PDS GAMING CORP - 10-K Annual Report

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

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

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

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

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

As of June 30, 2003, the last business day of the Registrant's most recently completed second fiscal quarter, the approximate market value of stock held by non-affiliates was $3,671,000 based upon 2,622,410 shares held by such persons and the closing price on June 30, 2003 (the last day of trading in the month) of $1.40.

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

The number of shares outstanding of the Registrant's $0.01 par value common stock at March 5, 2004 was 3,806,222.

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

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

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

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

The Company entered into casino operations on January 25, 2001 when the Nevada Gaming Commission issued its final approval for the Company's acquisition of The Gambler casino, a nonrestricted licensed casino located in downtown Reno, Nevada. The Gambler was re-themed and re-named as Rocky's Casino and Sports Bar ("Rocky's") in early 2002. Due to continuing operating losses, the Company sought and was granted approval from the Nevada Gaming Control Board to temporarily cease operations at Rocky's effective January 31, 2004. Prior to that time, Rocky's was licensed to operate 180 slot machines. The Company is evaluating its future alternatives for Rocky's, which include sale, lease or joint venture of the property.

In February 2003, the Company announced that it had entered into a letter of intent with respect to a proposal submitted by a management group consisting of Johan P. Finley, the Company's Chairman and Chief Executive Officer, Lona M.B. Finley, the Company's Executive Vice President, Secretary and Chief Administrative Officer, and Peter D. Cleary, the Company's President, Chief Operating Officer and Treasurer (collectively, the "Management Group"), to acquire all of the

approximately 69% of the outstanding shares of the Company's common stock not already owned by the Management Group for $1.25 per share in cash and an additional $1.50 per share in deferred cash payment rights. The deferred payment rights represent the right to receive three equal installments of $.50 per share of common stock on, respectively, the first, second and third anniversaries of the closing of the transaction. After the final deferred payment of $.50 is made on the third anniversary, total cash payments per share will total $2.75. The holders of such deferred payment rights will have no rights as shareholders of the Company, and the rights themselves will not be transferable except pursuant to testamentary disposition or by operation of law.

The proposal is subject to, among other things, the execution of a definitive agreement, approval by a committee of the Company's independent directors and by a majority of the Company's shares not owned by the Management Group, the procuring of all necessary consents of the Company's commercial lenders, the securing of required approvals from all gaming regulatory agencies, the obtaining of the necessary financing, and the receipt by the Company of a favorable fairness opinion from an investment bank. The Management Group intends to maintain the Company's status as a public reporting company under the Securities Exchange Act of 1934 until the outstanding shares of the Company's common stock not already owned by the Management Group are acquired. The Management Group further intends to keep the Company's operations intact and maintain its headquarters in Las Vegas, Nevada.

Under the terms of the letter of intent, which has been extended through April 15, 2004, the Company will pay certain fees and costs associated with the transaction, consisting primarily of legal costs and investment banking fees. During the year ended December 31, 2003, $729,000 of such costs were paid from general corporate funds. Management estimates that additional costs in the range of $100,000 to $200,000 will be paid, with said costs also being paid from general corporate funds.

On February 6, 2004, the Company announced that the Management Group received a financing commitment of up to $5.5 million that would be used toward the proposed buyout.

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

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

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

intangibles and other assets of the Table Games and Casino Slot Exchange Divisions. Pre-tax operating losses for the discontinued operations were $2.5 million and $2.4 million in 2002 and 2001, respectively. Additional information on Discontinued Operations is contained in Note 7 to the Company's Consolidated Financial Statements included in Part IV, Item 15.

The casino industry in the United States, and the gaming industry in general, have experienced substantial growth in recent years. Prior to 1979, high stakes gaming activities were limited to Nevada. In 1979, casino gaming was legalized in New Jersey. Between 1979 and 1988, gaming activities by various Native American tribes developed, leading to the federal enactment of the Indian Gaming Regulatory Act. The growth of Native American gaming served as a catalyst for many jurisdictions to consider non-Native American casino gaming and lotteries because of their potential as a source of government revenue. Since 1989, various forms of casino gaming have been legalized in numerous states, and many states either conduct lotteries or participate in multi-state lotteries. In addition, gaming facilities operate on cruise ships sailing out of other states such as Florida and Texas. Several other jurisdictions (including, for this purpose, Native American tribes) have approved or are considering approval of some form of legalized gaming. No assurance can be given as to the extent that additional jurisdictions will adopt legislation or ordinances permitting casino or other legalized gaming in the future, or the nature, timing and extent of legalized gaming development in any jurisdiction.

The Company is licensed or registered to serve customers in 10 states and in certain Native American jurisdictions in California, Iowa, New Mexico and North Carolina. Most of the casino operators that purchase, finance or lease gaming equipment from the Company cater to customers that live nearby or who drive to their facilities, and most of these operators are not heavily dependent upon convention events or airline travel to support their customer base. Those distinctions may lessen any negative economic impact the Company might suffer, as compared to other gaming companies, from economic downturns in the convention and airline travel industries, including those that might be caused by the war against terrorism.

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

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

generally obtains the funds necessary for its direct finance leases or collateralized loans by pledging those assets against recourse or non-recourse borrowings or by selling all or a portion of its interest in the payment stream, often simultaneously with its origination of financing transactions.

The Company also offers its customers operating leases, which afford the customer lower monthly payments and off-balance sheet financing. The Company believes that its operating lease program promotes its strategic objective of increasing recurring revenues. The Company appropriately retains ownership of the gaming equipment under operating leases, and at the end of the applicable lease term the Company offers the customer an option to purchase the gaming equipment at its then-determined fair market value, to extend the lease term or return the equipment. The Company receives rental income under a non-cancelable operating lease, which ranges from 6 to 48 months and has a typical term of 36 months. The casino operator incurs rental expense, and avoids reflecting an asset and related liability on its balance sheet. Returned machines are held for lease or resale by the Company.

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

In 2001, the Company acquired The Gambler in Reno, Nevada. The Gambler was renamed Rocky's Casino and Sports Bar in the first quarter 2002 after undergoing extensive renovation and retheming. Due to continuing operating losses, the Company sought and was granted approval from the Nevada Gaming Control Board to temporarily cease operations at Rocky's effective January 31, 2004. Prior to that time, Rocky's was licensed to operate 180 slot machines. The Company is evaluating its future alternatives for Rocky's, which include sale, lease or joint venture of the property.

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

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

Historically, the Company has experienced significant nonrecurring revenues in connection with the completion of large gaming equipment financing transactions. During 2003, revenues from two of the Company's customers, as a percentage of total revenue, were 47% and 20%. Revenues from two of the Company's customers, as a percentage of 2002 revenue, were 24% and 24%. Revenues from one of the Company's customers, as a percentage of 2001 revenue, was 29%. No other customers in these years contributed 10% or more of total revenue. Due to the non-recurring nature of its large gaming

equipment financing transactions, the Company cannot estimate the relative level of revenues that may be derived from one or several customers during 2004.

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

Jurisdiction		Type of License
California		Registered Manufacturer/Distributor
Colorado		Manufacturer/Distributor
Illinois		Supplier
Indiana		Supplier
Iowa		Distributor
Minnesota		Manufacturer/Distributor
Mississippi		Manufacturer/Distributor
Nevada		Manufacturer, Distributor, Slot Route Operator, Casino Operator
New Jersey		Casino Service Industry
New Mexico		Manufacturer/Distributor

In 2003, the Company renewed its registration in California and its licenses in Illinois, Minnesota and New Mexico, and it filed renewal applications in the normal course in Colorado, Iowa, Mississippi and New Jersey. The Company believes all of its pending applications will be approved by the applicable gaming regulatory authorities.

The Company is also licensed as a gaming Vendor or Supplier with several Native American tribes in California, including Barona, Cabazon, Dry Creek, Middletown Rancheria, Paskenta and Picayune (Chukchansi), and has been licensed by other tribal gaming commissions in Iowa, New Mexico and North Carolina. The Company will renew those licenses and file applications for new licenses as business dictates.

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

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

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

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

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

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

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

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

The Nevada Gaming Authorities may investigate any individual who has a material relationship or involvement with the Company in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of

the Company must file applications with the Nevada Gaming Authorities and may be required to become licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in the Company's gaming activities may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation incurred by the Nevada Gaming Authorities. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in corporate position.

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

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

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

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

The Nevada Act requires any person who acquires more than five percent of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires the beneficial owners of more than 10 percent of the Company's voting securities apply to the Nevada Commission for a finding of suitability within 30 days after the chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10 percent, but not more than 15 percent, of the Company's voting securities, may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the Board of Directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting

securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies, or operations and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of the investigation incurred by the Nevada Gaming Authorities.

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

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

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

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

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

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

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

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

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

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

Federal Registration. The manufacture and storage of devices used in gaming are governed by the Johnson Act of 1951, as amended by the Federal Gambling Devices Act of 1962 (collectively, the "Federal Acts"). The Federal Acts make it unlawful for a person to manufacture, transport, or receive gaming machines, gaming devices or components across interstate lines unless that person has first registered with the Attorney General of the United States Department of Justice. In addition, gambling device identification and record keeping requirements are imposed by the Federal Acts. Violation of the Federal Acts may result in seizure and forfeiture of the equipment, as well as other penalties. The Company has complied with the registration requirements of the Federal Acts.

Native American Gaming Regulation. Federal law, tribal-state compacts, and tribal gaming regulations govern gaming on Native American lands. The Indian Gaming Regulatory Act of 1988 (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 (the "NIGC") and the Secretary of the United States Department of the Interior. The NIGC has authority to issue regulations governing tribal gaming activities, approve tribal ordinances for regulating gaming, and approve management agreements for gaming facilities, conduct investigations and monitor tribal gaming generally. The IGRA is subject to interpretation by the NIGC and may be subject to judicial and legislative clarification or amendment. The IGRA requires that the tribe and the state enter into a written agreement, a tribal-state compact to govern gaming activities generally associated with casino gaming (termed "Class III" gaming under the IGRA). A tribal-state compact is generally not required for gaming generally described as "bingo games" (termed "Class II" gaming under the IGRA). Tribal-state compacts vary from state-to-state and in most 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 pursuant to the terms of the applicable tribal-state compact to regulate casino-style (Class III) gaming related activity by the tribe. Indian tribes are sovereign in their own government systems, which have primary regulatory authority over gaming on land within the tribes' jurisdiction. The Company distributes both Class II and Class III gaming equipment to Native American tribes.

