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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

Commission File No. 0-23928

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

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

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

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

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value

Common Stock Purchase Warrants
(Title of Class)

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

PART I

ITEM 1. BUSINESS

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

        The Company was originally founded as a leasing company, specializing in vehicle and general equipment leasing transactions. The Company began providing equipment financing for new Native American gaming facilities in the Upper Midwest in early 1991. Since 1992, substantially all of the Company's gross financing originations have resulted from transactions in the gaming industry. In 1996, the Company established a sales office in Las Vegas, Nevada, which became the Company's principal office in 1997.

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

        In order to offer financing and gaming products to the gaming industry, the Company must be licensed in each jurisdiction in which it conducts business. As part of the licensing process, each gaming jurisdiction performs a thorough investigation of each applicant and certain of its directors, officers, key employees and significant shareholders. The Company currently is licensed in the states of Nevada (Manufacturer, Distributor, Slot Route Operator and Operator), New Jersey, California, Colorado, Illinois, Indiana, Iowa, Minnesota, Mississippi, New Mexico and Washington and with numerous Native American jurisdictions. A significant percentage of the installed base of gaming devices in the United States is located in these jurisdictions. The Company believes its gaming licenses, coupled with its ability to remarket used gaming devices, provide a competitive advantage, enabling the Company to offer financing and leasing services that meet the needs of this industry more effectively than traditional financing.

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

Recent Developments

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

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

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

Discontinued Operations

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

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

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

Gaming Industry

        The casino industry in the United States, and the gaming industry in general, have experienced substantial growth in the last decade. Prior to 1979, high stakes gaming activities were limited to Nevada. In 1979, casino gaming was legalized in New Jersey. Between 1979 and 1988, gaming activities by various Native American tribes developed, leading to the federal enactment of the Indian Gaming

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

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

Finance and Lease Operations

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

        The Company provides financing to its customers in the form of direct finance leases, sales-type leases and collateralized loans. Such financing transactions are either originated directly by the Company with the casino operator or are structured jointly with the gaming equipment manufacturer or distributor. Under these types of transactions, substantially all of the benefits and risks of ownership are borne by the lessee/borrower. Under a direct finance and sales-type lease, the lessee is required to pay the Company the purchase price of the gaming equipment plus interest over the term of the lease; if the lease payments are not sufficient to cover the purchase price of the gaming equipment, the lessee is required to pay the Company a balloon payment at the end of the lease term. Most of the Company's equipment financing transactions range from $500,000 to $2.5 million. The Company generally obtains the funds necessary for its direct finance leases or collateralized loans by pledging those assets against recourse or non-recourse borrowings or by selling all or a portion of its interest in the payment stream, often simultaneously with its origination of financing transactions.

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

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term of 36 months. The casino operator incurs rental expense, and avoids reflecting an asset and related liability on its balance sheet. Returned machines are held for lease or resale by the Company.

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

Casino Operations

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

Competition

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

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

Principal Customers

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

Government Regulation

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

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

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

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

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

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

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

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

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

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

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

        The Company is required to be licensed as a distributor by the Nevada Gaming Authorities. The gaming license requires the periodic payment of fees and taxes and is not transferable. The Company also holds a manufacturer, slot route operator and an operator's license in Nevada. The Company is registered by the Nevada Commission as a publicly traded corporation ("Registered Corporation"), and as such, is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. No person may become a five percent or greater stockholder of, or receive any percentage of profits from, the Company without first reporting the acquisition to the Nevada Gaming Authorities and obtaining all required licenses and approvals. The Company has obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in the distribution of gaming devices and to act as a manufacturer of gaming devices in Nevada, operate a slot route or operate gaming establishments.

        The Nevada Gaming Authorities may investigate any individual who has a material relationship or involvement with the Company in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Company must file applications with the Nevada Gaming Authorities and may be required to become licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in the Company's gaming activities may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and

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financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation incurred by the Nevada Gaming Authorities. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in corporate position.

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

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

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

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

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

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list of beneficial owners. The applicant is required to pay all costs of the investigation incurred by the Nevada Gaming Authorities.

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

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

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

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

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

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

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material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.

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

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

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

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

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

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ability of the Company or its employees to obtain any required licenses, permits and approvals from the New Jersey Commission, or any renewals thereof.

