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

FORM 10-K

Commission file number 0-23588

PAUL-SON GAMING CORPORATION

(Exact name of registrant as specified in its charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 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 the 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

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

        The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2003, based on the closing price as reported on the Nasdaq National Market of $5.35 per share: $11,852,529

        The number of shares outstanding of each of the registrant's classes of common stock, as of March 26, 2004: 7,594,900

Documents Incorporated by Reference:

        Portions of the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrant's fiscal year end of December 31, 2003, are incorporated by reference into Part III of this Report.

        Part II, Item 4 "Submission of Matters to a Vote of Security Holders" of the Registrant's Form 10-Q for the period ended September 30, 2003, is incorporated by reference into Part I, Item 4 "Submission to a Vote of Security Holders" of this Report.

PART I

Item 1. Business

        The following Business section contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Statements on Forward-Looking Information."

Company Overview

        Paul-Son Gaming Corporation, a Nevada corporation ("Paul-Son"), and each of its subsidiaries are collectively referred to herein as the "Company," "we" or "our." On September 12, 2002, the stockholders of Paul-Son approved the Agreement and Plan of Exchange dated as of April 11, 2002 and amended as of May 13, 2002 (the "Combination Agreement"), between Paul-Son and Etablissements Bourgogne et Grasset S.A. ("B&G"), a societe anonyme organized under the laws of France. Paul-Son and B&G completed the transactions contemplated under the Combination Agreement on September 12, 2002. At the closing, the businesses of Paul-Son, B&G and B&G's wholly owned subsidiary, The Bud Jones Company, Inc. ("Bud Jones"), were combined, with B&G and Bud Jones becoming wholly owned subsidiaries of Paul-Son (the "Combination"). The Combination was accounted for as a purchase transaction for financial accounting purposes. Because the former B&G stockholders own a majority of the outstanding Paul-Son common stock as a result of the Combination, the Combination was accounted for as a reverse acquisition in which B&G is the purchaser of Paul-Son. (See Part II-Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Notes 1 and 2).

        We believe we are one of the leading manufacturers and suppliers of casino table game equipment in the world. Our business activities include the manufacture and/or supply of casino chips, table layouts, wheels, playing cards, dice, gaming furniture, and miscellaneous table accessories such as chip trays, drop boxes and dealing shoes, which are used in conjunction with casino table games such as blackjack, poker, baccarat, craps and roulette.

        We are headquartered in Las Vegas, Nevada, with manufacturing facilities located in Las Vegas, Nevada, San Luis, Rio Colorado, Mexico, Kansas City, Kansas and Beaune, France. Our primary sales offices are in Las Vegas, Nevada and Atlantic City, New Jersey for the United States, and Beaune, France for the remainder of the world. Through our Paul-Son Gaming Supplies, Inc. subsidiary, we primarily sell our casino products manufactured in North America to licensed casinos throughout the United States and Canada. Through our B&G subsidiary, we primarily sell our European-manufactured casino products and some North American products to licensed casinos internationally in countries other than the USA. Our revenues are derived primarily from the sale of casino table game products to casinos throughout the world. Most of our products are sold directly to end-users. In some regions of the world, however, we sell through distributors.

        We manufacture products to meet particular customer and industry specifications, which may include a wide range of shapes and sizes, varied color schemes and other graphics, and security and anti-counterfeit features. The useful lives of our products typically range from several hours in the case of playing cards and dice, to several months in the case of layouts, and several years in the case of casino chips and gaming furniture. As such, our primary business is the ongoing replacement sale of these products. When a new casino opens, we strive to supply most of the products required to operate the casino's table games. When successful, revenues are generated both from the initial sale to the new casino and on a continuing basis as the new casino becomes part of our primary customer base.

        Paul-Son was founded in 1963 by our former Chairman, Paul S. Endy, Jr., and initially manufactured and sold dice to casinos in Las Vegas. B&G was formed in 1923 in Beaune, France.

Product Segments

        We operate in one operating segment—casino game equipment products in multi-geographic areas. (See Part II-Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 15).

Recent Developments

        We previously engaged in retail sales of casino-quality products, including poker chips, "Fantasy Casino" chips, dice, playing cards and gift items made with Paul-Son components through our inactive Authentic Products, Inc. subsidiary. These activities in Las Vegas were discontinued in the first quarter of 2003, with no material impact on our consolidated financial statements. Our Las Vegas retail sales activities were also discontinued and we currently only sell our casino products to licensed casino operations and, in limited circumstances, to distributors.

Products

Casino Chips

        We design and manufacture casino chips and plaques and jetons (the European equivalent of casino chips) to meet a variety of customer preferences and specifications, including size, weight, ability to stack, ease of handling, texture, color, graphics, durability, security and anti-counterfeit features. Casino chips, jetons and plaques, like real currency, are subject to counterfeiting.

        A casino will generally order all of its casino chips, including replacement chips after wear and usage, from a single supplier. Accordingly, we strive to become the original chip supplier to a casino upon its opening. A new casino order will typically include at least five distinct chip colors (for the U.S. market and a wider range of colors for the international market) and styles, ranging in denominations from $1 to in excess of $1 million. Our selling price is generally between $0.75 and $1.15 per chip, depending upon the specification, quantities, design and security features. Given this relatively low cost and a chip's expected lifespan of five or more years, management believes that competition is generally based upon factors other than price. In 2003, we manufactured approximately 14 million chips, including plaques and jetons.

        Casino chips can be divided into three basic families: (a) European-style jetons and plaques; (b) American-style casino chips; and (c) commemorative chips. Jetons, plaques and casino chips can also be manufactured with an embedded microchip.

European-style Jetons and Plaques

        Jetons and plaques are European-style casino chips. Our jetons and plaques are manufactured by B&G at our facility in France. Jetons are circular with standard diameters ranging from 32 mm to 60 mm. Plaques are rectangular, square or oval with standard sizes ranging from 30 mm × 30 mm to 151 mm × 105 mm. Jetons and plaques are used mainly for traditional European games and also extensively in Asian countries. Jetons and plaques are made of laminated cellulose acetate with a very large range of size, colors, shapes and additional security components (UV print, laser print ("LaserLock"), hologram). B&G created this product line in 1923 and has held a leading position in this market since that time.

American-style Casino Chips

        Casino chips are used worldwide for games originating in the United States. Originally, chips in the United States were made of clay and called "clay chips." Clay was replaced many years ago by plastic materials. There are currently three main technologies to produce these types of chips: injection molding, sublimation and compression molding. We produce casino chips using all three of these

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methods. Paul-Son Gaming Supplies, Inc., manufactures our American-style casino chips under our brand names, Paul-Son Gaming and Bud Jones, at our facilities in San Luis, Rio Colorado, Mexico and Kansas City, Kansas.

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Injection Molded Chips.  Bud Jones created injection molded chips back in the late 1960's. Such chips are made with several injection molded colors, typically with a central metal piece for the weight and printed decals. There are several standard diameters and a wide range of design and color combinations. Various security features are used to make the chips counterfeit resistant, including UV pigments, UV prints, LaserLock and holograms. The Bud Jones brand offers a very wide range of such chips, made of acrylic with very vivid colors and with ground and smooth surface. Since 1990, the B&G brand has developed a full line of injection molded chips with designs different from the Bud Jones brand and using a different type of plastic material with less vivid colors but requiring no grinding and allowing a rougher surface. The Bud Jones' and B&G's lines of injection-molded chips allow a very good coverage of most casinos' requirements, which vary greatly around the world.



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Sublimation Chips.  Sublimation chips are made of one disc of white plastic material (usually injection molded). The decor of these chips is traditionally transferred from printed paper to the plastic material by pressing and heating the printed paper on to the plastic disc. The printed colors sublimate and go from the paper into the plastic material. Starting in 1996, B&G created a new way of manufacturing this type of casino chip by using a printing technology called "pad printing." This technology permits simultaneously printing on the face and the edge of the chip. B&G calls this casino chip "Full Face." B&G holds several patents and patent applications for this technology.



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Compression Molded Chips.  Compression molded casino chips are manufactured from a proprietary formulation of more than ten raw materials using a compression molding system. Printed decals or "inlays" are incorporated in the chips during the molding steps. Customized designs, security and identifying features are incorporated into the chips. Paul-Son holds a leading market share in compression-molded chips, which are similar to the original clay chips of the past. Compression molded chips are manufactured under the Paul-Son Gaming™ brand at its facilities in San Luis, Rio Colorado, Mexico. Our annual production capacity at our Mexico facilities is approximately 16 million compression molded chips (based on a single shift and increased labor availability). Management believes that given our current anticipated production level of compression molded chips per year, there will be sufficient manufacturing capacity to meet potential increases in future demand.

Commemorative Chips

        Since 1994, Paul-Son has marketed chips that commemorate certain types of events such as title boxing matches, significant anniversaries and premier entertainment events. Casino patrons often retain commemorative chips as souvenirs. Casinos benefit to the extent that casino chips purchased are not redeemed, thereby resulting in added cash flow to the casino. We are also pursuing opportunities to sell commemorative chips outside of the gaming industry.

Casino Chips with Microchips and Reading Equipment

        Traditional jetons, plaques and casino chips cannot easily and precisely be accounted for by the casinos and therefore, games which call for them cannot be managed by casinos as efficiently as slot systems.

        Safechips by Bourgogne et Grasset®, Chipsoft by Paul-Son Gaming™, and Smartchips by Bud Jones™ are not only high quality casino chips, they are also reliable carriers of the data needed by casinos to manage their table games efficiently. A sophisticated microchip transponder is embedded in

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each casino chip and read/write devices are able to communicate with a large number of the casino chips without contact, establish the authenticity of each chip and transfer the data to information systems.

        The ability to mass-produce our casino chips with microchip transponder technology was developed after more than five years of research and development. We manufacture our casino chips with the Philips' exclusive Hitag Vegas microchip transponder and we have developed several data collection devices based on this technology that can be used by casinos to authenticate their casino chips and collect and process data for efficient table operation management.