Changes in federal, state or tribal laws or ordinances may limit or otherwise materially affect the types of gaming that may be conducted on Native American land. In addition, numerous lawsuits nationwide seek to limit or expand Native American gaming activities, the outcomes and impacts of which cannot be predicted. In this regard, on March 1, 2004, the United States Supreme Court declined to consider on appeal recent decisions made by the Eighth Circuit and the Tenth Circuit of the United States Court of Appeals. Previously, the Eighth Circuit of the United States Court of Appeals held that the Federal Acts do apply to Class II technological aids, although the court also found that the pull tab player stations at issue in that case were not Federal Acts devices. In addition, the Tenth Circuit of the United States Court of Appeals held that the Federal Acts did not prohibit the use of technological aids to Class II gaming on Native American land. As a result of the Supreme Court's refusal to reconsider the lower court decisions, the sale of Class II technological aids to, and the use of such aids by, Native American tribes have been upheld as legally permissible.

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

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

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

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

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

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

The Company does not rely on any patents, trademarks, licenses or franchises with respect to its finance and lease operations. Previously, in conjunction with its discontinued operations, the Company entered into agreements with third parties to secure various intellectual property rights with respect to certain table games and related technology. As part of its decision to discontinue certain operations,

the Company either terminated said agreements or entered into mutual termination agreements with respect to said agreements.

As of December 31, 2003, the Company employed 64 persons, including five in direct sales and marketing, three in retail store sales, 11 in equipment remarketing, 16 in general and administrative functions (including accounting, credit, legal, compliance and human resources) and 29 in casino operations at Rocky's. Due to the temporary closure of Rocky's on January 31, 2004, all persons employed there were terminated.

The Company's corporate offices and its equipment remarketing facilities are located in approximately 60,000 square feet of leased space in Las Vegas, Nevada. The Company pays monthly rent of approximately $52,000 pursuant to leases expiring through December 31, 2004. As of December 31, 2003, 27,500 square feet of this leased space was subleased for payments aggregating $15,400 per month. These subleases extend for various terms through December 31, 2004. The Company considers its facilities as adequate and suitable for the purposes they serve.

In addition, the Company owns a 6,500 square foot building situated on approximately .15 acres located in downtown Reno, Nevada where it operated Rocky's Casino and Sports Bar until it was closed on January 31, 2004. This land and building collateralize, with other assets, a $4 million line of credit that bears interest at the rate of prime plus 1.5% and matures in April 2004. As of December 31, 2003, the outstanding balance on this line of credit was $3,816,000.

Tekbilt, Inc. In May 2002, the Company received notification that Tekbilt, Inc. ("Claimant") had submitted a Demand for Arbitration to the American Arbitration Association alleging breach of a Distributor Agreement (the "Agreement") in connection with the Company's discontinued operations. In the notification, Claimant alleged that such breach has caused Claimant to sustain substantial damages. The hearing before the American Arbitration Association panel was scheduled to begin in February 2004. In February 2004, prior to the arbitration hearing, the Company and the Claimant agreed to settle the dispute. Under the settlement agreement, without any admission of fault or liability by either party, the Company agreed to pay the Claimant $450,000. The payment will be made in two installments. The first installment, of $200,000, was paid in March 2004 and the second installment, of $250,000, will be paid in August 2004. The settlement expense and corresponding liability are reflected in the Company's Consolidated Financial Statements included in Part IV, Item 15.

Heller EMX, Inc. On October 3, 2003, the Company filed a Complaint for Declaratory Relief against Heller EMX, Inc. and Does 1 through 100 in the United States District Court for the District of Nevada (the "Nevada Case"). The Complaint was provided to legal counsel for the defendants, but was not served pending a possible negotiated resolution. On October 16, 2003, the Company was served with a Summons and Complaint for Fraud, Conversion and Other Claims, filed by Heller EMX, Inc., Heller Financial Leasing, Inc., and General Electric Capital Corporation (collectively, "GE") in the United States District Court for the Southern District of New York, being case number 03 CV-6187 (the "New York Case"). Both cases sought a determination of the respective rights and duties of the parties under four Sale and Purchase Agreements, a Nonrecourse Proceeds Sharing Agreement and related agreements and documents. Plaintiffs in the New York Case also sought to recover compensatory and punitive damages for at least $5 million for alleged conversion and an order enjoining the Company from withholding certain payments, and compensatory and punitive damages in

amounts to be determined at trial for alleged fraud, negligent misrepresentation, tortious interference with prospective business advantage/relations, breach of contract and unjust enrichment.

In February 2004, the Company and GE settled the dispute described in the previous paragraph. Under this agreement, the Company purchased GE's rights, title and interest in certain leases, they terminated the Nonrecourse Proceeds Sharing Agreement dated December 31, 2001, certain escrowed funds were released to the Company, GE terminated its interests in a warrant held by GE to purchase common stock of the Company and GE restructured certain covenants in existing loan documents between GE and the Company. See also Note 11, Commitments and Contingencies, to the Company's Consolidated Financial Statements included in Part IV, Item 15.

The Company held its annual meeting of shareholders on December 29, 2003 for the purposes of (1) electing members of the Board of Directors of the Company, and (2) ratifying the appointment of Piercy, Bowler, Taylor and Kern, Certified Public Accountants and Business Advisors as the independent accountants of the Company for the fiscal year ended December 31, 2003.

There were 3,806,222 shares of Common Stock entitled to vote at the meeting and a total of 3,751,420 shares (98.6%) were represented at the meeting. The shareholder voting was as follows:

	For	Withhold Authority
Johan P. Finley	3,641,690	109,730
Peter D. Cleary	3,642,650	108,770
Joel M. Koonce	3,639,100	112,320
James L. Morrell	3,647,600	103,820
Patrick R. Cruzen	3,647,600	103,820
Lona M.B. Finley	3,627,190	124,230

For		Withheld/Against		Abstain
3,728,260		21,200		1,960

Based on the votes cast at the meeting, the ballot items relating to the election of directors and the ratification of auditors were approved.

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

	Price Range of Common Stock
	2003				2002
	High		Low		High		Low
First Quarter	$	2.08	$	0.82	$	4.92	$	3.00
Second Quarter		1.58		1.17		4.15		0.90
Third Quarter		1.64		1.26		1.50		0.43
Fourth Quarter		2.30		1.45		1.77		0.81

As of March 5, 2004, the Company's common stock was held by 52 holders of record and an estimated 1,000 additional beneficial owners.

No dividends were paid during the years ended December 31, 2003 and 2002. The Company does not anticipate that it will pay cash dividends on its common stock in the foreseeable future. Certain of the Company's financing agreements restrict the payment of dividends. For additional information on restrictions on the payment of dividends, see Note 4 to the Company's Consolidated Financial Statements included in Part IV, Item 15.

With respect to equity compensation plans, the Company has adopted the 1993 Stock Option Plan (the "1993 Plan") and the 2002 Stock Option Plan (the "2002 Plan") that are authorized to issue up to 1,600,000 shares and 800,000 shares, respectively, of the Company's common stock. Although the 1993 Plan expired in April 2003, the options issued under the 1993 Plan shall continue to be exercisable until the relevant dates set forth in the individual stock option grants. All options issued since the expiration of the 1993 Plan have been issued under the 2002 Plan, which was approved by the shareholders in May 2002. The following table summarizes the Company's equity compensation plans that have been approved by stockholders and have not been approved by stockholders.

During the year ended December 31, 2003, the Company did not issue any unregistered securities.

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

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

The Company is engaged in the business of leasing and other financing of gaming equipment and remarketing previously leased gaming devices to casino operators. The gaming equipment financed by the Company consists mainly of slot machines, video gaming machines and other gaming devices. In addition, the Company finances furniture, fixtures and other gaming-related equipment, including gaming tables and chairs, restaurant and hotel furniture, vehicles, security and surveillance equipment, computers and other office equipment. The Company believes it is currently the only independent leasing company licensed (or registered, as the case may be) in the states of Nevada, New Jersey, California, Colorado, Illinois, Indiana, Iowa, Minnesota, Mississippi and New Mexico to provide this financing alternative. In early 2001, the Company received a nonrestricted gaming license to operate The Gambler, now known as Rocky's Casino and Sports Bar, in Reno, Nevada. Due to continuing operating losses, the Company sought and was granted approval from the Nevada Gaming Control Board to temporarily cease operations at Rocky's effective January 31, 2004. Prior to that time, Rocky's was licensed to operate 180 slot machines. The Company is evaluating its future alternatives for Rocky's, which include sale, lease or joint venture of the property.

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

	2003		2002		2001
Financing transactions originated and sold to third parties	$	60,225	$	5,400	$	1,000
Financing transactions originated for the Company's portfolio		68,496		46,400		43,088

	$	128,721	$	51,800	$	44,088

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

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

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

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

Estimates related to the economic life of the equipment and present value factors can influence the classification of a lease. The Company selects present value factors based upon perceived economic risk associated with the transaction relative to alternatives. The economic life of the related equipment is generally determined by reference to industry practices.

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

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

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

During 2003, 2002 and 2001, the Company had net income (loss) of $659,000, $(4,379,000) and $1,430,000, respectively, on revenues of $45.2 million in 2003, $40.3 million in 2002 and $39.1 million in 2001.

The Company's operating results are subject to quarterly and annual fluctuations resulting from a variety of factors, including variations in the mix of financing transactions between operating leases, direct finance leases and notes receivable, changes in the gaming industry which affect the demand for remarketed gaming devices, economic conditions in which a detrimental change can cause customers to delay new investments or increase the Company's bad debt experience and the level of fee income obtained through the sale of leases or financing transactions.

The Company's quarterly operating results, including net income, have historically fluctuated due to the timing of completion of large financing transactions, as well as the timing of recognition of the resulting fee income upon subsequent sale. The years 2003, 2002 and 2001 are no exception. Transactions, particularly individually significant ones, can be in the negotiation and documentation stages for several months, and recognition of the resulting revenue and fee income by the Company may fluctuate greatly from quarter to quarter. Thus, the results of any quarter are not necessarily indicative of the results that may be expected for any other period.

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

The table below summarizes the results of equipment sales and sales-type leases (in thousands):

		Years Ended December 31,
		2003		2002		2001
Revenues:
	Sales-type leases	$	1,185	$	4,523	$	1,019
	Equipment sales		2,873		3,725		5,002
	Sale of equipment at lease termination		2,767		10,659		4,957

			6,825		18,907		10,978

Costs of goods sold:
	Sales-type leases		866		3,878		807
	Equipment sales		2,758		3,047		4,488
	Sale of equipment at lease termination		2,715		10,385		4,469

			6,339		17,310		9,764

Gross margin		$	486	$	1,597	$	1,214

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

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

In 2002, one large finance lease was terminated early, and the lessee purchased the equipment for cash. The resulting transaction was reported as a sale of equipment at lease termination, and accounted for the substantial increase in revenue from and costs of goods sold for the sale of equipment at lease termination in 2002.