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

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

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

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

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

Intellectual Property

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

11

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

Employees

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

ITEM 2. DESCRIPTION OF PROPERTIES

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

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

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's common stock has traded on the Nasdaq SmallCap market since the approval by Nasdaq of the Company's application for listing on March 8, 2000, and trades under the symbol PDSG. The following table sets forth the high and low bid information for the common stock as reported by Nasdaq for the periods indicated. These prices reflect inter-dealer prices, without retail mark-up or markdown or commissions, and do not necessarily represent actual transactions:

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

        No dividends were paid during the years ended December 31, 2002 and 2001. The Company does not anticipate that it will pay cash dividends on its common stock in the foreseeable future. Certain of the Company's financing agreements restrict the payment of dividends. For additional information on restrictions on the payment of dividends, see Note 4 to the Company's Consolidated Financial Statements included in Part IV, Item 15.

Equity Compensation Plan Information

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

Unregistered Issuances of Securities

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

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ITEM 6. SELECTED FINANCIAL DATA

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

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

OVERVIEW

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

STRATEGY

        The Company's strategy is to increase recurring revenues and cash flows through originations of leases. In addition to its leasing activities, the Company also originates note transactions which it generally sells to third parties. In some of its transactions, the Company holds the leases or notes for a period of time after origination or retains a partial ownership interest in the leases or notes. The Company believes its ability to remarket used gaming devices enhances the gaming devices' values at the end of an operating lease and facilitates additional financing transactions. The following schedule shows the amount of leases and collateralized equipment loans ("financing transactions") originated (in thousands):

ACCOUNTING POLICIES

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

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

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

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

        The Company's leasing activities include operating, direct finance, sales-type and leveraged leases. For all types of leases, the determination of profit considers the estimated value of equipment at lease termination, referred to as the residual value. The issues specific to operating, direct finance, sales-type and leveraged leases are as follows:

•

For operating leases, revenue and depreciation on the leased equipment are recorded on the straight-line method over the term of the lease.



•

Direct finance and sales-type leases are similar in that substantially all of the benefits and risks of ownership of the leased equipment are transferred to the lessee, and finance income is recognized at a constant percentage return on the asset carrying value. The carrying value consists of the present value of the future lease payments plus any unguaranteed residual, sometimes referred to herein as leases receivable. A dealer's profit or loss on the subject equipment is recognized at the inception of a sales-type lease.



•

Investment in leveraged leases consists of rentals receivable (net of principal and interest on nonrecourse debt), plus the estimated residual values of the equipment and minus unearned income that is recognized at a constant percentage return on the investment over the lease term.

        After the inception of a lease, the Company may discount or sell notes and future lease payments to reduce or recover its investment in the asset. Initial direct costs related to leases and notes receivable are capitalized as part of the related asset and amortized over the term of the agreement using the interest method, except for operating leases, for which the straight-line method is used.

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

        Reserves For Losses.    An allowance for losses is maintained at levels determined by the Company's management to adequately provide for collection losses and any other-than-temporary declines in other asset values. In determining losses, the Company's management considers economic conditions, the activity in used equipment markets, the effect of actions by equipment manufacturers, the financial condition of customers, the expected courses of action by lessees with regard to leased equipment at termination of the initial lease term, changes in technology and other factors which management believes are relevant. Recoverability of an asset value is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If a loss is indicated, the loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds the net realizable value of the asset. Asset charge-offs are recorded upon the disposition of the underlying assets. Management reviews the Company's assets on a quarterly basis to determine the adequacy of the allowances for losses.

RESULTS OF OPERATIONS

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

        The Company's operating results are subject to quarterly and annual fluctuations resulting from a variety of factors, including variations in the mix of financing transactions between operating leases, direct finance leases and notes receivable, changes in the gaming industry which affect the demand for remarketed gaming devices, economic conditions in which a detrimental change can cause customers to

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delay new investments or increase the Company's bad debt experience and the level of fee income obtained through the sale of leases or financing transactions.

        The Company's quarterly operating results, including net income, have historically fluctuated due to the timing of completion of large financing transactions, as well as the timing of recognition of the resulting fee income upon subsequent sale. 2002 and 2001 are no exception. Transactions, including individually significant ones, can be in the negotiation and documentation stages for several months, and recognition of the resulting revenue and fee income by the Company may fluctuate greatly from quarter to quarter. Thus, the results of any quarter are not necessarily indicative of the results that may be expected for any other period.

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

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EQUIPMENT SALES AND SALES-TYPE LEASES

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

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

•

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



•

An existing lessee chooses to terminate a lease prior to its scheduled expiration. The lessee is generally required to pay the Company an amount in excess of its carrying value in such situations.