        Some of the data collection devices that we have developed based on the Hitag Vegas microchip technology include: table top authenticator; cage reader; black jack and roulette float tray readers; chip bank reader; tip box reader; and evaluation kits. The table top authenticator is an electronic device to gives the dealers an easy way to authenticate the casino chips at the table. The cage reader gives cashiers an easy and efficient tool to minimize human error for the casino chip flow data. The black jack and roulette float tray readers allow automatic and accurate accounting of the casino chips and the value of the float online. The chip bank reader automatically authenticates trays of casino chips from 100 to 300 chip tray holders. The automatic tip box reader automatically accounts for the number and value of the tip chips dropped in the tip box. The evaluation kits present all of the major aspects of the B&G Safechip system, such as allowing casino management information system specialists to rapidly understand and assess the functionalities of the Safechip system, and giving them the software indications to be able to develop applications and integrate them into their existing systems.

        In order to meet the particular needs of our casino customers, we also offer a full range of chips or BG-S2 chips, which are specially designed for optical identification based on colors and edge pattern combinations. The central decal on the BG-S2 chip is available in a four-color process option and that can be serialized. These BG-S2 chips will be able to meet the requirements coming from the table manager's perspective (ease of handling and use); from the casino surveillance area's perspective (distinct color combination); and the marketing department's needs (stylish and sophisticated appeal).

Dice

        We manufacture the Paul-Son Gaming™ dice at our Mexico facilities, and Bud Jones™ and the T-K™ brand dice at our Las Vegas facilities, from cellulose acetate specifically formulated to provide the required clarity, hardness and dimensional stability. We offer a variety of spot designs, which are inserted in the body of the dice and machined flat to the surface. A casino may request the imprinting of its name and logo (in a variety and combination of colors), the insertion of a security "key" onto the reverse side of a particular spot, the addition of a security "glow" spot, the serialization of the dice, or all or a combination of the above.

        The typical sales price of casino dice currently ranges between approximately $2.90 and $3.50 per pair. We currently have the capacity to produce approximately 900,000 pair of dice per year (based upon one production shift) in Mexico and approximately 500,000 pair of dice per year in the U.S. In 2003, we produced approximately 900,000 pair of dice. Management believes our capacity for dice production is sufficient to accommodate an increase in production requirements.

        All of our brands of dice are manufactured in conformity with the strictest standards of gaming regulations, which may require that each side of a die be within +/- 0.0006 (six ten thousandths) of an inch for a perfect cube. Generally, a stick of dice (two and one-half pair) does not remain in play for more than eight hours in a busy casino.

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Table Layouts

        Every gaming table is covered with a layout printed with patterns particular to each specific game, as well as multi-colored logos and other markings according to individual casino preferences. Historically, the casino industry used a layout made from woolen material. However, in recent years, many customers have requested layouts made from synthetic material. We believe we are a leading manufacturer of layouts in the United States, utilizing high quality cloths, enhanced graphics, and proprietary dye formulations which management believes result in the widest variety of customized colors. Since 2000, when we acquired certain patent rights covering methodology and processes relating to the screening of inks on synthetic cloth for casino tabletop layouts, we have also offered synthetic layouts in a wide variety of colors and customer preferences. The patent rights have a remaining duration of 12 years and enable us to provide a full line of table game supplies and equipment.

        We typically install layouts on new gaming tables prior to delivery to a casino. The table layouts are replaced by casinos on a regular basis, in order to maintain their appearance, which is generally within 60 to 150 days. Layouts typically sell in a price range of approximately $80 to $300, in the U.S., depending on the type of table, the complexity of the patterns and the variety and difficulty of color combinations.

        We primarily manufacture our layouts in our Mexico facilities and occasionally, in Las Vegas, we also may sell a small quantity of full graphic sublimation layouts using an outside vendor. Our layout production capacity is approximately 50,000 "steam" woolen layouts, approximately 25,000 "hand-painted" woolen layouts and approximately 30,000 "synthetic" layouts per year. In fiscal 2003, we produced approximately 36,000 layouts, of which approximately 23,000 were synthetic and 13,000 were woolen. Management believes the capacity of our layout production facilities in Mexico will allow us to increase layout production as needed.

Playing Cards

        We manufacture and sell our own line of paper casino playing cards. A deck of cards typically sells to casinos within a price range of approximately $0.80 and $1.40 and, based on casino industry practices, is generally replaced every eight hours or less. A casino typically enters into a one or two year purchase commitment with a supplier to supply its cards at regular intervals, generally monthly. Casinos occasionally purchase cards from more than one supplier, as casino floor managers often have preferences for a particular type of card.

        Given our relatively low market share of the playing cards market, our established distribution system for table game supplies and our low cost manufacturing facilities, management believes that playing cards represent a reasonable growth opportunity for us.

        We produce all of our playing cards in our Mexico facilities. We purchased and leased additional equipment in fiscal 1999 to increase our production capacity to satisfy the marketplace. The appropriate marketing approach will permit management to offer better customer service to selected clients, providing a better return to us. In 2003, the Company produced approximately six million decks of playing cards.

        We also distribute plastic playing cards, which are used predominately in California card clubs. Traditionally, the California card room market prefers the plastic playing cards while the traditional hotel-casino markets generally prefer the paper cards.

Wheels

        B&G manufactures American Roulette and French Roulette wheels in Beaune, France and sells them primarily in Europe and in certain U.S. jurisdictions where B&G is licensed (such as New Jersey, Washington State and Mississippi).

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        Until the Combination, Paul-Son and Bud Jones manufactured roulette wheels and "Big Six" wheels in their plants in Las Vegas. In October 2000 and September 2002, respectively, Bud Jones and Paul-Son administratively and voluntarily surrendered their Nevada gaming manufacturer and distributor licenses and thus can no longer assemble or manufacture wheels in Nevada or sell wheels from Nevada.

Gaming Furniture

        We sell a variety of casino gaming furniture, including tables and seating. Tables range in price from approximately $1,500 for a blackjack table to approximately $4,000 for a roulette game table (excluding the roulette wheel). We offer a "Premier" line of gaming furniture and a "Select" line in response to the industry's demand for a lower priced, quality line of blackjack tables. Management believes the "Select" line enables us to compete with the price structure of our competitors while maintaining our quality standards. We vigorously pursue gaming table sales because the sale of a gaming table will generally bolster our ability to sell chips and consumable products such as layouts, dice, cards, and other accessories to the table purchasers. Prior to 2000, we purchased our gaming tables from a third party and subsequently we began manufacturing our own table game furniture components in our San Luis, Rio Colorado, Mexico facility. As of December 31, 2002, the table manufacturing process was primarily moved from the Mexico facility to the Las Vegas plant to improve economies of scale with the merger of Bud Jones, with intermittent use of the Mexico facilities for other operations. Tables are assembled by us and completed by adding the felt layout, drop boxes, trays and other accessories. Table game seating is produced by nonaffiliated manufacturers and distributed by us. B&G also manufactures a variety of casino gaming furniture, including tables (black jack, roulette, craps etc.) and seating, in Beaune, France.

Table Accessories and Other Products

        In order to offer our customers a full product line, we sell a number of ancillary casino table game products, which we typically do not manufacture. However, we manufacture limited quantities of certain plastic products, including dealing shoes. Ancillary products include plastic money paddles, discard holders, drop boxes, dealing shoes, trays and covers, dice sticks and on/off pucks. These products are generally sold in conjunction with the sale of gaming tables and tend to have long useful lives. We generally maintain two suppliers for each of these products.

        Our new "Air-Rail System" creates a positive flow of air at the gaming table in close range, which pushes smoke away from the dealer and assists nonsmokers in contending with secondhand smoke. Small air vent devices secured underneath the table draw smoke from the surface and recycle it, dispensing the air outward where the casino's primary ventilation systems can handle it. By filtering and dispersing the smoke-filled air, the Air-Rail System makes the casino's primary air circulation systems perform more efficiently and improves the comfort of the nonsmoking casino dealers and patrons.

Sales, Advertising and Promotion

        We generally distribute our products in the United States through our six-person sales force, which primarily operates out of regional offices in Las Vegas, Nevada and Atlantic City, New Jersey. We generally distribute our products in the international market through our three-person sales force, which operates out of our Beaune, France office.

        Management believes that the long-standing customer relationships, which have been developed over the years by our individual sales representatives, as well as our reputation for quality and reliability, are key factors upon which we successfully compete in the market place. When direct selling is not feasible because of local conditions, we may enter into agreements with carefully selected local distributors. But, even in this case, we always maintain direct contact with the end clients.

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        We place advertising in trade publications and participate in major casino industry trade shows. We keep abreast of new casino openings through personal contact with casino management, legislative and trade publications and wire service press releases. When new casinos are identified, our representatives make personal contact with appropriate officers and/or purchasing agents in order to solicit the sale of our products to such potential new customers.

        Our experience has been that once a casino buys from a table game supplier, it tends to purchase replacement products from the same supplier, provided that the quality, service and competitive pricing on the products are maintained. As a result, our sales efforts are primarily focused on selling a wide range of table gaming products to casinos while they are in the development and licensing stage. By thereafter maintaining a frequent contact program, we seek to realize a steadily increasing base of recurring sales while capturing incremental sales to new casinos.

Materials and Supplies

        We maintain good relationships with our suppliers and have, where possible, diversified our supplier base so as to avoid a disruption of supply. In most cases, our raw materials are staple goods, such as paper, plastic, wood, and felt and synthetic fabric, which are readily available from several suppliers. We believe that our practice of purchasing from diversified sources minimizes the risk of interrupting the supply of raw materials.

Competition

        There are a number of companies that compete with us in the sale of each of our product lines:

        Casino Chips.    The casino chip product line has in recent years become an increasingly competitive area of the gaming supply business. Currently, our major competitors and their respective locations, are Chipco International Ltd. and RT Plastics in the United States, Abbiati in Italy, Dolphin in Australia, Matsui Gaming Machines in Japan and other local manufacturers in each jurisdiction. We believe key competitive factors for casino chip sales are: well established product and process security, respect of players' and dealer habits', attractiveness, durability, quality of service and price.