	Years Ended December 31,
	2003			2002			2001
Operating lease rentals	$	28,193		$	13,691		$	11,142
Finance income		4,938			4,911			10,912
Depreciation on operating leases		(19,631	)		(9,388	)		(7,642	)

	$	13,500		$	9,214		$	14,412

Finance and lease gross margin increased in 2003 primarily as a result of the Company's significantly larger portfolio of operating leases in 2003. Equipment under operating leases, net, was $77.9 million and $42.5 million at December 31, 2003 and 2002, respectively. Notes and finance leases receivable were $19.6 million and $32.1 million at December 31, 2003 and 2002, respectively. The changes reflect the Company's increased emphasis on originating a greater proportion of operating leases than notes and finance leases. The Company expects that it will continue to originate a greater proportion of operating leases to hold in its portfolio. Consequently, the portfolio of notes and finance leases is expected to continue to decline in 2004 or increase at a lesser percentage than the increase in operating leases.

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

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

Finance and lease gross margin declined from 2001 to 2002 primarily as a result of non-recurring finance income recognized in 2001 related to the workout and settlement of claims related to the Company's then largest customer.

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

Fee income was $4.4 million, $1.1 million and $4.7 million in 2003, 2002 and 2001, respectively. Approximately $3.3 million of the fee income in 2003 was attributable to one customer, and approximately all of the fee income in 2001 was attributable to one customer.

Interest expense increased to $10.7 million in 2003 from $7.8 million in 2002 due to higher levels of borrowings combined with generally higher costs of borrowing. Interest expense decreased to $7.8 million in 2002 from $9.7 million in 2001 due to lower levels of borrowings combined with generally lower costs of borrowing.

Selling, general and administrative expenses increased to $5.1 million in 2003 from $4.0 million in 2002. The increase of $1.1 million is primarily the result of increased litigation and settlement expenses of $963,000.

Selling, general and administrative expenses decreased to $4.0 million in 2002 from $5.6 million in 2001. The decrease of $1.6 million reflects increased capitalized initial direct costs of $519,000, due to higher originations in 2002 as compared to 2001, legal fees and settlement costs of $355,000 that were incurred in 2001, but not in 2002, in connection with the bankruptcy of the Company's then most significant customer in 2001 and the resolution of a series of claims among the interested parties, and costs of $225,000 that were incurred in 2001, but not in 2002, associated with the Senior Subordinated Debt exchange offer.

Collection and asset impairment provisions are established for the Company's estimates of the amounts expected to be lost from (i) doubtful accounts, notes and direct finance leases receivable, reflected as provisions for doubtful accounts and deducted from notes, accounts and leases receivable, (ii) an impairment in the estimated net realizable value of equipment held for sale or lease, reflected as a component of selling, general and administrative expense and deducted from equipment held for sale or lease, and (iii) an impairment in the estimated net realizable value of equipment under operating leases, reflected as a component of depreciation on operating leases and deducted from equipment under operating leases. See Schedule II, Valuation and Qualifying Accounts and Reserves, included in Part IV, Item 15.

The Company's effective tax rate was approximately 38% for 2003. The effective rate for 2003 is higher than the federal statutory rate of 34% due primarily to state income taxes and costs that are non-deductible for federal income tax purposes. The Company's effective tax benefit rate was approximately 32% for 2002. The effective rate for 2002 is lower than the federal statutory rate of 34% due primarily to miscellaneous costs that are non-deductible for federal income tax purposes and therefore do not provide any tax benefit. The Company's effective tax rate was approximately 45% for 2001. The effective rate for 2001 is higher than the federal statutory rate of 34% due primarily to non-deductible amortization of asset/loan acquisition costs acquired through the issuance of warrants.

The Company's deferred tax assets include net operating loss ("NOL") carryovers of approximately $310,000, which expire in 2023. The NOL may also be carried back up to two years. The NOL is available to offset federal income tax liability.

As of December 31, 2003, the Company had $2.0 million in cash and cash equivalents, and $3.1 million in availability on lines of credit. The funds necessary to support the Company's activities have been provided by cash flows generated primarily from operating activities and various forms of recourse and non-recourse borrowings from banks, financial institutions and financial intermediaries. Payments under the Company's borrowings and the maturities of its borrowings are typically structured to match the payments under the leases and notes collateralizing the borrowings. The Company manages its portfolio to optimize concentration among customers and geographic markets. To achieve this goal, it will from time to time sell or externally finance transactions originated, including those held in its investment portfolio. The Company continues to explore other possible sources of capital, however, there is no assurance that additional capital, if required, can be obtained or will be available on terms acceptable to the Company.

In February 2003, the Company announced that it had entered into a letter of intent with respect to a proposal submitted by the Management Group to acquire all of the approximately 69% of the outstanding shares of the Company's common stock not already owned by the Management Group. Under the terms of the letter of intent, the Company will pay certain fees and costs associated with the transaction, consisting primarily of legal costs and investment banking fees. During the year ended December 31, 2003, $729,000 of such costs were paid from general corporate funds. Management estimates that remaining such costs will be in the range of $100,000 to $200,000, with said costs being paid from general corporate funds.

On February 6, 2004, the Company announced the receipt of a financing commitment from Cochran Road, LLC, a New York-based lender ("Cochran"), in the maximum amount of $9.5 million. Of the funds available, the Company has drawn $6.1 million as of March 12, 2004. The funds drawn have been used for the redemption of the Company's outstanding 10% and 12% Senior Subordinated Notes at par and working capital. At the time of redemption of the Senior Subordinated Notes, in March 2004, the outstanding principal balance of the notes was $5.5 million, of which $3.3 million was due in July 2004.

Also on February 6, 2004, the Company announced that the Management Group had received a financing commitment from Cochran in a maximum principal amount of $5.5 million. The proceeds from this financing are intended to be used to acquire all of the approximately 69% of the outstanding shares of the Company's common stock not already owned by the Management Group.

The Company prepares its balance sheet in an unclassified format, as is customary in its industry, because the working capital concept is not particularly meaningful for its business.

Net cash provided by continuing operating activities amounted to $38.1 million in 2003, compared to $29.0 million in 2002. The increase in cash provided by continuing operating activities of $9.1 million primarily reflects an increase in cash earnings from operations of $12.9 million. With respect to the Company's discontinued operating activities, the Company used net cash of $1.6 million in 2002.

The Company's investing activities used net cash of $53.6 million in 2003, compared to $35.0 million in 2002. The increase of $18.6 million in net cash used in investing activities resulted primarily from an increase of $21.2 million in the purchases of equipment to be placed under operating leases, which were $54.7 million in 2003 and $33.5 million in 2002. The increase in the purchases of equipment to be placed under operating leases and the resultant increase in net cash used in investing activities reflect the Company's emphasis on originating operating leases rather than notes and direct finance leases.

The Company's financing activities provided $17.4 million in net cash in 2003, compared to $3.6 million in 2002. The increase of $13.8 million in net cash provided by financing activities was due primarily to an increase of $38.9 million in proceeds from borrowings, offset, in part, by an increase of $16.3 million in repayments of borrowings and an increase of $8.1 million in restricted cash.

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

The Company's current financial resources, including estimated cash flows from future operations and the lines of credit (which total approximately $12.2 million, of which $3.1 million is available as of December 31, 2003), are expected to be sufficient to fund the Company's anticipated working capital needs. In addition to the borrowing activities described previously, the Company has developed a network of financial institutions from which it borrows money related to specific financial transactions and to which it sells financial transactions on a regular basis. No assurance can be given that the Company will be successful in completing this financing.

As of December 31, 2003, the Company's contractual cash obligations under its lines of credit, equipment notes, subordinated debt and operating leases for the next five years are as follows (in thousands):

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

Certain statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as "believe," "may," "will," "expect," "anticipate," "intend," "designed," "estimate," "should" or "continue" or the negatives thereof or other variations thereon or comparable terminology. Such forward-looking statements involve known or unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: strict regulation and changes in regulations imposed by gaming authorities; the limitation, conditioning, suspension or revocation of gaming licenses and entitlements held by the Company; new legislation, regulations, and court decisions that could impact Native

American Gaming; competition the Company faces or may face in the future; the effects of the proposed going private transaction; uncertainty of market acceptance of the Company's products and services; uncertainties regarding the disposition of Rocky's; a decline in the public acceptance of gaming; unfavorable public referendums or legislation, particularly as they relate to gaming; the inability of the Company to continue to obtain adequate financing on acceptable terms; the inability of the Company to recover its investment in gaming equipment leased under operating leases; the risk of default by the Company's customers with respect to its financing transactions; the Company's dependence on key employees; potential fluctuations in the Company's quarterly results; general economic and business conditions and other factors detailed from time to time in the Company's reports filed with the Securities and Exchange Commission (the "SEC").

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

Effects of Proposed Going Private Transaction. The proposed going private transaction announced in February 2003 has caused and may continue to cause substantial time commitments for the Company's executive officers and directors. Should these matters distract management from the Company's business, the Company's operations could be adversely affected. In addition to the time commitments, the Company has paid $729,000 in legal costs and investment banking fees relating to the proposed going private transaction during 2003, and estimates $100,000 to $200,000 of additional costs in 2004.

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

Native American Gaming. In recent years, a growing portion of the Company's business has been related to the financing of gaming equipment used by Native American gaming operations. New legislation, regulations and court decisions could impact the manner in which Native American gaming operations are conducted, thus potentially impacting the Company's ability to recoup its investment in equipment that is leased to these operations, as well as its ability to generate additional transactions with Native American tribes. Additionally, Native American tribes in the United States generally enjoy sovereign immunity from lawsuits, similar to that of the United States government. Although the Company generally obtains a waiver of sovereign immunity, there can be no assurance that a tribe will not assert sovereign immunity, even if such right has been waived. The law regarding sovereign immunity is unsettled. If any Native American tribe defaults and successfully asserts its right of

sovereign immunity, the Company's ability to recover its investment and originate and sell future Native American gaming transactions could be materially adversely affected.

Competition. Significant competition encountered by the Company may have a materially adverse effect on the Company, and there can be no assurance that the Company will be able to compete successfully against current and future competitors. In recent years, the Company has focused primarily on providing financing to the gaming industry, including remarketing previously leased gaming machines to casino operators in the United States. In the gaming equipment financing market, the Company competes primarily with equipment manufacturers and to a lesser extent with leasing companies, commercial banks and other financial institutions. Certain of the Company's competitors are significantly larger and have substantially greater resources than the Company. With regard to the Company's investment in Rocky's, the Company temporarily closed the facility in January 2004 due to continued operating losses. There are many locations that compete directly or indirectly with Rocky's in the Reno, Nevada market. Gaming operators in that market have additionally come under significant competitive pressure from Native American owned casinos operating in Northern California. These factors could negatively impact the Company's ability to fully recover its investment in Rocky's.

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

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

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

Risks Relating to Financing Transactions. The Company has funded selected gaming equipment transactions entirely with its own working capital or with borrowed funds rather than immediately selling the transactions to institutional investors. In certain situations, the Company retains a portion of the transactions it originates. This approach requires substantial capital and places the Company at risk for its investment in the transactions, which may subject the Company to greater loss in the event of a default by the lessee or borrower, or an inability to sell the transactions to institutional investors after a period of temporary investment by the Company. In connection with its financing transactions, the Company's level of risk depends primarily on the creditworthiness of the lessee or borrower and the underlying collateral. No assurance can be given that the Company will not incur significant losses with respect to financing transactions in the future, or that such losses will not have a materially adverse effect on the Company's financial condition.

