|                                      |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |   |  | 
|------------------------------------- |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | - | ------ | - |  | - | ------ | - |  | 
|                                     
|                                     
|                                      |  |       |        |       
|                                      |  | 2003  |        |       
|                                      |  |      
|                                      |  |      
|(in $000s except per share data)     |  | First |        | Second |  | Third |        | Fourth |  |  
|                                     
|                                     
|Net sales                             |  | $     | 11,857 |        |  | $     | 11,810 |        |  | $ | 11,744 |   |  | $ | 11,270 |   |  | 
|Net earnings (loss)                   |  | $     | 125    |        |  | $     | 35     |        |  | $ | (55    | ) |  | $ | (802   | ) |  | 
|Basic net earnings (loss) per share   |  | $     | 0.02   |        |  | $     | 0.01   |        |  | $ | (0.02  | ) |  | $ | (0.13  | ) |  | 
|Diluted net earnings (loss) per share |  | $     | 0.02   |        |  | $     | 0.01   |        |  | $ | (0.02  | ) |  | $ | (0.13  | ) |  | 
|                                     

|                                  |  |       |        |        |  |       |        |        |  |   |        |  |  |   |        |  |  | 
|--------------------------------- |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | - | ------ |  |  | - | ------ |  |  | 
|                                 
|                                 
|                                  |  |       |        |       
|                                  |  | 2002  |        |       
|                                  |  |      
|                                  |  |      
|(in $000s except per share data) |  | First |        | Second |  | Third |        | Fourth |  |  
|                                 
|                                 
|Net sales                         |  | $     | 11,303 |        |  | $     | 12,077 |        |  | $ | 11,886 |  |  | $ | 14,043 |  |  | 
|Net earnings                      |  | $     | 202    |        |  | $     | 229    |        |  | $ | 122    |  |  | $ | 262    |  |  | 
|Basic net earnings per share      |  | $     | 0.03   |        |  | $     | 0.04   |        |  | $ | 0.02   |  |  | $ | 0.05   |  |  | 
|Diluted net earnings per share    |  | $     | 0.03   |        |  | $     | 0.04   |        |  | $ | 0.02   |  |  | $ | 0.05   |  |  | 
|                                 

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INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders of
Wells-Gardner Electronics Corporation:

We have audited the accompanying consolidated
balance sheet of Wells-Gardner Electronics Corporation and
subsidiary as of December 31, 2003 and the related
consolidated statements of operations, shareholders equity
and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Wells-Gardner Electronics
Corporation and subsidiary as of December 31, 2003 and the
results of their operations and their cash flows for the year
then ended, in conformity with accounting principles generally
accepted in the United States of America.

BLACKMAN KALLICK BARTELSTEIN LLP

Chicago, Illinois

January 27, 2004


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[KPMG LOGO]


INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders of
Wells-Gardner Electronics Corporation:

We have audited the accompanying consolidated
balance sheet of Wells-Gardner Electronics Corporation and
subsidiary as of December 31, 2002 and the related
consolidated statements of operations, shareholders equity
and cash flows for the years ended December 31, 2002 and
2001. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Wells-Gardner Electronics
Corporation and subsidiary at December 31, 2002, and the
results of their operations and their cash flows for the years
ended December 31, 2002 and 2001, in conformity with
accounting principles generally accepted in the United States of
America.

As discussed in Note 2 to the consolidated
financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets,on January 1,
2002.

As discussed in Notes 2 and 11 to the
consolidated financial statements, the accompanying consolidated
financial statements for the years ended December 31, 2002
and 2001 have been revised to include disclosure of the
provision for warranty and operating segments.

[KPMG LLP SIGNATURE]

Chicago, Illinois

February 5, 2003, except as to the fifth
paragraph of Note 2 and Note 11, which are as of March 4,
2004


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##### Table of Contents



|                   |  |                   
|------------------ |  | ------------------
|BOARD OF DIRECTORS |  | EXECUTIVE OFFICERS



|                                                                                                                                                                                                                                            |  |                                                                                                                                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Anthony SpierChairman, President &
    Chief Executive OfficerMarshall L. BurmanCounsel to Wildman,
    Harrold, Allen & DixonJerry KalovPresident of Kay ConsultingFrank R. MartinSenior Partner of Righeimer,
    Martin & Cinquino, P.C. |  | Anthony SpierChairman, President &
    Chief Executive OfficerGeorge B. Toma CPA, CMAVice President of Finance,
    Chief Financial Officer, Treasurer
    & Corporate Secretary

|                      |  | 
|--------------------- |  | 
|CORPORATE INFORMATION |  | 



|                                                                                                                                                                                                                            |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|ANNUAL MEETING                                                                                                                                                                                                              |  | 
|The Annual Meeting of Shareholders will take
    place at 2:00 p.m. on Thursday,April 29, 2004 at the
    corporate offices of the Company.                                                                                 |  | 
|                                                                                                                                                                                                                           
|FORM 10-K                                                                                                                                                                                                                   |  | 
|A copy of the Companys annual report on
    Form 10-K, as filed with the Securitiesand Exchange
    Commission, is available without charge upon written request
toGeorge B. Toma at the corporate offices of the Company. |  | 
|                                                                                                                                                                                                                           
|TRANSFER AGENT                                                                                                                                                                                                              |  | 
|LaSalle National Bank
    135 South LaSalle Street
    Chicago, Illinois 60603                                                                                                                                              |  | 
|                                                                                                                                                                                                                           
|BANKERS                                                                                                                                                                                                                     |  | 
|LaSalle Bank National Association
    Chicago, Illinois                                                                                                                                                                     |  | 
|                                                                                                                                                                                                                           
|AUDITORS                                                                                                                                                                                                                    |  | 
|Blackman Kallick Bartelstein LLP
    Chicago, Illinois                                                                                                                                                                      |  | 
|                                                                                                                                                                                                                           
|COUNSEL                                                                                                                                                                                                                     |  | 
|Pedersen & Houpt
    Chicago, Illinois                                                                                                                                                                                      |  | 

24



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(WELLS-GARDNER ELECTRONICS CORPORATION LOGO)
    
    Wells-Gardner Electronics
Corporation9500 West 55th Street, Suite AMcCook, Illinois 60525-3605
800-336-6630708-290-2100
708-290-2200 (fax)
www.wellsgardner.com
 (WELLS EASTERN ASIA DISPLAYS LOGO)
    
    Wells Eastern Asia Displays
(M) SDN BHDLot 316 & 317, Jalan PKNK 3/2
Kawasan Peridustrian Sungai Petani
08000 Sungai Petani, Kedah, Malaysia
60-4-441-133660-4-442-7028 (fax)
 (AMERICAN GAMING AND ELECTRONICS LOGO)
    
    American Gaming &
Electronics, Inc.6255 McLeod Drive, Suite 21
Las Vegas, Nevada 89120
800-727-6807702-798-5752
702-798-5762 (fax)202 West Parkway Drive
Egg Harbor Township, New Jersey 08234
800-890-9298609-383-9970 
609-383-9971 (fax)www.americangaminginc.com