        Table Layouts.    Our primary competitors for casino table layouts are Midwest Game Supply Co., Gemaco in the United States, and TCS/John Huxley in the United Kingdom. Management believes the key competitive factors for table layout sales are cloth quality, enhanced graphics, printing processes and prices.

        Playing Cards.    Our major competitors in the domestic playing card market are The U.S. Playing Card Co. and Gemaco Playing Card Co. Our major competitors internationally are Angel Cards in Japan, primarily servicing the Asian market, and Carta Mundi in Belgium, primarily servicing the European market. Management believes the primary competitive factors for playing cards are price, intrinsic characteristics (snap memory, ease of handling, etc.), security, durability, brand name identification, process security and reputation.

        Gaming Furniture.    Our principal competitors for casino gaming furniture are TCS/John Huxley in the United Kingdom and Abbiati in Italy and smaller regional wood shops in certain geographic areas. Competition is based on product ranges, quality and price.

        Dice.    Our principal competitor for domestic casino dice sales is Midwest Game Supply Co. There is no significant market internationally for casino dice. Management believes the primary competitive factors for dice sales are quality of the product and services and pricing. In addition, casino shift managers typically prefer that casinos purchase dice from more than one supplier due to industry superstition that dice from one of its suppliers may run "cold" for the house from time to time.

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        Table Accessories and Other Products.    Our principal competitors for distributing table accessories and other products, which include plastic money paddles, discard holders, drop boxes, dealing shoes, trays and covers, dice sticks and on/off pucks are several local vendors. We believe that key competitive factors for these products are the ability to be a single source supplier, service and product quality.

Environmental Matters

        We believe we are in compliance with international, federal, state and local laws and provisions that have been enacted or adopted relating to the protection of the environment. The liability for environmental remediation or costs will be accrued by us when or if it is considered probable and the costs can be reasonably estimated. We do not expect that continued compliance with these provisions would have any material effect upon capital expenditures and earnings.

Employees

        At February 29, 2004, we employed approximately 540 persons. Approximately 275 of the employees are located at our Mexico facilities, approximately 160 employees are located in our Beaune, France facility and the remainder are located primarily in Las Vegas, Nevada, Kansas City, Kansas and Atlantic City, New Jersey. None of our employees are covered by collective bargaining agreements and we believe that our relations with our employees are good.

Regulation and Licensing

General Gaming Regulation

        The gaming operations of each of our subsidiaries are subject to extensive regulation, and each of our subsidiaries hold registrations, approvals, gaming licenses or permits in each jurisdiction in which it operates gaming activities. A list of the geographical locations of the jurisdictions in which we, through our subsidiaries, are subject to licensing and/or regulatory control of the gaming authorities is set forth below.

        While the regulatory requirements vary from jurisdiction to jurisdiction, most require licenses, permits, findings of suitability, documentation of qualification including evidence of financial stability and/or other required approvals for companies who manufacture and distribute gaming equipment, as

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well as the individual suitability of officers, directors, major stockholders and key employees. Under the various gaming regulations, key personnel generally include the current and/or proposed corporate officers and directors of a corporation and its subsidiaries. Laws of the various gaming regulatory agencies are generally intended to protect the public and ensure that gaming related activity is conducted honestly, competitively, and free of corruption.

        Various gaming regulatory agencies have issued licenses allowing our wholly owned subsidiaries to manufacture and/or distribute our products. Our subsidiaries and their key personnel, as applicable, have obtained or applied for all government licenses, permits, registrations, findings of suitability and approvals necessary allowing for the manufacture and distribution of gaming supplies and equipment in the jurisdictions where it is required. These companies have never been denied a gaming related license, nor have any licenses been suspended or revoked.

Nevada Gaming Regulation

        The manufacture and distribution of gaming equipment in Nevada are subject to extensive state and local regulation. Our operations were subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming Control Board and various local regulatory agencies, or the Nevada Gaming Authorities, due to our prior manufacture of roulette wheels and Big Six wheels, which are considered gaming devices.

        The complex regulatory scheme governing the licensing of roulette wheel and Big Six wheel manufacturers and distributors in Nevada imposed administrative burdens which far exceed those of most other gaming jurisdictions when applied to our new combined corporate structure and our foreign stockholders. The anticipated time and expense of a foreign investigation that would be conducted by the Nevada Gaming Authorities would, in the opinion of our management, far outweigh any benefit to be gained by maintaining licensure in Nevada. Specifically, based upon an analysis of three factors: the potential market for our roulette and Big Six wheels in Nevada; the benefits gained through our choice of corporate structure; and the administrative costs associated with compliance with certain requirements of Nevada Gaming Authorities, we concluded that the costs of maintaining licensure in Nevada upon the completion of the Combination significantly exceeded our potential profits. We thus administratively and voluntarily surrendered the Nevada gaming licenses of Paul-Son Gaming Supplies, Inc. upon the completion of the Combination, a procedure that allowed Paul-Son Gaming Supplies, Inc. to forego licensure in Nevada without impacting its licensure in other gaming jurisdictions or its ability to continue to manufacture roulette wheels and Big Six wheels in and for other jurisdictions. The above license surrender does not impact the manufacture or sale of our other products in Nevada.

New Jersey Gaming Regulation

        Our subsidiaries are currently required to be licensed under the New Jersey Casino Control Act, or the New Jersey Act, as casino service industries qualified to manufacture and sell gaming-related products to casinos in New Jersey. As part of such licensure, parent companies, holding companies and certain officers and directors of the companies are required to be found suitable by the New Jersey Casino Control Commission, or the New Jersey Commission. The sale and distribution of gaming equipment to casinos in New Jersey is also subject to the New Jersey Act and the regulations promulgated thereunder by the New Jersey Commission. The New Jersey Commission has broad discretion in promulgating and interpreting regulations under the New Jersey Act. Amendments and supplements to the New Jersey Act, if any, may be of a material nature, and accordingly may adversely affect the ability of a 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

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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, and reputation for honesty, business ability and experience of the applicant and its directors, officers, management and supervisory personnel, principal employees and stockholders as well as the adequacy of the financial resources of the applicant. New Jersey licenses are granted for a period of three or four years, depending on the length of time a company has been licensed, and if they 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 applicant or licensee 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 licensee for services rendered or otherwise. Failure of such stockholder to dispose of such stockholder's stock could result in the loss of the 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.

        Our new combined structure required that each subsidiary company submit a new application for licensure. Upon a satisfactory initial background investigation, each company as necessary has obtained transactional waiver approval from the New Jersey Commission to engage in specific transactions with New Jersey casinos pending the outcome of the complete investigation of its respective license application.

Other Gaming Jurisdictions

        In addition to New Jersey, our subsidiaries are currently licensed in a number of other jurisdictions. Although the regulations in these jurisdictions are not identical to the states of Nevada or New Jersey, their material attributes are substantially similar, as summarized below.

        The manufacture, sale and distribution of gaming supplies 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. These laws, regulations and ordinances primarily concern the responsibility, financial stability and character of gaming supply and 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 supplies 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 distributors of gaming supplies, most jurisdictions have the authority to conduct background investigations of a 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. Our subsidiaries and their respective key personnel have obtained all licenses necessary for the conduct of their respective business in the jurisdictions in which they sell and distribute gaming equipment and supplies. Suspension or revocation of such licenses could have a material adverse effect on our operations.

Federal Gaming Registration

        The Federal Gambling Devices Act of 1962 makes it unlawful for a person to manufacture, transport, or receive gaming machines, gaming devices (including roulette wheels) or components across interstate lines unless that person has first registered with the Attorney General of the U.S. Department of Justice. In addition, gambling device identification and record keeping requirements are imposed by the Federal Act. Violation of the Federal Act may result in seizure and forfeiture of the

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equipment, as well as other penalties. Our subsidiaries, which are involved in the manufacture and transportation of gaming devices, are required to register annually. We have permission to sell our existing inventory of roulette wheels and Big Six wheels that we had manufactured in the United States prior to the Combination.

Native American Gaming Regulation

        Gaming on Native American lands is governed by federal law, tribal-state compacts, and tribal gaming regulations. The Indian Gaming Regulatory Act of 1988, or the IGRA, provides the framework for federal and state control over all gaming on Native American lands and is administered by the National Indian Gaming Commission and the Secretary of the U.S. Department of the Interior. The IGRA requires that the tribe and the state enter into a written agreement, a tribal-state compact, which governs the terms of the gaming activities. Tribal-state compacts vary from state-to-state and in many cases require equipment manufacturers and/or distributors to meet ongoing registration and licensing requirements. In addition, tribal gaming commissions have been established by many Native American tribes to regulate gaming related activity on Indian lands. Our subsidiaries manufacture and distribute gaming supplies to Native American tribes who have negotiated compacts with their state and have received federal approval. Currently, Paul-Son Gaming Supplies, Inc. is authorized to sell products to Native American casinos in seventeen states and B&G is authorized to sell products to Native American casinos in five states.

International Gaming Regulation

        Certain foreign countries permit the importation, sale and operation of gaming supplies in casino and non-casino environments. Certain jurisdictions require the licensing of manufacturers and distributors of gaming supplies. We and our subsidiaries manufacture and/or distribute gaming supplies to various international markets including Australia, the Caribbean, Canada, and other foreign countries. We have obtained the required licenses to manufacture and distribute our products in the various foreign jurisdictions where we do business.

        While the regulatory requirements vary from jurisdiction to jurisdiction, most require licenses, permits, findings of suitability, documentation of qualification including evidence of financial stability and/or other required approvals for companies who manufacture and distribute gaming equipment, as well as the individual suitability of officers, directors, major stockholders and key employees. Under the various gaming regulations, key personnel generally include the current and/or proposed corporate officers and directors of a corporation and its subsidiaries. Laws of the various gaming regulatory agencies are generally intended to protect the public and ensure that gaming related activity is conducted honestly, competitively, and free of corruption.

Financial Information About Geographic Areas

        See Part II-Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 15 for certain financial information by geographic area.