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

Potential Fluctuations in Results. The Company's quarterly results have historically fluctuated due to the timing of completion of large financing transactions, as well as the timing of recognition of the resulting fee income upon the completion of brokered transactions. Thus, the results of any quarter are not necessarily indicative of the results that may be expected for any other interim period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Control by Current Management. Johan P. Finley, the Company's founder and Chief Executive Officer, owns approximately 23.5% of the Company's outstanding common stock. In addition, Mr. Finley's wife and children own approximately 7.0% of the Company's outstanding common stock. Thus, Mr. Finley effectively controls the election of all members of the Company's Board of Directors and determines all corporate actions. Such ownership may discourage acquisition of large blocks of the Company's securities and may depress the price of the common stock and have an anti-takeover effect.

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

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

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

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

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

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

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

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

The Company evaluated the effectiveness of its disclosure controls and procedures as of the end of the 2003 fiscal year. This evaluation was done with the participation of the Company's Chief Executive Officer and the Company's President, Chief Operating Officer, Treasurer and Interim Chief Financial Officer.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to the Company's management, as appropriate to allow timely decisions regarding required disclosure.

The Company's management does not expect that the Company's disclosure controls and procedures or the Company's internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of a control. The design of a control system is also based upon certain

assumptions about the likelihood of future events, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Based on this evaluation, the Company concluded that, subject to the limitations noted above, its disclosure controls and procedures are effective to ensure that information the Company is required to disclose in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

There were no changes in the Company's internal controls over financial reporting that occurred during the Company's last fiscal quarter, i.e., the quarter ended December 31, 2003, that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

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

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

JOHAN P. FINLEY, age 42, is the founder of the Company and has been its Chief Executive Officer and Chairman of the Board of Directors since the Company's inception in February 1988. He was President of the Company from its inception to July 1999. In addition, Mr. Finley was the President and Chief Executive Officer of RCM Inc. and Home Products, Inc. from 1991 to 1994.

PETER D. CLEARY, age 46, has been a member of the Company's Board of Directors since January 1996 and has been President, Chief Operating Officer and Treasurer of the Company since July 1999 and has served as Interim Chief Financial Officer since August 2002. He was Executive Vice President of the Company from November 1998 to July 1999. Prior to that, Mr. Cleary served as Vice President and Chief Financial Officer from September 1995 to November 1998. From 1980 to 1995, Mr. Cleary served in various positions with Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP), most recently as Audit Manager.

JOEL M. KOONCE, age 65, has been a member of the Company's Board of Directors since April 1994. From 1986 to 1998, he served as Group Vice President and Chief Financial and Administrative Officer of CENEX, Inc., a distributor of petroleum and agronomy products and other farm supplies located in St. Paul, Minnesota. Prior to joining CENEX, Mr. Koonce served in various management positions with Land O'Lakes, most recently as Vice President of Administration and Planning for Agricultural Services. Mr. Koonce served in various management positions for General Mills from 1965 to 1981. In addition, he served as a member of the Board of Directors of St. Paul Bank for Cooperatives from 1988 to 1998, including Chairman from 1997 to 1998. St. Paul Bank for Cooperatives made operating and capital loans to cooperatives throughout the United States.

JAMES L. MORRELL, age 50, has been a member of the Company's Board of Directors since March 1996, and is an independent financial consultant. From 1986 to 1995, Mr. Morrell was employed by Dain Bosworth Inc., where he held a number of management positions, most recently Managing Director, Corporate Finance. During 1997, Mr. Morrell served as Interim Chief Financial Officer of Miller & Schroeder Financial, Inc., a company that has served as a lender to the Company. During 2001, Mr. Morrell served as President and Chief Financial Officer of The Marshall Group, a company that has provided investment banking services to the Company.

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

LONA M.B. FINLEY, age 39, has been a member of the Company's Board of Directors since May 1998, and has been Chief Administrative Officer since July 1998, Executive Vice President since February 2002, and Secretary since October 2002. Ms. Finley has served in various other positions with the Company since 1988, and is the spouse of Johan P. Finley.

The Audit Committee assists the Board of Directors in overseeing the Company's accounting and financial reporting processes and audits of the Company's financial statements, including the integrity of the Company's financial statements, compliance with legal and regulatory requirements, the Company's independent public accountants' qualifications and independence, the performance of the Company's internal audit function and independent public accountants, and such other duties as may be directed by the Board of Directors. The Audit Committee consists of Joel M. Koonce (Chairman), James L. Morrell and Patrick R. Cruzen.

The Board of Directors has not determined whether any members of the Audit Committee meet the definition of an audit committee financial expert, as set forth in Item 401(h)(2) of Regulation S-K, but intends to make such determination prior to the deadline established by NASDAQ. Each member of the Audit Committee meets the "independence" requirements of the SEC and NASDAQ for audit committee members.

The Company has adopted a Code of Conduct for its Directors, Executive Officers and employees. This Code of Conduct is publicly available as an exhibit to this Form 10-K.

If the Company makes any substantive amendments to its Code of Conduct or grants any waiver, including any implicit waiver, from a provision of its Code of Conduct that applies to the Company's Chief Executive Officer and Senior Financial Officers, the Company will disclose the nature of such amendment or waiver either through the Company's website or in a Form 8-K.

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

To the Company's knowledge, based solely on its review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended December 31, 2003, all Section 16(a) filing requirements applicable to its directors, executive officers and 10% owners were satisfied with the exception of one Form 4 that was filed three days delinquent in September 2003. This Form 4 reported the stock that was purchased by Peter D. Cleary, during the second quarter of 2003, through the employee stock purchase program.

The following table sets forth certain information concerning the compensation of the Company's executive officers as of December 31, 2003 who received total salary and bonus in excess of $100,000 for the year ended December 31, 2003 (the "Named Executive Officers").

							Long-term Compensation
		Annual Compensation
Name and Principal Position		Securities Underlying Options		All Other Compensation
	Year		Salary		Bonus (1)
Johan P. Finley, Chief Executive Officer and Chairman of the Board		2003 2002 2001		$	341,250 341,250 325,000	$	— — 50,000	— 25,000 25,000	$	25,933(2 25,740(2 18,313(2	) ) )
Peter D. Cleary, President, Chief Operating Officer and Treasurer		2003 2002 2001		$	210,000 210,000 195,000		— — —	— 10,000 —	$	5,305(3 5,500(3 4,217(3	) ) )

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

In February 1998, the Company entered into a five-year employment agreement with Johan P. Finley. The agreement provides for a monthly salary of $27,083 that is subject to annual increases as recommended by the Compensation Committee and approved by the Board of Directors. In January 2002, Mr. Finley received a salary increase to $28,437 per month. Mr. Finley also receives a grant of 25,000 stock options each year during the term of the agreement, each of which vests over a five year period. The agreement provides for annual bonuses in increments of $50,000 if the Company meets certain earnings per share projections. The agreement provides that Mr. Finley is entitled to an automobile of his selection, a life insurance policy and certain other benefits that are generally available to salaried employees of the Company. The agreement also contains provisions regarding payments to be made to Mr. Finley in the event of a termination of his employment by the Company, change in control of the Company or a sale of the majority of the Company's assets or stock. Mr. Finley's employment contract was extended by vote of the Board of Directors on February 10, 2003 for an additional two-year period, and included modifications to the change in control provisions included in the agreement. As modified, Mr. Finley is entitled to a reduced sale bonus of $250,000 in

the event of the sale of a majority of the Company's assets or stock to a single purchaser or group of purchasers.

In September 1995, the Company entered into a one-year employment agreement with Peter D. Cleary that renewed automatically at the end of the initial and each successive term for an additional one-year term. In January 2002, the Company entered into a new employment agreement with Mr. Cleary that renewed automatically for one-year terms in January 2003 and January 2004, and will continue to renew automatically for additional one-year terms unless terminated by either party. Under the terms of this contract, Mr. Cleary receives a salary of $210,000 and a grant of 10,000 stock options per year, and is eligible to earn an annual cash and/or stock option bonus, based on various factors, in the sole and absolute discretion of the Compensation Committee. Mr. Cleary's salary may be increased annually by the Compensation Committee.

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

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

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

The following table sets forth the number and aggregate dollar value of all unexercised options held by the Named Executive Officers as of the end of 2003. On December 31, 2003, the closing bid price of a share of the Company's common stock was $1.92. The value of the unexercised, in-the-money options held by the Named Executive Officers was based on the closing bid price on December 31, 2003 minus the relevant exercise price. There were no options exercised by the Named Executive Officers during 2003.

		Number of Shares Underlying Unexercised Options at December 31, 2003		Value of Unexercised In-the-Money Options at December 31, 2003
Name
	Exercisable		Nonexercisable		Exercisable		Nonexercisable
Johan P. Finley		55,000		45,000		$	26,250	$	17,500
Peter D. Cleary		131,000		23,000		$	6,520	$	—

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

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

The Company's only outstanding class of voting securities is Common Stock, $0.01 par value, of which 3,806,222 shares were outstanding as of the close of business on March 5, 2004. Each share of Common Stock is entitled to one vote on all matters put to a vote of shareholders. The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of March 5, 2004 by: (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock; (ii) each director; (iii) each executive officer of the Company included in the Summary Compensation Table set forth provided in Item 11, "Executive Compensation"; and (iv) all executive officers and directors as a group.

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

Name	Number(4)	Percent of Class
Johan P. Finley (1)(2)	954,786	24.8	%
Peter D. Cleary (1)	151,207	3.8	%
Lona M.B. Finley (1)(3)	278,786	7.3	%
Joel M. Koonce (1)	28,500	*
James L. Morrell (1)	25,000	*
Patrick R. Cruzen (1)	10,500	*
All officers and directors as a group (6 persons)	1,448,779	37.6	%
Johan P. Finley, Peter D. Cleary and Lona M.B. Finley (1)(5)	1,384,779	35.9	%

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

For information with respect to the proposed going private transaction, see Item 1, "Business—Recent Developments."

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

On February 24, 2004, the Company issued a promissory note in the original principal amount of $7,691,796 in favor of First State Bank of Thermopolis, the lender. The promissory note was issued in the ordinary course of business as part of the Company's plan of financing. In connection with this promissory note, Johan P. Finley provided a personal guaranty in favor of the lender. In exchange for the guaranty, the Company agreed to provide Mr. Finley with a guaranty fee equal to two percent of the outstanding principal on the promissory note in March of each year the promissory note is outstanding. The Company has also agreed to indemnify Mr. Finley for any and all losses, claims, damages, liabilities and expenses arising out of, or in connection with, the guaranty. The terms of the Company's arrangement with Mr. Finley were approved by the Company's Audit Committee.