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

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

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FINANCE AND LEASE GROSS MARGIN

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

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

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

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

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

FEE INCOME

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

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

INTEREST EXPENSE

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

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

•

Increased capitalized overhead of $519,000 due to significantly higher originations in 2002 as compared to 2001.



•

Legal fees and settlement costs of $355,000 incurred in 2001, but not in 2002, in connection with the bankruptcy of the Company's then most significant customer in 2001 and the resolution of a series of claims among the interested parties.



•

Costs of $225,000 incurred in 2001, but not in 2002, associated with the Senior Subordinated Debt exchange offer.

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

•

Increase in payroll and related costs of $348,000 from the expansion of the management team and additional administrative staff.



•

Legal fees and settlement costs of $355,000 incurred in 2001, but not in 2000, in connection with the bankruptcy of the Company's then most significant customer in 2001 and the resolution of a series of claims among the interested parties.



•

Costs of $225,000 incurred in 2001, but not in 2000, associated with the Senior Subordinated Debt exchange offer.

COLLECTION AND ASSET IMPAIRMENT PROVISIONS

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

INCOME TAXES

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

        As of December 31, 2002, the Company had $115,000 in cash and cash equivalents, and $4.1 million in availability on lines of credit. The funds necessary to support the Company's activities have been provided by cash flows generated primarily from operating activities and various forms of recourse and non-recourse borrowings from banks, financial institutions and financial intermediaries. Payments under the Company's borrowings and the maturities of its borrowings are typically structured to match the payments under the leases and notes collateralizing the borrowings. The Company manages its portfolio to optimize concentration among customers or geographic markets. To achieve this goal, it will from time to time sell or externally finance transactions originated, including those held in its investment portfolio. The Company continues to explore other possible sources of capital, however, there is no assurance that additional capital, if required, can be obtained or will be available on terms acceptable to the Company.

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

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

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CASH FLOW

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

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

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

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

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

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

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

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

FORWARD-LOOKING STATEMENTS

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

CAUTIONARY STATEMENTS

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

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

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

23

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

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

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

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

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

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

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

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

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

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

25

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

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

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

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

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Substantially all of the Company's borrowings are under fixed interest rates, and maturities are matched with the cash flows of leased assets and notes receivables. A changing interest rate environment will not significantly impact the Company's margins since the effects of higher or lower borrowing costs would be reflected in the rates for newly originated leases or collateralized loans. Therefore, consistent with the Company's strategy and intention to hold most of its originations to maturity, the Company does not have a significant exposure to interest rate changes.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

26

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

        Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

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

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

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

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

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

27

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

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

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

ITEM 11. EXECUTIVE COMPENSATION

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

(1)

Consists of Company contributions to a 401(k) profit sharing plan in the amount of $5,500, $5,250 and $5,250 in 2002, 2001 and 2000, respectively, Company-paid life insurance premiums in the amount of $19,343, $12,000 and $2,092 in 2002, 2001 and 2000, respectively, and an automobile allowance of $897, $1,063 and $1,300 in 2002, 2001 and 2000, respectively.

(2)

Consists of Company contributions to a 401(k) profit sharing plan in the amount of $5,500, $4,217 and $3,964 in 2002, 2001 and 2000, respectively.

Employment Agreements

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

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

28

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

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

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

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

Stock Options

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

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

29

2002 STOCK OPTION GRANTS

(1)

Options become exercisable 20% per year over a five-year period beginning one year after the date of the grant.

2002 YEAR-END OPTION VALUE TABLE

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

Compensation of Directors

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

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

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

30

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

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

*

Less than 1%

(1)

The address of such person is 6171 McLeod Drive, Las Vegas, NV 89120-4048.

(2)

Includes 11,200 shares held as co-trustee for minor child also claimed by spouse as co-trustee. Mr. Finley disclaims beneficial ownership of the shares held by Lona M.B. Finley, his spouse.

(3)

Includes 49,000 shares held by Ms. Finley as custodian for her minor children and 11,200 shares held as co-trustee for minor child also claimed by spouse as co-trustee. Ms. Finley disclaims beneficial ownership of the shares held by Johan P. Finley, her spouse.

(4)

Includes shares of Common Stock issuable to the following persons upon exercise of options that are currently exercisable or that will become exercisable within 60 days of March 5, 2003: Johan P. Finley, 76,000 shares; Peter D. Cleary, 113,000 shares; Lona M.B. Finley, 133,091 shares; Joel M. Koonce, 20,000 shares; James L. Morrell, 20,000 shares; Patrick R. Cruzen, 5,000 shares; all executive officers and directors as a group, 370,841 shares.