Available Information

        Our current website is www.paulsongaming.com. There we make available, free of charge, upon request, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information found on our website is not part of this or any other report we file or furnish to the SEC.

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Item 2. Properties

        We are based in, and operate domestically from, company-owned facilities in Las Vegas, Nevada, and internationally from Beaune, France. We currently assemble and manufacture our primary products at facilities in Las Vegas, Nevada, San Luis, Rio Colorado, Mexico and Beaune, France. We also lease a sales office in Atlantic City, New Jersey.

        Las Vegas, Nevada.    Our Las Vegas headquarters are located in an approximately 60,000 square foot building. Our Las Vegas headquarters was purchased in September 1995 for approximately $2,000,000. This facility houses the Las Vegas sales and corporate offices, a centralized warehouse for certain of our finished goods inventory, manufacturing departments, including casino chips, tables (wood shop), layouts, and dice and a graphics art department. In our Las Vegas headquarters, we also maintain certain inventory of templates, graphic designs, logos, and tools and dies for casino customers' gaming equipment. Maintaining such an inventory results in time and cost savings for product manufacture and delivery to our customers. Our Las Vegas headquarters secures a deed of trust issued under our outstanding term loan. (See Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.) Upon completion of the merger of Bud Jones into Paul-Son Gaming Supplies, Inc., the former Bud Jones' leases of two buildings in Las Vegas were cancelled, and the operations were moved to the one central location at our Las Vegas headquarters.

        San Luis, Rio Colorado, Mexico.    We primarily manufacture casino chips, playing cards, dice, plastic products and layouts at two facilities in San Luis, Rio Colorado, Mexico. These facilities include a 34,000 square foot leased facility in which casino chips and dice are manufactured and an approximately 66,000 square foot facility used for playing cards, and layout products production. We lease our main 34,000 square foot facility pursuant to a one-year lease, which expires on March 31, 2004, with an option to extend for up to 12 months upon the same terms, but at a rental amount proportionate with the space that will be utilized by us, at our discretion. We expect to extend the lease for the same amount after March 31, 2004. We own the 66,000 square foot facility. We also owned an approximately 30,000 square foot facility, which was previously used for layout, furniture and machine shop production purposes. The facility was vacant and subsequently sold in the first quarter of 2003 for $450,000 to the General Manager of Paul-Son Mexicana and his family. (See Part II-Item 8. Financial Statements and Supplementary Data.)

        Beaune, France.    We own an approximately 8,000 square foot manufacturing and administrative facility, in Beaune, France. In January 2004, B&G entered into a $442,000 loan transaction, with Banque Nationale de Paris (B.N.P), a French bank, for a building expansion, including approximately 3,600 square feet of additional office and production space and 1,350 feet of storage space.

        Facility Capacity.    With its current approximate 153,000 square feet of manufacturing facilities and the additional space resulting from the B&G building expansion; management believes that we have sufficient production capacity to meet anticipated future demand for all of our products in the United States and abroad.

Item 3. Legal Proceedings

        See Note 10—Commitments and Contingencies to the Notes to the Consolidated Financial Statements (Item 8.) for information regarding legal proceedings.

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

        Information with respect to matters submitted to a vote of our stockholders during the fourth quarter of 2003 may be found in Part II, Item 4 "Submission of Matters to a Vote of Security Holders" of our Form 10-Q for the period ended September 30, 2003. Such information is hereby incorporated by reference.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Market Information

        Our common stock is traded on the Nasdaq SmallCap Market under the symbol "PSON." The following table sets forth the high and low closing prices of our common stock as reported by Nasdaq during the periods indicated. All stock prices reflect a fiscal year ending December 31, although our board of directors did not resolve to change our fiscal year from a fiscal year ending May 31 until September 12, 2002. On March 26, 2004, the closing price was $4.01 per share.

Holders

        There were 119 holders of record of our common stock as of March 15, 2004. We estimate that there are approximately 900 beneficial holders of our common stock based on the proxies distributed in connection with the October 2003 meeting of stockholders.

Dividend Policy

        We have never paid cash dividends. Payments of dividends are within the discretion of our board of directors and depend upon our earnings, capital requirements, and operating and financial conditions, among other factors. We currently expect to retain our earnings to finance the growth and development of our business and do not expect to pay cash dividends in the foreseeable future.

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Equity Compensation Plan Information

        The following table sets forth certain information as of December 31, 2003 about our equity compensation plans under which our equity securities are authorized for issuance.

(1)

Reflects outstanding stock options to purchase 479,500 shares of common stock under our 1994 Long-Term Incentive Plan, stock options to purchase 78,500 shares of common stock under our 1994 Directors' Stock Option Plan, and anti-dilution warrants to purchase an aggregate of 374,999 shares.

(2)

Of these shares, 520,500 were available for future issuance under our 1994 Long-Term Incentive Plan and 71,500 were available under our 1994 Directors' Stock Option Plan.

        See Note 12 of the Notes to the Consolidated Financial Statements for additional information about our equity-based compensation plans.

Item 6. Selected Financial Data

        The selected consolidated financial data included in the following tables should be read in conjunction with our Consolidated Financial Statements and related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein. The selected consolidated financial data for the years ended December 31, 2003, 2002, and 2001 and as of December 31, 2003 and 2002, have been derived from our audited consolidated financial statements included elsewhere herein. The selected consolidated financial data for the fiscal year ended December 31, 2000, the nine months ended December 31, 1999 and fiscal year ended March 31, 1999 and as of December 31, 2001, 2000, 1999 and March 31, 1999 have been derived from our audited consolidated financial statements not included herein.

        On September 12, 2002, our stockholders approved the Combination Agreement. The Combination was effected on the same day. The businesses of Paul-Son, B&G and B&G's wholly owned subsidiary, Bud Jones, were combined with B&G and Bud Jones becoming wholly owned subsidiaries of Paul-Son. The Combination was accounted for as a purchase transaction for financial accounting purposes. Because the former B&G stockholders own a majority of the outstanding Paul-Son common stock as a result of the Combination, the Combination was accounted for as a reverse acquisition in which B&G is the purchaser of Paul-Son. (See Part II—Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Notes 1 and 2). On December 31, 2002, Bud Jones merged into Paul-Son's wholly owned subsidiary, Paul-Son Gaming Supplies, Inc. Formerly, Bud Jones was a wholly owned subsidiary of B&G. Bud Jones was a gaming supply manufacturing company, also headquartered in Las Vegas. Both operations (Paul-Son Gaming Supplies, Inc. and Bud Jones) have been consolidated into one facility at our Las Vegas headquarters. (See Part II—Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview—Acquisitions).

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        The table below reflects historical information for B&G for the fiscal year ended March 31, 1999 and the nine months ended December 31, 1999. The year ended December 31, 2000 includes historical information for B&G for the entire year and the former Bud Jones Company since October 2000. The year ended December 31, 2001 includes historical information for B&G and for the former Bud Jones Company for the entire year, the chip manufacturing business of Trend Plastics, Inc. from August 2001 and T-K Specialty Company, Inc. from September 2001. The year ended December 31, 2002 includes historical information for B&G, the former Bud Jones Company, Trend Plastics, T-K Specialty Company, Inc. for the entire year and Paul-Son Gaming Corporation and its subsidiaries from September 12, 2002. The year ended December 31, 2003 includes historical information for all entities described above for the full year.

(1)

Effective December 31, 1999, B&G changed its fiscal year from a fiscal year ending March 31 to a fiscal year ending December 31.

(2)

Cash dividends paid were $0 for all periods.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Recent Developments

        We previously engaged in retail sales of casino-quality products, including poker chips, "Fantasy Casino" chips, dice, playing cards and gift items made with Paul-Son components through our inactive Authentic Products, Inc. subsidiary. These activities in Las Vegas were discontinued in the first quarter of 2003, with no material impact on the financial statements. Our Las Vegas retail sales activities were also discontinued and we currently plan to only sell our casino products to licensed casino operations and, in limited circumstances, to distributors.

        While the first quarter of 2004 will result in a quarterly loss, we expect our significant sales backlog as of March 29, 2004, which resulted primarily from the timing of the sales orders received, to offset the first quarter loss as they are fulfilled throughout the remainder of the 2004 fiscal year.

Overview

        Paul-Son Gaming Corporation, a Nevada corporation ("Paul-Son") and each of its subsidiaries are collectively referred to herein as the "Company," or "we" or "our." The following discussion is intended to assist in the understanding of our results of operations and our present financial condition. The consolidated financial statements and the accompanying notes contain additional detailed information that should be referred to when reviewing this material. Statements in this discussion may be forward-looking. Such forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those expressed. See "Statement on Forward-Looking Information" below.

        On September 12, 2002, the stockholders of Paul-Son approved the Agreement and Plan of Exchange dated as of April 11, 2002 and amended as of May 13, 2002 (the "Combination Agreement"), between Paul-Son and Etablissements Bourgogne et Grasset S.A. ("B&G"), a societe anonyme organized under the laws of France. Paul-Son and B&G completed the transactions contemplated under the Combination Agreement on the same day. At the closing, the businesses of Paul-Son, B&G and B&G's wholly owned subsidiary, The Bud Jones Company, Inc. ("Bud Jones"), were combined, with B&G and Bud Jones becoming wholly owned subsidiaries of Paul-Son (the "Combination"). The Combination was accounted for as a purchase transaction for financial accounting purposes. Because the former B&G stockholders own a majority of the outstanding Paul-Son common stock as a result of the Combination, the Combination was accounted for as a reverse acquisition in which B&G is the purchaser of Paul-Son. (See Part II—Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Notes 1 and 2). On December 31, 2002, Bud Jones merged into Paul-Son Gaming Supplies, Inc. (a wholly owned subsidiary of Paul-Son Gaming Corporation) and Paul-Son Gaming Supplies, Inc. was the surviving entity. Formerly, Bud Jones was a wholly owned subsidiary of B&G. Bud Jones was a gaming supply manufacturing company, which was also headquartered in Las Vegas. Both operations (Paul-Son Gaming Supplies, Inc, and Bud Jones) have been consolidated into one facility at the Paul-Son Gaming Corporation headquarters in Las Vegas, Nevada.