The Company's Audit Committee is required to pre-approve all audit and permissible non-audit services provided by the Company's independent auditor, Piercy, Bowler, Taylor & Kern, Certified Public Accountants and Business Advisors, a Professional Corporation ("PBTK"), with certain limited exceptions. The Company's Audit Committee has concluded that the non-audit services provided by PBTK are compatible with maintaining auditor independence.

The fees paid during the fiscal years ended December 31, 2003 and 2002 for services provided by PBTK were as follows:

	2003		2002
Audit fees (1)	$	100,750	$	91,157
Audit-related fees (2)		983		24,093
Tax fees (3)		28,465		34,680
All other fees (4)		3,437		—

	$	133,635	$	149,930

The Company's Audit Committee has adopted policies and procedures for the pre-approval of audit and non-audit services rendered by PBTK, our independent public accountants. The Company's Audit Committee requires the pre-approval of certain specific services in the defined categories of audit services, audit-related services and tax services up to specified amounts and establishes requirements for specific case-by-case pre-approval of discrete projects. The pre-approval may be given as part of the Audit Committee's approval of the scope of the engagement of our independent auditor or on an individual basis. The Company's Audit Committee will consider whether proposed services are compatible with the independence of the public accountants and prohibit retention of the independent public accountants to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC.

In 2003, no fees were paid to PBTK pursuant to the "de minimus" exception to the pre-approval policy permitted under the Securities Exchange Act of 1934, as amended.

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

A report on Form 8-K was filed by the Company on November 17, 2003 announcing the financial results for the third quarter ended September 30, 2003. There were no other reports on Form 8-K filed by the Company during the quarter ended December 31, 2003.

A report on Form 8-K was filed on January 22, 2004 for the purpose of reporting the announcement that the Company would be closing its Rocky's Casino & Sports Bar, located in downtown Reno, Nevada, at midnight on Saturday, January 31, 2004. A report on Form 8-K was filed on February 6, 2004 for the purpose of reporting the announcement that (i) the Company had received a financing commitment from Cochran Road, LLC, a New York-based lender ("Cochran"), in a maximum principal amount of $9.5 million, and (ii) the management group proposing to acquire all of the outstanding stock of the Company not already owned by its members, consisting of Johan P. Finley, Lona M.B. Finley and Peter D. Cleary, had received a financing commitment from Cochran in a maximum principal amount of $5.5 million. There were no other reports on Form 8-K filed by the Company during the period from January 1, 2004 to the filing date of this Annual Report on Form 10-K.

Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation dated September 21, 1993 (4)
3.2		Articles of Amendment to Articles of Incorporation dated February 24, 1994 (4)
3.3		Articles of Amendment to Articles of Incorporation dated April 26, 1994 (4)
3.4		Articles of Amendment of Amended and Restated Articles of Incorporation dated May 3, 1995 (4)
3.5		Bylaws of the Registrant (1)
3.6		Certificate of Designation of Preferred Stock dated March 30, 1998 and filed as of April 7, 1998 (13)
3.7		Amended and Restated Bylaws dated May 12, 2000 (18)
3.8		Articles of Amendment to Articles of Incorporation dated May 14, 2001 (14)
4.1		Specimen of Common Stock Certificate (1)
4.2		Indenture, between PDS Financial Corporation and U.S. Bank Trust National Association for the Registrant's 10% Senior Subordinated Notes Due July 1, 2004 (5)
4.3		Indenture between PDS Gaming Corporation and U.S. Bank Trust National Association for the Registrant's 12% Senior Subordinated Notes Due July 1, 2007 (15)
10.1		Industrial Real Estate Lease dated April 29, 1997, between the Registrant, as Tenant, and Patrick Commerce Center, LLC, as Landlord (4)
10.2		1993 Stock Option Plan, as amended (1)
10.3		Form of Incentive Stock Option Agreement (1)
10.4		Form of Non-Qualified Stock Option Agreement (1)
10.5		Employment Agreement between the Registrant and Johan P. Finley, dated February 1, 1998 (1)
10.6		Form of Tax Indemnification Agreement between the Registrant and Johan P. Finley (1)
10.7		Loan and Security Agreement, dated October 29, 1998 between Heller Financial, Inc., as lender, and the Registrant as Borrower (6)
10.8		Loan and Security Agreement, dated October 29, 1998 between Heller Financial, Inc., as lender, and PDS Financial Corporation-Nevada, as Borrower (6)
10.9		Master Loan Agreement, dated December 15, 1998, by and among the Registrant, PDS Financial Corporation-Nevada and Miller & Schroeder Investments Corporation (6)
10.10		Loan and Security Agreement, dated April 28, 1999 between SunWest Bank as Lender and PDS Financial Corporation-Nevada as Borrower (9)
10.11		Master Revolving Line of Credit—Promissory Note by and among the Registrant, PDS Financial Corporation—Nevada and Nevada State Bank, dated April 22, 1999 (9)
10.12		Master Loan Agreement, dated October 28, 1999, by and among the Registrant, PDS Financial Corporation-Nevada and Miller & Schroeder Investments Corporation (9)

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has also been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 30, 2004.

Name	Title

By	/s/ JOHAN P. FINLEY Johan P. Finley	Chairman of the Board, Chief Executive Officer, Director (Principal Executive Officer)
By	/s/ PETER D. CLEARY Peter D. Cleary	President Chief Operating Officer, Treasurer, Interim Chief Financial Officer, Director
By	/s/ LONA M. B. FINLEY Lona M. B. Finley	Executive Vice President, Secretary, Chief Administrative Officer, Director
By	/s/ PATRICK R. CRUZEN Patrick R. Cruzen	Director
By	/s/ JOEL M. KOONCE Joel M. Koonce	Director
By	/s/ JAMES L. MORRELL James L. Morrell	Director

		Page
Consolidated Financial Statements:
Report of Independent Accountants		F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002		F-3
Consolidated Statements of Income (Loss) for the Years Ended December 31, 2003, 2002 and 2001		F-4
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001		F-6
Notes to Consolidated Financial Statements		F-7 - F-22
Schedule II—Valuation and Qualifying Accounts and Reserves		F-23

We have audited the accompanying consolidated balance sheets of PDS Gaming Corporation and Subsidiaries as of December 31, 2003 and 2002, and related consolidated statements of income (loss), stockholders' equity and cash flows for the years ended December 31, 2003, 2002 and 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PDS Gaming Corporation and Subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and cash flows for the years ended December 31, 2003, 2002 and 2001, in conformity with accounting principles generally accepted in the United States.

In connection with our audits of the consolidated financial statements referred to above, we audited the financial schedule of valuation and qualifying accounts and reserves for the years ended December 31, 2003, 2002 and 2001. In our opinion, this financial schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information stated therein.

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

PDS GAMING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002

PDS GAMING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

PDS GAMING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

PDS GAMING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

PDS GAMING CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

Lease and financing revenue and cost recognition. The Company's leasing activities include operating, direct finance and sales-type leases. For all types of leases, the determination of profit considers the estimated value of equipment at lease termination, referred to as the residual value. For operating leases, revenue and depreciation on the leased equipment are recorded on the straight-line method over the term of the lease. Direct finance and sales-type leases are similar in that substantially all of the benefits and risks of ownership of the leased equipment are transferred to the lessee, and finance income is recognized at a constant percentage return on the asset carrying value. The carrying

value consists of the present value of the future lease payments plus any unguaranteed residual, sometimes referred to herein as leases receivable. A dealer's profit or loss on the subject equipment is recognized at the inception of a sales-type lease. After the inception of a lease, the Company may discount or sell notes and future lease payments to reduce or recover its investment in the asset.

Initial direct costs related to leases and notes receivable are capitalized as part of the related asset and amortized over the term of the agreement using the interest method, except for operating leases, for which the straight-line method is used.

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

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

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

Cash equivalents. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2003 and 2002, cash equivalents consist solely of investments in money market accounts.

Restricted cash. Restricted cash consists of funds pledged against notes payable and certain funds received from lessees that are being held by the Company pending remittance to the lenders who have financed the leases. Restricted cash is excluded from cash and cash equivalents for purposes of the statements of cash flows.

Other assets, net. Property, plant and equipment is included in this classification and consists primarily of the land and building used at Rocky's Casino and Sport Bar (Note 12) in Reno, Nevada ("Rocky's") and other furniture, equipment and leasehold improvements stated at cost, less accumulated depreciation and amortization calculated using the straight-line method over the estimated useful lives. Also included are refundable income taxes, deferred income taxes, direct costs incurred in obtaining debt that are being amortized over the term of the underlying financing agreement, using the interest method, and costs to obtain licenses to own and distribute gaming devices and associated equipment that are amortized over three years on a straight-line basis.

Allowances for collectibility and other losses. Various allowances for losses are maintained at levels determined by management to adequately provide for any estimated declines in the recoverability of related asset values. In determining losses, economic conditions, the activity in used equipment markets, the effect of actions by equipment manufacturers, the financial condition of customers, the expected courses of action by lessees with regard to leased equipment at termination of the initial lease term, changes in technology and other factors which management believes are relevant are considered. Recoverability of an asset value is measured by a comparison of the carrying amount of the asset or its collateral to future net cash flows expected to be generated by the asset or its collateral if appropriate.

If a loss is indicated, the loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds the net realizable value of the asset. Asset charge-offs are recorded upon the disposition of the underlying assets. Assets are reviewed quarterly to determine the adequacy of the allowance for losses.

Net income (loss) per share. The Company calculated basic and diluted net income (loss) per share as follows for the years ended December 31:

		2003		2002			2001
Net income (loss), basic and diluted		$	659,000	$	(4,379,000	)	$	1,430,000

Per share amounts:
	Basic	$	0.17	$	(1.15	)	$	0.38
	Diluted	$	0.17	$	(1.15	)	$	0.37
Weighted average shares outstanding:
	Basic		3,804,000		3,794,000			3,730,000
	Effect of dilutive options		4,000					150,000

	Diluted		3,808,000		3,794,000			3,880,000

Options to purchase 510,310 shares of common stock and warrants to purchase 1,272,000 shares of common stock were not included in the computation of diluted earnings per share for 2003 because the effect would have been anti-dilutive and the options' and warrants' exercise prices were greater than the average market price of the common stock for the year. The weighted average exercise price for these options and warrants was $3.41 and $8.16, respectively, as of December 31, 2003. These options and warrants expire at various dates through 2013. Weighted-average exercise prices ($6.68 in 2002 and $7.16 in 2001) in excess of average market prices caused options and warrants to purchase common shares (1,997,000 in 2002 and 1,512,000 in 2001) to be excluded from the computation of diluted earnings in those years.