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14. CONTROLS AND PROCEDURES

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

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

31

PART IV

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

(a)

Financial Statements

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

(b)

Reports on Form 8-K

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

(c)

Exhibits

        Included as Exhibits are the items listed in the Exhibit Index. The Company will furnish to its shareholders of record, as of the record date for its 2003 Annual Meeting of Shareholders, a copy of any of the exhibits listed below upon payment of $0.25 per page.

32

EXHIBIT INDEX

33

34

Footnotes to Exhibit Index

(1)

Incorporated by reference to the Registrant's previously filed Registration Statement on Form SB-2 (No. 33-76948C)

(2)

Not used

(3)

Not used

(4)

Incorporated by reference to the Registrant's previously filed Form 10-KSB for the year ended December 31, 1997

(5)

Incorporated by reference to the Registrant's Amendment No. 2 to its Registration Statement on Form SB-2 (No. 333-49199) previously filed on April 30, 1998

35

(6)

Incorporated by reference to the Registrant's Post-Effective Amendment No. 1 on Form S-3 to its Registration Statement on Form SB-2 (No. 333-49199) previously filed on March 24, 1999

(7)

Not used

(8)

Incorporated by reference to the Registrant's previously filed Form 10-Q for the quarter ended September 30, 1999

(9)

Incorporated by reference to the Registrant's previously filed Form 10-K for the year ended December 31, 1999

(10)

Incorporated by reference to the Registrant's previously filed Form 10-Q for the quarter ended March 31, 2000

(11)

Incorporated by reference to the Registrant's previously filed Form 10-Q for the quarter ended September 30, 2000

(12)

Incorporated by reference to the Registrant's previously filed Form 10-K for the year ended December 31, 2000

(13)

Incorporated by reference to the Registrant's previously filed Form 10-Q for the quarter ended March 31, 2001

(14)

Incorporated by reference to the Registrant's Form 8-K previously filed on June 7, 2001

(15)

Incorporated by reference to the Registrant's Form T-3/A previously filed on June 21, 2001

(16)

Incorporated by reference to the Registrant's previously filed Form 10-Q for the quarter ended June 30, 2001

(17)

Incorporated by reference to the Registrant's previously filed Form 10-Q for the quarter ended September 30, 2001

(18)

Incorporated by reference to the Registrant's previously filed Form 10-K for the year ended December 31, 2001

(19)

Incorporated by reference to the Registrant's previously filed Form 10-Q for the quarter ended March 31, 2002

(20)

Incorporated by reference to the Registrant's previously filed Form 14A, Definitive Proxy Statement, filed on April 12, 2002

(21)

Incorporated by reference to the Registrant's previously filed Form 10-Q for the quarter ended June 30, 2002

(22)

Incorporated by reference to the Registrant's previously filed Form 10-Q for the quarter ended September 30, 2002

(23)

Incorporated by reference to the Registrant's Form 8-K previously filed on February 27, 2003

†

Confidential treatment has been granted with respect to certain portions of this agreement, including the exhibits thereto, of which certain portions have been omitted and filed separately with the Securities and Exchange Commission.

36

SIGNATURES

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

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has also been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 31, 2003.

37

CERTIFICATIONS

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

1.

I have reviewed this annual report on Form 10-K of PDS Gaming Corporation;

2.

Based on my knowledge, this yearly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this yearly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this yearly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this yearly report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during this period in which the yearly report is being prepared;

b.

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this yearly report (the "Evaluation Date"); and

c.

presented in this yearly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a.

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officer and I have indicated in this yearly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

38

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

1.

I have reviewed this yearly report on Form 10-K of PDS Gaming Corporation;

2.

Based on my knowledge, this yearly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this yearly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this yearly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this yearly report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during this period in which the yearly report is being prepared;

b.

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this yearly report (the "Evaluation Date"); and

c.

presented in this yearly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a.

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officer and I have indicated in this yearly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

39

PART IV

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

(a)

Documents filed as part of this report:

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

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

        We have audited the accompanying consolidated balance sheets of PDS Gaming Corporation and Subsidiaries as of December 31, 2002 and 2001, and related consolidated statements of income (loss), stockholders' equity and cash flows for the years ended December 31, 2002, 2001 and 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PDS Gaming Corporation and Subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and cash flows for the years ended December 31, 2002, 2001 and 2000, in conformity with accounting principles generally accepted in the United States.

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

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

Las Vegas, Nevada
March 14, 2003

F-2

PDS GAMING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2002 AND 2001

See notes to consolidated financial statements.

F-3

PDS GAMING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000