        Our business activities include the manufacture and/or supply of gaming equipment and supplies such as casino chips, table layouts, playing cards, dice, gaming furniture, table accessories and other products that are used with casino table games such as blackjack, poker, baccarat, craps and roulette. We generally sell our casino products to licensed casinos for new openings and to existing casino operations, worldwide. We are headquartered in Las Vegas, Nevada, with offices in Beaune, France, San Luis, Rio Colorado, Mexico, Atlantic City, New Jersey and other locations.

        The Combination resulted in substantial changes to the Company. The size of the combined company, both measured in revenues, assets and liabilities, is substantially larger than the Company

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prior to the Combination. Substantial costs were incurred in effecting the Combination, and management has commenced implementing various changes to integrate the constituent companies, to reduce redundancies and to incorporate the new strategies for the combined company. As a result, the historical results of operations and discussions of financial condition, liquidity and capital resources contained herein, to the extent that they are based on B&G and/or Bud Jones prior to the Combination, may not be meaningful with respect to the results of operations, financial condition liquidity and capital resources of the combined Company going forward on a post-Combination basis.

Results of Operations

        The following table summarizes selected items from the Company's Consolidated Statements of Operations as a percentage of revenues for the periods indicated:

        The following table details the Company's historical revenues by product line:

Comparison of Operations for the Years Ended December 31, 2003 and 2002

        Revenues.    For the year ended December 31, 2003, revenues were approximately $36.2 million, an increase of approximately $14.3 million, or 65.5%, versus revenues of approximately $21.9 million for the year ended December 31, 2002. This increase in revenues for 2003 was principally the result of the inclusion of the revenues for our combined operations in the twelve-month period, compared to B&G's revenues reported in the 2002 period, except for the period between September 12, 2002 and December 31, 2002, which includes revenues of Paul-Son and its pre-combination subsidiaries. Additionally, after the Combination and the merger between Paul-Son Gaming Supplies, Inc. and Bud Jones, some discounting practices were reduced and some sales prices increased. Revenues for 2003 also benefited from two substantial orders, including $1.2 million for a new casino opening in the U.S. and $3.7 million to a casino customer in Asia. This increase was partially offset by decreased sales of

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approximately $3.2 million in 2003 reflecting a decline in demand for "Euro" denominated chips, as many European casinos converted to these chips during 2001 and early 2002.

        Cost of Revenues.    Cost of revenues, as a percentage of sales, decreased to 61.9% for 2003, compared to 67.6% during 2002. This decrease in cost of revenues occurred principally due to (a) the inclusion of Paul-Son Gaming Supplies, Inc.'s cost of revenues for the twelve months ended December 31, 2003, which typically has lower cost of revenues than B&G, that were not included in the same period of 2002, except for the period between September 12, 2002 and December 31, 2002, and (b) increased production efficiencies as a result of the Combination.

        Gross Profit.    Gross profit in absolute dollars for 2003 increased by approximately $6.7 million from 2002 and the actual gross profit margin percentage increased to 38.1% for 2003 from 32.4% in 2002. This occurred as a result of the aforementioned increase in revenues of approximately $14.3 million offset, in part, by the increase in cost of revenues to $22.4 million for 2003 compared to $14.8 million in 2002. A full twelve-months of Paul-Son Gaming Supplies, Inc.'s revenues and cost of revenues were included in 2003 compared to only 111 days in 2002. Since Paul-Son Gaming Supplies, Inc. typically has a higher gross profit margin than B&G, the overall gross profit increased for 2003 compared to 2002. Also, the absence of certain discounting practices and increased sale prices during the 2003 period compared to the prior year, contributed to the increase in gross profit.

        Operating Expenses.    During the year ended December 31, 2003, operating expenses, which include product development, marketing and sales, and general and administrative costs (including depreciation and amortization), increased approximately $3.8 million from approximately $8.2 million in 2002 to approximately $12.0 million. This increase was primarily attributable to the inclusion of operating expenses of Paul-Son in the 2003 period. In 2002, we incurred restructuring costs of $622,000 associated with the Combination and no similar costs were incurred in 2003. No operating expenses of Paul-Son were included in the comparable period of 2002, except for the period between September 12, 2002 and December 31, 2002, which includes Paul-Son and its pre-combination subsidiaries. As a percentage of revenues, operating expenses for the year of 2003 decreased to 33.3% from 34.8% for the comparable period in 2002, as a result of continued efficiencies realized in the business combination in 2002 and a $369,000 receipt of a legal settlement in the fourth quarter of 2003. Our operating expenses for the twelve-month period include professional fees of approximately $1.0 million, of which $259,000 is associated with public reporting and regulatory expenses and $127,000 is related to B&G for the twelve months ended December 31, 2003, the remainder relates to legal, accounting and regulatory fees.

        Interest Expense.    For the year ended December 31, 2003, interest expense increased to approximately $264,000 from approximately $232,000 in 2002. This increase of approximately $32,000 was caused by an increase in the average outstanding debt amounts in 2003 as compared to 2002, due generally to the inclusion of Paul-Son's debt for the year 2003, which was not included in the same periods in 2002, except for the period between September 12, 2002 and December 31, 2002, which includes Paul-Son and its pre-combination subsidiaries.

        Other Income/Expense.    During the year ended December 31, 2003, other income, including loss on foreign currency transactions, interest expense, and other income (including gains (losses) on sales of marketable equity securities), decreased to approximately $408,000 in expense from approximately $633,000 of expense during the twelve months ended December 31, 2002. This decrease of approximately $225,000 was principally the result of an increase in other income of $20,000 from miscellaneous refunds and by decreased losses on foreign currency exchange of $237,000; partially offset by increased interest expense of $32,000, primarily due to the inclusion of the full year of Paul-Son debt. The variation in foreign currency transactions to $292,000 in 2003 from $529,000 in 2002 occurred as a result of an increase in the Euro in 2003 compared to 2002. Additionally, management changed its estimates for intercompany loans, which are now intended not to be repaid in the

18

foreseeable future. Therefore, as of the second quarter of 2003, the foreign currency exchange loss related to such loans did not impact the statements of operations.

        Income Taxes.    During 2003, we recorded an income tax provision of approximately $101,000 as compared to a tax provision of approximately $383,000 in 2002. In 2003 and 2002, we have not released our domestic deferred tax valuation allowance and we have not recognized the benefit of our net deferred tax asset due to the uncertainty surrounding the timing and amount of future profits. The effective income tax rates in 2003 and 2002 were 7.3% and (21.6)%, respectively. We recorded tax benefits on our U.S. pretax losses to the extent the benefits offset previously recorded deferred tax liabilities.

        Net Income/(Loss).    For the year ended December 31, 2003, we recorded net income of approximately $1.2 million. This occurred due to the aforementioned factors. We recorded a net loss of $2.2 million in 2002 as a result of the aforementioned factors.

Comparison of Operations for the Years Ended December 31, 2002 and 2001

        Revenues.    For the year ended December 31, 2002, revenues were approximately $21.9 million, a decrease of approximately $1.2 million, or 5.3%, versus revenues of approximately $23.1 million for the year ended December 31, 2001. This decrease in revenues for 2002 was principally the result of (i) decreased sales of approximately $7.7 million in European-and American-style casino chips sold principally in B&G's international markets in 2002 reflecting a decline in the demand for "EURO" denominated chips, as many European casinos converted to these chips during 2001 and early 2002 and (ii) the loss of the roulette wheel sales after surrendering the Bud Jones' Nevada gaming license of $150,000. These declines were partially offset by increased sales revenue of $1.3 million in Switzerland due to new casino openings and the 111 days of Paul-Son Gaming Supplies, Inc. revenue inclusion from September 12, 2002 through December 31, 2002, for $5.0 million. Paul-Son believes new technological improvements to its chips and jetons with, among other things, imbedded microchips, and laser-lock technology may increase demand and revenue over historical levels. Paul-Son also experienced an increase in the average selling price of its European casino chips in international markets with the introduction of embedded microchips, which aid in the security and tracking of the casino chips.

        Cost of Revenues.    Cost of revenues, as a percentage of sales, decreased to 67.6% for 2002, compared to 68.6% during 2001. The increase in gross margin occurred principally due to two factors: (a) an increase in gross margins of B&G; and (b) inclusion of Paul-Son Gaming Supplies, Inc. for 111 days, which historically has had a higher gross margin percentage than Bud Jones. The increase was partially offset by a decrease in the gross margin percentage of Bud Jones. Management believes the significant decline in the U.S. gross margins was attributable to a decrease in sales caused by a general economic decline in certain U.S. markets, loss of roulette wheel sales after surrendering the Bud Jones' Nevada gaming license, decreased foreign sales after terminating Paul-Son's relationship with a foreign distributor, transitioning foreign distribution to B&G, and increased competition including pre-Combination competition between Paul-Son Gaming Supplies, Inc. and Bud Jones. A decline in sales caused an inability to absorb fixed manufacturing overhead expenses. This decline was offset, in part, by a significant increase in gross profit margins from B&G's French Operations. This improvement was principally related to (a) the absence of certain sales discounting practices, which occurred during the three months ended December 31, 2001; and (b) fewer premium and startup costs related to the production of the new casino microchip product.

        Gross Profit.    Gross profit in absolute dollars for 2002 decreased by approximately $149,000 from 2001, while the actual gross profit margin percentage increased to 32.4% for 2002 from 31.4% in 2001. This occurred as a result of the aforementioned decrease in revenues of approximately $1.2 million offset, in part, by the decline in cost of revenues to $14.8 million for 2002 compared to $15.8 million in 2001.

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        Restructuring and costs associated with the Combination.    During the year ended December 31, 2002, costs incurred as a result of the Combination of B&G and Paul-Son and the merger of Paul-Son and Bud Jones were recognized of $622,000. These costs are not recurring and were necessary in order to achieve the synergies anticipated from the Combination and the merger. Some employee layoffs have occurred and facilities have been consolidated just prior and subsequent to December 31, 2002, in order to affect efficiencies and eliminate redundant functions as a result of the Combination and the merger of Bud Jones into Paul-Son Gaming Supplies, Inc.