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

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

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

	2003			2002
Notes receivable bearing interest at 8.5% to 12.5%	$	4,513,000		$	6,618,000
Minimum direct finance lease payments		18,511,000			39,072,000

		23,024,000			45,690,000
Unearned lease income, direct finance leases		(3,585,000	)		(12,588,000	)
Unamortized costs		216,000			40,000

		19,655,000			33,142,000
Accounts and other		2,154,000			9,156,000
Allowance for uncollectible notes, accounts and leases		(11,000	)		(1,095,000	)

	$	21,798,000		$	41,203,000

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

At December 31, 2003, future minimum payments receivable on notes and leases are as follows:

	Notes		Leases		Total
2004	$	1,003,000	$	8,075,000	$	9,078,000
2005		1,019,000		5,731,000		6,750,000
2006		934,000		4,209,000		5,143,000
2007		1,557,000		496,000		2,053,000
2008		—		—		—
2009		—		—		—

	$	4,513,000	$	18,511,000	$	23,024,000

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

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

		2003			2002
Balance, beginning of year		$	1,095,000		$	1,067,000
	Collection provision		218,000			141,000
	Charge-offs, net of recoveries		(1,302,000	)		(113,000	)

Balance, end of year		$	11,000		$	1,095,000

The estimated fair value of notes and direct finance lease receivables approximates their carrying value, net of any applicable allowance. The fair value is estimated using discounted cash flow analysis and interest rates currently offered by the Company for obligations with similar terms and credit risk.

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

	2003			2002
Gaming and related equipment	$	107,702,000		$	54,453,000
Less accumulated depreciation		(29,737,000	)		(11,966,000	)
Less impairment allowance		(43,000	)

	$	77,922,000		$	42,487,000

		2003			2002
Balance, beginning of year		$	—		$	—
	Charge-offs, net of recoveries		(317,000	)
	Collection provision		360,000

Balance, end of year		$	43,000		$	—

At December 31, 2003, future minimum lease payments to be received by the Company on operating leases for the years ending December 31, 2004 through 2007 are approximately $34,345,000, $28,960,000, $12,636,000 and $3,491,000, respectively, and none thereafter.

		2003			2002
Lines of credit with a maximum aggregate balance of $12,222,000 bearing interest at rates from 5.0% to 10.5%, secured by related investment in leases and equipment held for sale or lease		$	9,151,000		$	12,853,000
Equipment notes bearing interest at rates from 0% to 15.08%, secured by related investment in leases:
	Recourse		12,216,000			21,838,000
	Nonrecourse		56,978,000			25,726,000

			78,345,000			60,417,000
Unamortized loan discounts			(702,000	)		(440,000	)

		$	77,643,000		$	59,977,000

Principal and interest payments on recourse and nonrecourse notes payable are generally due monthly in amounts that are approximately equal to the total payments due from the lessee under the leases that collateralize the notes payable. Under recourse financing, in the event of a default by a lessee, the lender has recourse against the lessee, the equipment serving as collateral and the Company as borrower. Under nonrecourse financing, in the event of a default by a lessee, the lender generally has recourse only against the lessee and the equipment serving as collateral, but not against the Company.

In 1998, the Company issued $13,800,000 of 10% Senior Subordinated Notes, due on July 1, 2004, that included 740,000 detachable stock purchase warrants (Note 6) with an exercise price of $12.25 valued at $690,000 ($32,000 unamortized as of December 31, 2003). Pursuant to the terms of the indenture, beginning July 1, 2000, a total of $2.1 million of the Senior Subordinated Notes was randomly selected each year for mandatory redemption. In 2001, the Company exchanged $2,205,000 of the 10% Senior Subordinated Notes for an equal amount of newly-issued 12% Senior Subordinated Notes that was to be due 25% in each of the four consecutive years beginning with the year ending December 31, 2004. Interest was payable quarterly. In addition to the four mandatory yearly redemptions, the Company could redeem this subordinated debt, in part or in full, at any time at par plus accrued interest and any premium, if applicable. The entire unpaid principal balance and unpaid interest thereon was to be due and payable on July 1, 2004 and 2007, respectively. In February 2004, the Company announced the receipt of a financing commitment from a New York-based lender in the maximum amount of $9.5 million. Of the funds available, the Company has drawn $6.1 million as of March 12, 2004. The funds drawn have been used, among other purposes, for the full redemption of the Company's outstanding 10% and 12% Senior Subordinated Notes at par. At the time of redemption, in March 2004, the outstanding principal balance of the notes was $5.5 million, of which $3.3 million was due in July 2004.

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

Principal payments on recourse and nonrecourse notes payable and subordinated debt, as of December 31, 2003, are due as follows:

	Recourse Notes Payable		Nonrecourse Notes Payable		Subordinated Debt		Total
2004	$	14,356,000	$	30,465,000	$	3,940,000	$	48,761,000
2005		3,112,000		19,972,000		552,000		23,636,000
2006		3,563,000		6,251,000		551,000		10,365,000
2007		336,000		290,000		551,000		1,177,000

	$	21,367,000	$	56,978,000	$	5,594,000	$	83,939,000

The following summarizes the components of deferred income taxes included in the Company's consolidated balance sheets under Other Assets, Net at December 31, 2003 and December 31, 2002:

		2003			2002
Deferred tax assets:
	Customer deposits and prepaid rent	$	1,361,000		$	1,326,000
	Net operating loss carryforwards		106,000			199,000
	Asset valuation allowances and impairment provisions		933,000			958,000
	Other		536,000			335,000

			2,936,000			2,818,000

Deferred tax liabilities:
	Lease transactions		(960,000	)		(967,000	)
	Initial direct costs		(483,000	)		(264,000	)

			(1,443,000	)		(1,231,000	)

Net deferred tax assets		$	1,493,000		$	1,587,000

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

	2003		2002			2001
Current	$	310,000	$	(241,000	)	$	655,000
Deferred		94,000		(1,845,000	)		534,000

	$	404,000	$	(2,086,000	)	$	1,189,000

The difference between the normal federal statutory tax rate of 34% applied to income before income taxes and the Company's effective tax rate is:

	2003		2002		2001
Income taxes at federal statutory rate	34	%	34	%	34	%
State income taxes, net of federal effect	2				2
Non-deductible amortization of costs	2		(2	)	5
Other, net					4

	38	%	32	%	45	%

1993 Stock Option Plan. The Company established its 1993 Stock Option Plan (the "1993 Plan") to encourage stock ownership by employees, officers, directors and other individuals as determined by the Board of Directors or a committee appointed by the Board of Directors. Up to 1,600,000 shares of the Company's common stock were authorized to be issued under this plan. The 1993 Plan provided that options granted thereunder would be either incentive stock options ("ISO's") or nonqualified stock options. Although the 1993 Plan expired in April 2003, the options issued under the 1993 Plan continue to be exercisable until the relevant dates set forth in the individual stock option grants.

Options issued under the 1993 Plan had a maximum term of up to ten years. The exercise price of ISO's granted under the 1993 Plan was at least equal to the fair value of the common stock on the date of grant. The exercise price of nonqualified options was at least equal to 85% of the fair value of the common stock on the date of grant. If an option expired, terminated or was canceled, the shares not purchased thereunder became available for additional option awards under the 1993 Plan. Under the 1993 Plan, newly elected non-employee directors of the Company received an initial grant of non-qualified options to purchase 10,000 shares of common stock upon election to the Board and an annual grant of non-qualified options to purchase 5,000 shares of common stock.

2002 Stock Option Plan. The Company established its 2002 Stock Option Plan (the "2002 Plan") to encourage stock ownership by employees, officers, directors and other individuals as determined by the Board of Directors or a committee appointed by the Board of Directors. Up to 800,000 shares of the Company's common stock are authorized to be issued under this plan, which was approved by the shareholders in May 2002. The 2002 Plan is similar to the 1993 Plan in all material respects. At December 31, 2003, the Company has granted 15,000 options under the 2002 Plan.

	Options Outstanding		Options Exercisable
Range of Exercise Prices	Number of Options Outstanding	Weighted Average Remaining Contractual Life	Number of Options Outstanding	Weighted Average Remaining Contractual Life
$1.20 - $2.50	253,000	5.5 years	138,000	3.9 years
$2.51 - $5.00	260,000	5.8	155,500	5.2
$5.01 - $7.50	4,000	7.0	4,500	7.0
$7.51 - $9.13	33,000	4.9	33,000	4.9

	550,000		331,000

At December 31, 2003, the range of exercise prices and weighted average remaining contractual life of outstanding options was $1.20—$9.13 and 5.6 years, respectively. Had the Company used the fair value-based method of accounting and recognized compensation expense over the vesting period as provided for in Statement of Financial Accounting Standards No. 123, Stock Based Compensation, net income and net income per share for 2003, 2002 and 2001 would have been as follows:

		2003		2002			2001
Pro forma net income (loss):
	Basic and diluted	$	571,000	$	(4,490,000	)	$	960,000
Pro forma net income (loss) per share:
	Basic	$	0.15	$	(1.18	)	$	0.26
	Diluted	$	0.15	$	(1.18	)	$	0.25

The pro forma information above only includes stock options granted after December 31, 1995. Pro forma compensation expense under the fair value-based method of accounting will generally increase over the next few years as additional stock option grants are considered.

No options were granted under the 1993 Plan in 2003 to non-director employees. The weighted-average grant-date fair value of options granted under the 1993 Plan was $1.01 and $1.10 per option for 2002 and 2001, respectively. The weighted-average grant-date fair value of options was determined by using the fair value of each option grant on the date of grant, utilizing the "Black-Scholes" option-pricing model and the following key assumptions:

	2003	2002	2001
Risk-free interest rate	3.7%	3.7%	3.7%
Expected life	5 years	5 years	5 years
Expected volatility	60%	60%	60%
Expected dividends	0	0	0

Preferred Stock. The Company's Articles of Incorporation, as amended, authorize the issuance of 2,000,000 shares of preferred stock, par value $0.01 per share. The rights, preferences and privileges of the authorized preferred shares (none of which have been issued) may be established by the Board of Directors without further action by the holders of the Company's common stock.

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

In March 2002, the Company issued a warrant to purchase 181,700 shares of its common stock to General Electric Capital Corporation ("GE") in connection with an agreement entered into between the two parties. As part of this agreement, warrants to purchase 181,700 shares of common stock that were issued to an affiliate of GE in 1998, in partial consideration for the approval of a $25 million revolving line of credit, were cancelled. The warrant issued in 2002 was terminated in March 2004 pursuant to an agreement between the Company and GE, further described in Note 11, to settle a dispute between the parties. The warrant was exercisable when terminated, had an exercise price of $3.20 per share and would have expired in 2006. The warrants issued in 1998 were exercisable when cancelled, had an exercise price of $4.66 per share and would have expired in 2003. The Company valued the warrant issued in 2002 at $80,000, which was treated as a debt issuance cost and expensed, with a corresponding entry to additional paid-in capital.