        Operating Expenses.    During the year ended December 31, 2002, operating expenses, which include product development, marketing, sales, general and administrative costs, increased approximately $1.9 million, or 33.5%, from approximately $5.7 million in 2001 to approximately $7.6 million. This increase was primarily attributable to (a) operating costs of Paul-Son after the Combination of $1.4 million; and (b) increased sales and marketing costs of $570,000. During the fourth quarter of 2002 and the first quarter of 2003, the Company ceased the retail store activity in Las Vegas, and closed the Company's subsidiary, Authentic Products, as we focus on more profitable, direct sales to licensed casinos. Authentic Products stopped activity during this same time and will be merged into Paul-Son later in 2003. The Company intends to focus on its core business while meeting customer needs and providing better service and a broader range of products. Management is continually aware of and analyzing the costs and activities of the Company. Marginally profitable areas are evaluated and eliminated or restructured as necessary, focusing on the core business.

        Interest Expense.    For the year ended December 31, 2002, interest expense increased to approximately $232,000 from approximately $170,000 in 2001. This increase of approximately $62,000 was caused by an increase in the average outstanding debt amounts in 2002 as compared to 2001, due to the inclusion of Paul-Son Gaming Supplies, Inc. and its subsidiaries' debt as a result of the Combination.

        Other Income/Expense.    During the year ended December 31, 2002, other income, including gains on foreign currency transactions, interest income, gains on sales of marketable equity securities and other income/expenses decreased to an expense of approximately $401,000 from income of approximately $349,000 during 2001. This decrease of approximately $750,000 was principally the result of foreign currency exchange losses of approximately $529,000 in 2002 compared to currency exchange gains of approximately $225,000 in 2001. This variation occurred as a result of the volatility between the U.S. Dollar and the French currency (Euro). In addition, there was an increase in interest income of approximately $82,000 in the 2002 period.

        Income Taxes.    During 2002, the Company recorded a tax provision of approximately $383,000 as compared to a tax provision of approximately $737,000 in 2001. During the year 2002, taxable income of the Company's foreign businesses could not be offset by pretax losses incurred by Paul-Son Gaming Supplies, Inc. and Bud Jones. The effective income tax rate in 2002 was (21.6)%. During 2001, the Company had consolidated net pretax income. The Company recorded a tax provision of $737,000 from its pretax income in 2001. The Company recorded tax benefits on its U.S. pretax losses to the extent the benefits offset previously recorded deferred tax liabilities. Due to the uncertainty surrounding the timing and amount of future profits, the Company did not record a tax benefit against the pretax losses of Paul-Son Gaming Supplies, Inc. and Bud Jones for the year 2002.

        Net Income/(Loss).    For the year ended December 31, 2002, the Company recorded a net loss of approximately $2.2 million, including approximately $457,000 loss from Paul-Son Gaming Supplies, Inc. after the Combination. The net loss contributed by the former Bud Jones Company was $2.2 million in 2002 compared to $900,000 in 2001 primarily due to a decline in sales revenue of $500,000 and an increase in SG&A costs of $450,000 due to increased amortization of intangibles and employee expenses. Additionally, the former Bud Jones Company recognized a tax benefit in 2001 of $290,000 while no similar benefit was recorded in 2002. This occurred as the aforementioned decrease in

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revenues, increase in operating expenses, decrease in other income, and increase in other expenses, partially offset by increases in income tax expenses. During 2001, the Company recorded net income of $984,000 as a result of the aforementioned increase in revenues and decrease in operating expense in 2001 compared to 2002.

Liquidity and Capital Resources

        Overview.    Management believes that the combination of cash flow from operations and cash on hand should be sufficient to fund expenses from routine operations on a short-term basis. At December 31, 2003, we had approximately $4.2 million in cash and cash equivalents. For the longer term, in addition to these cash sources, management will evaluate other cash source alternatives, including the sale of assets and bank or other lending facilities. In the first quarter of 2003, we sold a vacant building in Mexico for $450,000 (See Part II—Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 14). There can be no assurance that the other cash sources will be available to us on terms and conditions acceptable to us. We also hope to continue to realize some benefits of the Combination-related efficiencies in 2004.

        Working Capital and Cash Flow.    Working capital totaled approximately $7.3 million at December 31, 2003, compared to approximately $6.2 million in working capital at December 31, 2002. Working capital increased approximately $1.1 million during the year primarily due to an increase in current assets of $1.6 million, partially offset by an increase in current liabilities of $547,000. Overall, cash increased approximately $1.9 million from December 31, 2002 to December 31, 2003.

        The increase in current assets is due primarily to an increase in cash and cash equivalents of $1.9 million and marketable equity securities of $1.3 million due to increased sales; the receipt of an income tax refund of $846,000; a legal settlement received for $369,000; and $450,000 received from the sale of a building in Mexico. In the Consolidated Statements of Cash Flows for the year ended 2003, this increase in current assets was partially offset by a decrease in inventories of $76,000; a decrease in accounts receivable of $338,000 a decrease in income tax receivable of $846,000, and capital expenditures of $2.2 million.

        The increase in current liabilities was a result of the reclassification of a note payable from B&G that did not meet a French bank covenant agreement and therefore, $1.7 million was reclassified from long-term debt to current maturities of long-term debt for 2003. (See Part II—Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 9). In the Consolidated Statements of Cash Flows for the year ended 2003, this increase was partially offset by a decrease in accounts payable and accrued expenses of $1.4 million, as cash flow has improved and a decrease in customer deposits of $575,000 due to the timing of deposits on large orders. This decrease in current liabilities was partially offset by increases in taxes and other liabilities $518,000.

        Cash provided by operating activities totaled approximately $3.1 million during fiscal 2003 compared to cash used in operations of approximately $2.1 million in fiscal 2002, primarily due to the factors listed above. Cash used in investing activities was $2.6 million for 2003, an increase of $2.8 million from 2002, primarily due to increased expenditures in 2003, primarily in France for buildings, improvements, machinery and equipment of $1.7 million (which is net of the sale of the building in Mexico), and the net purchases of marketable equity securities of $800,000, also in France.

        Secured Debt.    In February 2001, B&G borrowed approximately $2.2 million. Principal and interest payments are due quarterly in the original approximate amount of $116,000 until February 2008. Interest accrues at the fixed rate of 5.1%. The B&G loan is guaranteed by our majority stockholder, Holding Wilson, S.A. Under the terms of the B&G loan agreement, B&G must comply with certain financial covenants that are calculated annually based on the financial statements of B&G. Specifically, B&G's ratio of total loans and similar debt (inclusive of capital lease obligations) to operating cash flow (defined under French GAAP as operating income before depreciation and provisions) must not

21

exceed 1.7, and the ratio of total loans and similar debts (inclusive of capital lease obligations) to stockholders' equity must not exceed 0.5. B&G did not meet the total loan and similar debt (inclusive of capital lease obligations) to operating cash flow ratio for 2003. B&G's actual ratio of total loans and similar debt (inclusive of capital lease obligations) to operating cash flow and ratio of total loans and similar debts (inclusive of capital lease obligations) to stockholders' equity were 1.85 and 0.18, respectively, as of December 31, 2003. Because B&G no longer prepares financial statements in accordance with French GAAP, the lender is not legally permitted to grant a formal waiver for any such violation. Although management does not believe that the lender intends to accelerate the B&G loan as a result of this financial covenant violation, no assurance can be given that such event will not occur. Therefore, we reclassified the debt from long-term debt to current maturities of long-term debt on the Consolidated Balance Sheets for 2003. (See Part II—Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 9). In the event that the lender accelerates the B&G loan, we believe that we would have sufficient cash and cash equivalents by which to repay the outstanding loan balance, or that we could refinance the B&G loan through another lender, or perform some combination of the foregoing.

        We entered into a $995,000 loan transaction, or the Loan, with Jackson Federal Bank, a federal savings bank, or Jackson, on March 5, 2002. The other principal terms of the Loan are as follows:

•

Interest Rate.  The interest rate equals the greater of 8% per annum, or the Floor Rate, or 362.5 basis points over the average of the London Interbank offered rates for six-month dollar deposit in the London market based on quotations of major banks, or Libor. The interest rate shall not be less than the Floor Rate nor more than 12% per annum, nor shall the interest rate increase or decrease by more than two percentage points per annum during any twelve month period or one-half percentage point per annum during any three month period.



•

Maturity Date.  The maturity date is March 1, 2012.



•

Payment Schedule.  The Loan is payable in arrears in equal monthly installments of principal and interest (based upon a 30 year amortization schedule) (currently approximately $7,300 per month) beginning April 1, 2002 and continuing on the first day of each month through and including March 1, 2012, at which time the entire remaining principal balance of approximately $874,000 will be due and payable.



•

Security.  The Loan is secured by a Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing, or the Deed of Trust, encumbering our Las Vegas, Nevada Headquarters.



•

Guaranty.  We executed a Guaranty in favor of Jackson by which it guaranteed the obligations of Paul-Son Gaming Supplies, Inc. under the Loan and Deed of Trust and the related loan documents executed in connection with the Loan.



•

Prepayment.  The Loan contains a prepayment provision requiring the payment of a prepayment premium equal to 3% of the amount prepaid during the first twelve-month period of the Loan. Thereafter, the Loan may be prepaid in part or in whole at any time without a prepayment premium.



•

Transfer Restrictions.  The Loan is secured by a Deed of Trust that restricts Paul-Son Gaming Supplies, Inc. from transferring or encumbering (i) our Las Vegas headquarters; or (ii) any ownership interest in Paul-Son Gaming Supplies, Inc. Further, the Deed of Trust grants to Jackson a security interest in Paul-Son Gaming Supplies Inc.'s personal property, including, but not limited to, machinery, furniture, fixtures, licenses and income.

        Seasonality.    We do not typically experience seasonality relative to our revenues, except, potentially, for the third quarter of each year, when the French location (office and manufacturing facility) is closed for a substantial part of the month of August.

22

        Las Vegas, Nevada Facilities.    In May 1997, we purchased our current corporate headquarters, an approximately 62,000 square foot building located in Las Vegas. The Las Vegas headquarters secures the Deed of Trust issued under the Loan. See "Secured Debt" above. In connection with the Combination, Bud Jones relocated its operations to the Las Vegas headquarters during the fourth quarter of 2002.

        San Luis, Rio Colorado, Mexico Facilities.    We lease a 34,000 square foot facility pursuant to a one-year lease, which expires on March 31, 2004, with an option to extend up to 12 months upon the same terms, but at a rental amount proportionate with the space that will be utilized by us, at our discretion. We expect to extend the lease for the same amount after March 31, 2004. In November 1997, we completed the purchase of a 66,000 square foot new San Luis facility for approximately $1.1 million. In December 1994, we purchased an adjacent 30,000 square foot facility for approximately $1.5 million. This facility was vacant and subsequently sold in the first quarter of 2003 for $450,000 to the General Manager at this facility of Paul-Son Mexicana. (See Part II—Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 14).

        Beaune, France Facilities.    We own an approximately 8,000 square foot manufacturing and administrative facility in Beaune, France. In January 2004, B&G entered into a $442,000 loan transaction, with Banque Nationale de Paris (B.N.P), a French bank for building expansion. The other principal terms of this loan are as follows:

•

Interest Rate.  The interest rate is fixed at 3.6% per annum.



•

Maturity Date.  The maturity date is January 2010.



•

Security.  The loan is secured by a mortgage on the building premises

        Capital Expenditures.    We currently plan to purchase approximately $800,000 to $1.0 million in capital equipment and improvements in 2004.

        Inventory.    During the last several years we have experienced inventory obsolescence provisions, which contributed to the cost of sales as a percentage of revenues. Several factors contributed to these increases, including (i) changes in materials used to make casino table layouts, from a more traditional woolen cloth to a longer lasting synthetic cloth, thereby causing certain obsolescence and slow movement of certain colors and quantities of woolen cloth held by us, (ii) a general decline in sales brought on by a trend in the casino industry to decrease the number of table games on a casino floor in favor of slot machines, and (iii) increased security features added to casino playing cards and casino chips which obsoleted certain materials or finished goods on hand at the time.

Contractual Obligations and Commercial Commitments

        The following table presents contractual obligations and commercial commitments as of December 31, 2003.

        The impact that our contractual obligations are anticipated to have on our liquidity and cash flow in future periods is reflected in the table below. We have no other significant contractual obligations or commercial commitments either on or off balance sheet as of December 31, 2003. Operating leases on

23

a month-to-month basis are not included in the table below. (See Part II—Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 10).

(1)

Amounts represent the expected cash payments of our long-term debt, including the current portion of the long-term debt, but excluding any fair value adjustments. The Less Than 1 Year amount of $2.2 million contains the B&G debt of $1.7 million that was reclassified from current to long-term. (See Part II—Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 9).

(2)

Amounts represent purchase obligations, income taxes paid in 2004, for the 2003 USA federal income tax return, agreements to purchase goods or services, obligations that relate to an intellectual property agreement mentioned in the Subsequent Event Note 17, and employment agreements that are enforceable and legally binding on us and that specify all significant terms, but excluding any agreements that are cancelable without penalty.

(3)

Interest paid in 2003 was approximately $252,000 and we expect it to increase in the future periods due to the additional loan by B&G to approximately $275,000 per year. This loan by B&G for $442,000 is not included in the above table. It has a maturity date in January 2010; at 3.6% interest per annum.

Related Party Transactions

        B&G's majority stockholder provided assistance for the acquisition of Bud Jones, Trend Plastics, Inc., and T-K Specialty Company, Inc. Fees charged to is by our majority stockholder for the years ended December 31, 2003, 2002 and 2001 were approximately $0, $43,000 and $49,000, respectively.

        Ron-Lynn Enterprises, a company co-owned by Ron Coiro, East Coast Sales Manager of Paul-Son Gaming Supplies, Inc., provides miscellaneous table game plastic accessories to Paul-Son Gaming Supplies, Inc., including dealing shoes, money paddles and discard holders. For the fiscal year ended December 31, 2003 and the 111 days ended December 31, 2002, Paul-Son Gaming Supplies, Inc. paid Mr. Coiro approximately $113,300 and $12,000, respectively.

        We lease our main 34,000 square foot manufacturing facility located in San Luis, Rio Colorado, Mexico from an entity controlled by the family of Frank Moreno, General Manager of Paul-Son Mexicana. The lease is currently a one-year lease that expires on March 31, 2004, with an option to extend up to 12 months upon the same terms, but at a rental amount proportionate with the space that will be utilized by us, at our discretion. We expect to extend the lease for the same amount after March 31, 2004. We also owned an approximately 30,000 square foot facility, which was previously used for layout, furniture and machine shop production purposes. The facility was vacant and subsequently sold in the first quarter of 2003 for $450,000 to the General Manager of Paul-Son Mexicana and his family. (See Part II—Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 14).

        Neither Mr. Coiro nor Mr. Moreno is a director or executive officer. We require the Audit Committee of our board of directors review related party transactions involving our directors and executive officers.

24

Critical Accounting Policies and Estimates

        Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Certain of our accounting policies, including the depreciable lives of our assets, the recoverability of deferred tax assets, the allowance for doubtful accounts receivable, the allowance for obsolete or slowing moving inventories and the estimated cash flows in assessing the recoverability of long-lived assets require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on our historical experience, terms of existing contracts, our observance of industry trends, information provided by or gathered from our customers and information available from other outside sources, as appropriate. There can be no assurance that actual results will not differ from our estimates. The policies and estimates discussed below are considered by management to be those in which our policies, estimates and judgments have a significant impact on issues that are inherently uncertain. To provide a further understanding of the methodology we apply, our significant accounting policies are discussed where appropriate in this discussion and analysis and in the notes to our consolidated financial statements.

Property and Equipment

        We have significant capital invested in our property and equipment, which represents 30% of our total assets in 2003 and 34% in 2002. Judgments are made in determining the estimated useful lives of assets, salvage value to be assigned to the assets and if or when an asset has been impaired. These estimates and the accuracy thereof affect the amount of depreciation expense recognized in the financial results and whether we have a gain or a loss on the disposal of the asset. We assign lives to our assets based on our standard policy, which is established by management as representative of the useful life of each category of asset. The carrying value of property and equipment is reviewed whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. The factors considered by management in performing this assessment include: current operating results, trends and prospects, historical data, as well as the effect of obsolescence, demand, competition and other economic factors.

Goodwill and Other Intangible Assets

        We have approximately $3.3 million in goodwill and other intangible assets on our consolidated balance sheet at December 31, 2003 and $3.6 million at December 31, 2002, primarily resulting from our acquisition of other businesses. Effective November 1, 2002, in connection with the implementation of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and trademarks with indefinite useful lives are not amortized. We review goodwill and all intangibles with indefinite lives for impairment, annually as of January 1^st, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable in accordance with SFAS 142. We completed the annual goodwill impairment test, and as a result of this test, no impairment of goodwill was deemed necessary. Management derived the fair value of our goodwill with assistance from an independent appraiser.

        Other intangible assets such as patents, non-compete agreements and others with definite lives are amortized using the straight-line method, over their economic useful lives, ranging from three to fourteen years. We evaluate these intangible assets with definite lives for potential impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The annual evaluation of goodwill and other non-amortizing intangible assets requires the use of estimates about future operating results of each reporting unit to determine their estimated fair value. Changes in forecasted operations can materially affect these estimates.

25

Bad Debt Reserves

        We recognize allowance for doubtful accounts (bad debt reserves) to ensure trade receivables are not overstated due to uncollectibility. This allowance is maintained for all customers, based on a variety of factors, including the length of time the receivables are past due, economic conditions and trends, significant one-time events and historical experience. Various percentages are applied to the aged receivables. Additional amounts are recorded to the allowance based on our awareness of a particular customer's ability to meet its financial obligations. At December 31, 2003 and 2002, we had $382,000 and $390,000, respectively, in our bad debt reserves, representing 10.1% and 9.2%, respectively, of total accounts receivable. As with many estimates, management must make judgments about potential actions by third parties in establishing and evaluating our reserves for bad debts.

Inventory Reserves

        We reserve an estimated amount as a provision for slow-moving, excess and obsolete inventory that may not be saleable or recoverable. Analysis of inventory levels and future sales forecasts are some of the methodologies for estimating the inventory allowance reserves. Historical inventory usage activity, industry trends, and scrap rates are considered in determining the level of reserves. At December 31, 2003 and 2002, we had $882,000 and $1,053,000, respectively, in our inventory reserves, representing 14.1% and 15.6%, respectively, of total inventory. Approximately $745,000 of the inventory reserve in 2003 relates to Paul-Son Gaming Supplies, Inc. As with many estimates, management must make judgments about potential actions by third parties, including customer demands in establishing and evaluating our inventory reserves.

Recently Issued and Adopted Accounting Guidance

        In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R"), "Consolidation of Variable Interest Entities (revised December 2003)," clarifying FIN 46 and exempting certain entities from the provisions of FIN 46R. Generally, application of FIN 46R is required in financial statements of public entities that have interests in structures commonly referred to as special-purpose entities for periods ending after December 15, 2003, and, for other types of variable interest entities for periods ending after March 15, 2004. FIN 46R addresses the consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the company will hold a significant variable interest in, or have significant involvement with, an existing variable interest entity. The adoption of FIN 46R for provisions effective during 2003 did not have a material impact on our financial position or results of operations.

        In December 23, 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106." This statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, "Employers' Accounting for Pensions," No. 88, "Employers" Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The new rules require additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The new disclosures are effective for 2003 calendar year-end financial statements. We have adopted this statement as of December 31, 2003, and there was no material impact on our consolidated financial statements.