The Company also issued 740,000 detachable stock purchase warrants as part of the 1998 issuance of Senior Subordinated Notes discussed in Note 4. These warrants had an exercise price of $12.25 per share and expired in 2003.

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

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

		Year Ended December 31
		2003		2002			2001
Loss on discontinued operations:
	Loss on disposal			$	(2,370,000	)
	Operating loss				(2,457,000	)	$	(2,375,000	)
	Income tax benefit				1,558,000			1,078,000

		$	0	$	(3,269,000	)	$	(1,297,000	)

Loss per share (diluted):
	Loss on disposal			$	(0.62	)
	Operating loss				(0.65	)	$	(0.61	)
	Income tax benefit				0.41			0.28

		$	0	$	(0.86	)	$	(0.33	)

Benefit plans. The Company maintains a contributory defined contribution benefit plan that qualifies under Section 401(k) of the Internal Revenue Code and covers eligible employees. Company contributions are at the discretion of the Board of Directors, and are currently established as 50% of the employee's contribution up to a maximum employee contribution of 6% of the employee's earnings. The Company's contributions to the plan in 2003, 2002 and 2001 were not material.

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

Guaranty fee and indemnity. On February 24, 2004, the Company issued a promissory note to a bank in the original principal amount of $7,691,796, personally guaranteed by Johan P. Finley, the Company's Chief Executive Officer. In exchange for his personal guaranty, the Company agreed to provide Mr. Finley with a guaranty fee equal to two percent of the outstanding principal on the promissory note in March of each year the promissory note is outstanding. The Company has also agreed to indemnify Mr. Finley for any and all losses, claims, damages, liabilities and expenses arising out of, or in connection with, the guaranty. The terms of the Company's arrangement with Mr. Finley were approved by the Company's Audit Committee.

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

As of December 31, 2003, the Company's two largest customers represented 65% and 16% of the total portfolio of notes, accounts and leases of $99,720,000. No other customer represented more than 3% of the portfolio.

Based on the carrying value of the portfolio, 100% of the Company's portfolio at December 31, 2003 is located in the United States, with 65%, 8% and 7% in the states of New Jersey, Florida and Oklahoma, respectively.

During 2003, revenues from two of the Company's customers, as a percentage of total revenue, were 47% and 20%. Revenues from two of the Company's customers, as a percentage of 2002 revenue, were 24% and 24%. Revenues from one of the Company's customers, as a percentage of 2001 revenue, was 29%.

The carrying amounts at December 31, 2003 for cash and cash equivalents, notes, accounts and leases receivable, net of allowances, equipment vendors payable, accounts payable, notes payable and subordinated debt approximate their fair values due to the short maturity of these instruments, or because the related interest rates approximate current market rates.

Tekbilt, Inc. dispute. In May 2002, the Company received notification that Tekbilt, Inc. ("Claimant") had submitted a Demand for Arbitration to the American Arbitration Association alleging breach of a Distributor Agreement (the "Agreement") in connection with the Company's discontinued operations. In the notification, Claimant alleged that such breach has caused Claimant to sustain substantial damages. The hearing before the American Arbitration Association panel was scheduled to begin in February 2004. In February 2004, prior to the arbitration hearing, the Company and the Claimant agreed to settle the dispute. Under the settlement agreement, without any admission of fault or liability by either party, the Company agreed to pay the Claimant $450,000. The payment will be made in two installments. The first installment, of $200,000, was paid in March 2004 and the second installment, of $250,000, will be paid in August 2004. The settlement expense and corresponding liability are reflected in the consolidated financial statements.

Heller EMX, Inc. litigation. On October 3, 2003, the Company filed a Complaint for Declaratory Relief against Heller EMX, Inc. and Does 1 through 100 in the United States District Court for the District of Nevada (the "Nevada Case"). The Complaint was provided to legal counsel for the defendants, but was not served pending a possible negotiated resolution. On October 16, 2003, the Company was served with a Summons and Complaint for Fraud, Conversion and Other Claims, filed by Heller EMX, Inc., Heller Financial Leasing, Inc., and General Electric Capital Corporation (collectively, "GE") in the United States District Court for the Southern District of New York, being case number 03 CV-6187 (the "New York Case"). Both cases sought a determination of the respective rights and duties of the parties under four Sale and Purchase Agreements, a Nonrecourse Proceeds Sharing Agreement and related agreements and documents. Plaintiffs in the New York Case also

sought to recover compensatory and punitive damages for at least $5 million for alleged conversion and an order enjoining the Company from withholding certain payments, and compensatory and punitive damages in amounts to be determined at trial for alleged fraud, negligent misrepresentation, tortious interference with prospective business advantage/relations, breach of contract and unjust enrichment.

Management Group proposal. In February 2003, the Company announced that it had entered into a letter of intent (the "Letter of Intent") with respect to a proposal submitted by a management group consisting of Johan P. Finley, the Company's Chairman and Chief Executive Officer, Lona M.B. Finley, the Company's Executive Vice President, Secretary and Chief Administrative Officer, and Peter D. Cleary, the Company's President, Chief Operating Officer and Treasurer (collectively, the "Management Group"), to acquire all of the approximately 69% of the outstanding shares of the Company's common stock not already owned by the Management Group (the "Proposed Transaction"). The Letter of Intent has been extended until April 15, 2004. The Proposed Transaction is subject to, among other things, the execution of a definitive agreement, approval by the Special Committee, approval by a majority of the Company's shares not owned by the Management Group, the procuring of all necessary consents of the Company's commercial lenders, the securing of required approvals from all gaming regulatory agencies, the obtaining of the necessary financing and the receipt by the Company of a favorable fairness opinion from an investment bank.

Lease and other commitments. The Company leases office space, warehouse space for its equipment remarketing activities, retail space and personal property under terms of various noncancelable operating leases expiring through 2010. The lease agreements require the Company to pay monthly base rent in varying amounts plus its pro rata share of operating expenses. Percentage rents apply to the leased retail space to the extent that certain sales thresholds are exceeded. Rent expense for continuing operations was approximately $761,000, $485,000 and $308,000 in 2003, 2002 and 2001, respectively. The increase in rent expense from 2002 to 2003 was substantially due to rent expense that was applicable to discontinued operations in 2002.


2004	$	704,000
2005		187,000
2006		186,000
2007		184,000
2008		180,000
Thereafter		300,000

	$	1,741,000

Residual sharing. In December 2001, the Company entered into the Nonrecourse Proceeds Sharing Agreement with an affiliate of GE. Under this agreement, the parties were to share the proceeds from future sales of certain equipment at lease termination, but only to the extent, if any, that such proceeds exceeded the Company's original estimate of residual values of the equipment made at the inception of the respective leases. The Company's obligation to assign assets to the residual sharing pool was collateralized by receivables totaling $7.9 million at December 31, 2003.

Pursuant to the settlement of litigation between the Company and GE, as previously described under "Litigation," the Nonrecourse Proceeds Sharing Agreement was terminated and the Company agreed to share with GE the Residual Profits (as such term is defined in the settlement agreement) from certain leases. Under this new sharing arrangement, the Company will receive 75% and GE will receive 25%, up to a maximum of $400,000, of the Residual Profits derived from the applicable leases after the Company has received $2.6 million in Residual Profits from the applicable leases and certain other leases.

In addition to the Nonrecourse Proceeds Sharing Agreement previously described, the Company's investments in certain leases are subject to lending agreements that provide for a sharing of the proceeds from the disposition of such leases once the Company's investment has been returned.

Due to continuing operating losses, the Company sought and was granted approval from the Nevada Gaming Control Board to temporarily cease operations at Rocky's effective January 31, 2004. Prior to that time, Rocky's was licensed to operate 180 slot machines. The Company is evaluating its future alternatives for Rocky's, which include sale, lease or joint venture of the property.

On February 6, 2004, the Company announced the receipt of a financing commitment from a New York-based lender in the maximum amount of $9.5 million. Of the funds available, the Company has drawn $6.1 million as of March 12, 2004. The funds drawn have been used for the redemption of the Company's outstanding 10% and 12% Senior Subordinated Notes at par and working capital. At the time of redemption of the Senior Subordinated Notes, in March 2004, the outstanding principal balance of the notes was $5.5 million, of which $3.3 million was due in July 2004.

Also on February 6, 2004, the Company announced that the Management Group had received a financing commitment from the same New-York based lender in a maximum principal amount of $5.5 million. The proceeds from this financing are intended to be used to acquire all of the approximately 69% of the outstanding shares of the Company's common stock not already owned by the Management Group.

The following table sets forth selected historical operating results for each quarter of 2003 and 2002. The quarterly information is unaudited but, in management's opinion, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented:

		2002 Quarter Ended
		March 31		June 30		September 30		December 31
Revenues		$	9,433,000		$	8,783,000		$	7,348,000		$	14,763,000
Income taxes			(349,000	)		(20,000	)		16,000			(175,000	)
Income (loss) from continuing operations			(481,000	)		(29,000	)		24,000			(624,000	)
Loss from discontinued operations			(1,392,000	)		(484,000	)		(348,000	)		(1,045,000	)
Net loss			(1,873,000	)		(513,000	)		(324,000	)		(1,669,000	)
Per share, basic and diluted:
	Income (loss) from continuing operations			(0.13	)		(0.01	)		0.01			(0.16	)
	Loss from discontinued operations			(0.37	)		(0.13	)		(0.10	)		(0.28	)
	Net loss			(0.50	)		(0.14	)		(0.09	)		(0.44	)
Total originations			9,500,000			20,400,000			7,600,000			14,300,000

The summation of quarterly per share amounts may not equal the calculation for the full year, as each quarterly calculation is performed discretely. During 2003 and 2002, management refined its estimates of income taxes in the fourth quarter.