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Forward-Looking Information Statements and Risk Factors

        Through this Annual Report on Form 10-K, we make some forward-looking statements, which do to relate to historical or current facts, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable that, while considered reasonable by us, are inherently subject to significant business, economic and competitive risks and uncertainties, many of which are beyond our control and are subject to change. The statements also relate to our future prospects and anticipate performance, development and business strategies. These statements are identified by their use of terms and phrases such as anticipate, believe, could, would, estimate, expect, intend, may, plan, predict, project, pursue, will, continue, feel, or the negative or other variations thereof, and other similar terms and phrases, including references to assumptions.

        Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those expressed or implied. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent known and unknown risks and uncertainties. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.

        We urge you to carefully review the following discussion of the specific risks and uncertainties that affect our business. These include, but are not limited to, the following:

We are subject to risk related to our combination with B&G, including:

•

unexpected fees, charges, taxes or costs that could result from the Combination;



•

unexpected delays or cost in the integration of our business operations with B&G, Bud Jones and T-K.

Our success in the gaming industry depends in part on our ability to develop innovative products and would be adversely affected by:

•

a decline in the popularity of our gaming products with players and casinos;



•

a lack of success in developing new products, in particular our products with security features; and



•

an increase in the popularity of competitors' products.

Demand for our products would be adversely affected by:

•

a reduction in the growth rate of new and existing casinos and markets;



•

delays of scheduled openings of newly constructed or planned casinos; and



•

a decline in the public acceptance of gaming.

We operate in a highly regulated industry and our ability to sell our products in certain jurisdictions could be adversely affected by:

•

unfavorable public referendums or anti-gaming legislation;



•

unfavorable legislation affecting or directed at manufacturers or gaming operators, such as referendums to increase taxes on gaming revenues;



•

adverse changes in or findings of non-compliance with applicable governmental gaming regulations;

27

•

delays in approvals from regulatory agencies;



•

a limitation, conditioning, suspension or revocation of any of our gaming licenses; and



•

unfavorable determinations or challenges of suitability by gaming regulatory authorities with respect to our officers, directors or key employees.

Our intellectual property rights are subject to risks, including:

•

potential inability to obtain and maintain patents, trademarks and copyrights to protect our newly developed products and technology;



•

competitors' infringement upon our existing trademarks, patents and copyrights;



•

costs in defending our intellectual property rights against unexpected claims; and



•

approval of competitors' patent applications that may restrict our ability to compete effectively.

Our business is vulnerable to changing economic conditions, including:

•

unfavorable changes in economic conditions including those that affect the relative health of the gaming industry;



•

unfavorable changes in state taxation laws or application of such laws that could reduce our profitability;



•

political or economic instability in international markets;



•

changes in interest rates causing a reduction of investment income or in the value of market rate sensitive instruments;



•

fluctuations in foreign exchange rates, tariffs and other trade barriers; and



•

an inability to effectively hedge our foreign currency exposures.

Our outstanding debt obligations subject us to certain additional risks, including:

•

increasing our vulnerability to general adverse economic and industry conditions;



•

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and other general corporate requirements;



•

requiring a substantial portion of our cash flows from operations for the payment of interest on our indebtedness and reducing our ability to use our cash flows to fund working capital, capital expenditures, acquisitions, and general corporate requirements;



•

limiting our flexibility in planning for, or reacting to, changes in or business and the industry; and



•

creating a disadvantage to us compared to competitors with less indebtedness.

Our business operations are subject to other risks, including:

•

the loss or retirement of our key executives of other key employees;



•

adverse changes in the creditworthiness of parties with whom we have receivables;



•

the discovery of facts with respect to legal actions pending against us not presently known to us or determinations by judges, juries or other finders of fact which do not accord with our evaluation of the possible liability or outcome of existing litigation;

28

•

increased costs due to reliance on third party suppliers and contract manufacturers;



•

agreements with casinos in Native American jurisdictions which may subject us to sovereign immunity risk;



•

acts of war or terrorist incidents; and



•

any failures, difficulties or significant delays in implementing or maintaining our computer information systems could result in material adverse consequences to our business, including disruption of operations, loss of information and unanticipated increases in costs.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        Market Risk refers to the potential losses arising from changes in interest rates, foreign currency fluctuations and exchange rates, equity prices and commodity prices including the correlation among these factors and their volatility. We are primarily exposed to foreign currency fluctuations and exchange risk and interest rate risk.

        Foreign Currency Risk.    There are two types of foreign currency exchange risks that we may be subject to: transaction and translation gains and losses. Foreign exchange transaction gains or losses are distinguished from translation gains or losses as follows: (i) translation adjustments do not involve the movement of cash, they are accounting conversion calculations of an existing functional currency to a reporting currency and (ii) transaction gains or losses which are based on an actual transaction that requires formal payment at a future point in time.

        We are subject to foreign currency exchange risk relating to the translation of B&G's assets, liabilities, and income and expense accounts. The translation adjustment for assets and liabilities is reflected in the other accumulated comprehensive income (loss) caption included in the stockholders' equity section on our condensed consolidated balance sheet. B&G uses the local currency as its functional currency.

        The assets and liabilities of B&G are translated into United States of America dollars ("U.S. dollars") at the rate of exchange at the end of the period. The income and expense accounts are translated using the average rate of exchange during the period. B&G typically incurs gains or losses of specified foreign currency translations and these amounts are occasionally material. These gains and losses are reflected in our other accumulated comprehensive income (loss). The U.S. dollar weakened against the Euro from $0.95374 at December 31, 2002 to $0.79670 at December 31, 2003. For the twelve months ended December 31, 2003, we did not have any forwards, options or other derivative contracts in force.

        Although our manufacturing is partially performed in Mexico, the functional currency of its Mexican subsidiary is considered to be the U.S. dollar. The Mexican operation is funded by our U.S. subsidiary in U.S. dollars and the Mexican subsidiary does not have significant financial transactions other than the receipt of U.S. dollar funds to pay employees and the payment of certain costs to operate the manufacturing plants. Balance sheet accounts of the Mexican subsidiary are maintained and reported principally in U.S. dollar historical amounts. Therefore, the balance sheet of the Mexican subsidiary is not subject to translation adjustment risk.

        Because of the significant international operations, we are exposed to currency fluctuations and exchange risk on all loans and contracts in foreign currencies. We may engage in hedging as it relates to sale contracts between B&G and other foreign countries, which have currencies that are different than the Euro. Although we have not entered into any hedging agreements during the periods reflected in this report, there is a possibility that we may enter into a hedging agreement, dependent on the world money market conditions and other foreign currency fluctuation considerations. To minimize the financial impact of these items, we attempt to contract a majority of our services in U.S. dollars. We

29

continually monitor the currency exchange risk associated with all transactions not denominated in the U.S. dollar.

        Interest Rate Risk.    Changes in interest rates may result in changes in the fair market value of our financial instruments, interest income and interest expense. As of December 31, 2003, we had total interest bearing debt and capital lease obligations of approximately $4.2 million. Of this amount, approximately $3.1 million has a fixed rate of interest and we believe that these agreements have fair values, which approximate reported amounts.

        The remaining approximately $1.1 million of interest bearing obligations have variable interest rates which are tied to a (i) U.S.-based prime borrowing rate of interest, and (ii) LIBOR, or a London Interbank Offered Rate, for six-month dollar deposits, plus 362.5 basis points. To the extent there are significant changes to the U.S.-based prime lending rate, which is approximately 4.0% as of December 31, 2003, and to the extent there are significant increases to LIBOR, that would exceed a floor of 8%; we would have increased interest expense on approximately $1.1 million of debt over the succeeding ten years. If interest rates were to turn unfavorably by 1.0%, the resulting interest expense incurred would be approximately $11,000 over the next twelve-month period.

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Item 8. Financial Statements and Supplementary Data

31

PAUL-SON GAMING CORPORATION
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

32

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Paul-Son Gaming Corporation and Subsidiaries
Las Vegas, Nevada

        We have audited the accompanying consolidated balance sheets of Paul-Son Gaming Corporation and Subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and other comprehensive income, and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Paul-Son Gaming Corporation and Subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Note 1 to the consolidated financial statements, in 2002, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangibles."

DELOITTE & TOUCHE LLP

Las Vegas, Nevada
March 30, 2004

33

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Bourgogne et Grasset S.A.

        We have audited the consolidated statements of income, stockholders' equity, and cash flows of Etablissements Bourgogne et Grasset S.A. (a French Société Anonyme) and its subsidiary for the year ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the financial statements of The Bud Jones Company, Inc., a wholly owned subsidiary, which statements reflect total assets of 33% as of December 31, 2001, of the related consolidated totals, and total revenues of 27% for the year ended December 31, 2001, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it related to the amounts included for The Bud Jones Company, Inc., is based solely on the report of the other auditors.

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

        In our opinion, based on our audit and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Etablissements Bourgogne et Grasset S.A. and its subsidiary for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

/s/ Mazars LLP
New York, NY

March 22, 2002

34

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholder
The Bud Jones Company, Inc.

        We have audited the statements of operations, retained earnings, comprehensive loss and accumulated other comprehensive loss and cash flows of The Bud Jones Company, Inc. for the year ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

        In our opinion, the financial statements referred to above present fairly, in all material respects, the results of The Bud Jones Company, Inc. operations and comprehensive loss and its cash flows for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

/s/ Bradshaw, Smith & Co., LLP

Las Vegas, Nevada
February 15, 2002
(Except for Note 10, as to which the date is April 23, 2002).

35

PAUL-SON GAMING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,

(dollars in thousands, except share amounts)

See Notes to Consolidated Financial Statements.

36

PAUL-SON GAMING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31,

(dollars in thousands, except per share amounts)

See Notes to Consolidated Financial Statements.

37

PAUL-SON GAMING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)

Years ended December 31, 2003, 2002 and 2001

(dollars in thousands, except share amounts)

See Notes to Consolidated Financial Statements.

38

PAUL-SON GAMING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31,

(dollars in thousands)