PDS Gaming Corporation and Subsidiaries
SCHEDULE II—VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
Years Ended December 31, 2003, 2002, and 2001
(in thousands)

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-23928

Plan category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights	(b) Weighted-average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by stockholders	550,000	$	3.61	785,000
Equity compensation plans not approved by stockholders	—		—	—

	550,000	$	3.61	785,000

		Years Ended December 31
		2003		2002			2001			2000			1999
		(in thousands, except per share and number of shares data)
Income Statement Data
Revenues:
	Equipment sales and sales-type leases	$	6,825	$	18,907		$	10,978		$	31,288		$	4,015
	Operating lease rentals		28,193		13,691			11,142			10,497			12,426
	Finance income		4,938		4,911			10,912			7,509			5,511
	Fee income		4,383		1,104			4,750			2,107			3,697
	Casino		896		1,714			1,356

			45,235		40,327			39,138			51,401			25,649

Costs and expenses:
	Equipment sales and sales-type leases		6,339		17,310			9,764			26,102			3,875
	Depreciation on operating leases		19,631		9,388			7,642			8,217			8,773
	Interest		10,658		7,832			9,704			8,358			8,133
	Casino		1,483		2,555			1,270
	Selling, general and administrative		5,118		3,985			5,619			4,337			4,424
	Depreciation and amortization on other property		725		754			868			726			386
	Provision for doubtful accounts		218		141			147			212			1,395

			44,172		41,965			35,014			47,952			26,986

Income (loss) from continuing operations before income taxes and extraordinary item			1,063		(1,638	)		4,124			3,449			(1,337	)
Income taxes (benefit)			404		(528	)		1,872			1,391			(349	)
Income (loss) from continuing operations before extraordinary item			659		(1,110	)		2,252			2,058			(988	)
Income (loss) from discontinued operations, net of income taxes					(3,269	)		(1,297	)		(1,330	)		254
Extraordinary gain on early extinguishment of debt, net of income tax								475

Net income (loss)		$	659	$	(4,379	)	$	1,430		$	728		$	(734	)

Net income (loss) per common share:
	Basic	$	0.17	$	(1.15	)	$	0.38		$	0.20		$	(0.20	)
	Diluted		0.17		(1.15	)		0.37			0.20			(0.20	)
Weighted average shares outstanding
	Basic		3,804,000		3,794,000			3,730,000			3,711,000			3,684,000
	Diluted		3,808,000		3,794,000			3,880,000			3,730,000			3,684,000
Balance Sheet Data
(in thousands)
Total assets		$	123,833	$	97,838		$	85,387		$	84,301		$	108,033
Notes payable and subordinated debt			83,205		69,031			64,806			60,378			79,872

	Condensed Consolidated Statements of Income (Loss) for the Years Ended December 31,									Condensed Consolidated Statements of Income (Loss) for the Years Ended December 31,
							The Effect on Income of Changes Between Years									The Effect on Income of Changes Between Years
	2003			2002			The Effect on Income of Changes Between Years			2002			2001			The Effect on Income of Changes Between Years
Equipment sales and sales-type leases gross margin	$	486		$	1,597		$	(1,111	)	$	1,597		$	1,214		$	383
Finance and lease gross margin		13,500			9,214			4,286			9,214			14,412			(5,198	)
Fee income		4,383			1,104			3,279			1,104			4,750			(3,646	)
Interest expense		(10,658	)		(7,832	)		(2,826	)		(7,832	)		(9,704	)		1,872
Casino gross margin		(587	)		(841	)		254			(841	)		86			(927	)
Selling, general and administrative		(5,118	)		(3,985	)		(1,133	)		(3,985	)		(5,619	)		1,634
Depreciation and amortization on other property		(725	)		(754	)		29			(754	)		(868	)		114
Provision for doubtful accounts		(218	)		(141	)		(77	)		(141	)		(147	)		6

Income (loss) from continuing operations before income taxes (benefit) and extraordinary item	$	1,063		$	(1,638	)	$	2,701		$	(1,638	)	$	4,124		$	(5,762	)

			Payments due by Period
Contractual Obligations			Payments due by Period
Contractual Obligations	Total		1 Year		2-3 Years		4-5 Years		After 5 Years
Lines of credit	$	9,398	$	8,853	$	545
Equipment notes (recourse)		14,209		6,639		7,209	$	361
Equipment notes (nonrecourse)		66,226		36,748		29,090		388
Subordinated debt		6,459		4,458		1,400		601
Operating leases		1,741		704		373		364	$	300

Total	$	98,033	$	57,402	$	38,617	$	1,714	$	300

10.13		Agreement for Technology Transfer, Manufacture, Distribution and Affecting Patent, Trademark and Copyrights by and between the Registrant and DigiDeal Corporation dated June 16, 1999 (8)
10.14		Agreement for Technology Transfer, Manufacture, Distribution and Affecting Patent, Trademark and Copyrights (Sovereign Nations) by and between the Registrant and DigiDeal Corporation dated June 16, 1999 (8)
10.15		Amended and Restated Agreement for Technology Transfer, Manufacture, Distribution and Affecting Patent, Trademark and Copyrights by and between the Registrant and DigiDeal Corporation, effective June 16, 1999 and dated September 7, 2000 (12)
10.16		Deferred Compensation Plan, adopted February 4, 2000 and effective as of April 1, 2000 (10)
10.17		Purchase Agreement by and among the Registrant, PDS Financial Corporation and C.J. Classics, Inc. dated June 12, 2000 (11)
10.18		† Amended and Restated Agreement for Technology Transfer, Manufacture, Distribution and Affecting Patent, Trademark and Copyrights by and among the Registrant and DigiDeal Corporation, effective August 31, 1999 and dated February 23, 2001 (12)
10.19		Amended and Restated Agreement for Technology Transfer, Manufacture, Distribution and Affecting Patent, Trademark and Copyrights (Sovereign Nations) by and among the Registrant and DigiDeal Corporation, effective August 31, 1999 and dated February 23, 2001 (13)
10.20		† License Agreement, dated March 20, 2001, between Action Gaming, Inc. and the Registrant (18)
10.21		Promissory Note, dated May 14, 2001, between U.S. Bank National Association, as lender, and PDS Financial Corporation, et. al., as borrower (16)
10.22		Loan and Security Agreement (Full Recourse), dated as of July 26, 2001, between SunWest Bank, as lender, and PDS Financial Corporation-Nevada, as borrower (17)
10.23		Loan Agreement, dated as of August 6, 2001, by and between Bremer Business Finance Corporation, as lead lender, and PDS Gaming Corporation, PDS Gaming Corporation-Nevada, PDS Financial Corporation-Mississippi and PDS Gaming Corporation-Colorado, as borrower (17)
10.24		Master Guidance Line Promissory Note, dated October 18, 2001, by PDS Gaming Corporation, PDS Gaming Corporation-Nevada, PDS Financial Corporation-Mississippi and PDS Gaming Corporation-Colorado in favor of First International Bank & Trust (18)
10.25		† Nonrecourse Proceeds Sharing Agreement, dated December 31, 2001, between Heller EMX, Inc. and the Registrant (18)
10.26		† Distributor Agreement, dated January 1, 2002, between TEKBILT, Inc. and the Registrant (18)
10.27		† Remarketing and Repurchase Agreement, dated January 11, 2002, between TEKBILT, Inc. and the Registrant (18)
10.28		Credit Agreement, dated February 1, 2002, between Wells Fargo Bank, National Association, and the Registrant (18)
10.29		Employment Agreement, dated February 28, 2002, between the Registrant and Peter D. Cleary (18)

10.30		Employment Agreement, dated February 28, 2002, between the Registrant and Lona M. B. Finley (18)
10.31		Promissory Note, dated March 13, 2002, between First Savings Bank and the Registrant (19)
10.32		2002 Stock Option Plan (20)
10.33		Amendment to Loan Agreement and Note, dated May 3, 2002, between U.S. Bank N.A. and the Registrant (19)
10.34		† Amendment and Termination Agreement, dated May 3, 2002, by and between DigiDeal Corporation and the Registrant (19)
10.35		Master Loan Agreement, dated as of May 14, 2002, by and among PDS Gaming Corporation, PDS Gaming Corporation-Nevada, PDS Gaming Corporation-Mississippi, PDS Gaming Corporation-Colorado, and First State Bank of Thermopolis (21)
10.36		† First Amended and Restated Amendment and Termination Agreement, made on August 14, 2002 with an effective date of May 3, 2002, by and between PDS Gaming Corporation and DigiDeal Corporation (22)
10.37		Letter Agreement, dated as of February 10, 2003, between the Registrant and Johan P. Finley amending the Employment Agreement between the Registrant and Johan P. Finley, dated February 1, 1998 (23)
10.38		Letter of Intent, dated February 23, 2003, by and between Johan P. Finley, Lona M.B. Finley, Peter D. Cleary and the Registrant (23)
10.39		Amended & Restated Loan Pooling and Last-Out Participation Agreement, dated September 24, 2003, between the Registrant and Canpartners Investments IV, LLC, Libra Securities, LLC, Ravich Revocable Trust of 1989, Highbridge/Zwirn Special Opportunities Fund, L.P. and Wishow, Ross, Warsavsky & Company
10.40		Promissory Note, dated February 24, 2004, issued by the Registrant to First State Bank of Thermopolis
10.41		Guaranty, dated February 24, 2004, by Johan P. Finley in favor of First State Bank of Thermopolis relating to the Promissory Note, dated February 24, 2004, issued by the Registrant to First State Bank of Thermopolis
10.42		Letter Agreement, dated February 24, 2004, between the Registrant and Johan P. Finley relating to the Guaranty, dated February 24, 2004, by Johan P. Finley in favor of First State Bank of Thermopolis relating to the Promissory Note, dated February 24, 2004, issued by the Registrant to First State Bank of Thermopolis
10.43		Settlement Agreement and Release, made and entered into as of February 24, 2004, by and between the Registrant and Tekbilt, Inc.
10.44		Settlement Agreement and Release, dated and effective as of February 27, 2004, by and between the Registrant and GE Capital Corporation, Heller EMX, Inc. and Heller Financial Leasing, Inc.
10.45		Loan Agreement, dated March 11, 2004, by and among the Registrant and Cochran Road, LLC, as agent for Lenders
14		Code of Conduct for Directors, Chief Executive and Senior Financial Officers of PDS Gaming Corporation

21.1		Subsidiaries of the Registrant
23.1		Consent of Independent Accountants
31.1		Certification by Johan P. Finley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
31.2		Certification by Peter D. Cleary pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.1		Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

		PDS GAMING CORPORATION
Date: March 30, 2004		By:		/s/ JOHAN P. FINLEY Johan P. Finley, Chief Executive Officer

		2003			2002
ASSETS:
Cash and cash equivalents		$	2,042,000		$	115,000
Restricted cash			10,886,000			1,377,000
Notes, accounts and leases receivable, net of allowances			21,798,000			41,203,000
Equipment under operating leases, net			77,922,000			42,487,000
Equipment held for sale or lease			1,984,000			3,350,000
Other assets, net			9,201,000			9,306,000

		$	123,833,000		$	97,838,000

LIABILITIES AND STOCKHOLDERS' EQUITY:
Equipment vendors payable		$	21,767,000		$	14,385,000
Accounts payable			311,000			233,000
Customer deposits			4,678,000			3,440,000
Notes payable			77,643,000			59,977,000
Subordinated debt			5,562,000			9,054,000
Accrued expenses and other			5,056,000			2,599,000

			115,017,000			89,688,000

Stockholders' equity:
	Common stock, $.01 par value, 20,000,000 shares authorized, 3,806,222 and 3,799,978 shares issued and outstanding		38,000			38,000
	Additional paid-in capital		11,819,000			11,812,000
	Deficit		(3,041,000	)		(3,700,000	)

			8,816,000			8,150,000

		$	123,833,000		$	97,838,000

		2003		2002			2001
REVENUES:
	Equipment sales and sales-type leases	$	6,825,000	$	18,907,000		$	10,978,000
	Operating lease rentals		28,193,000		13,691,000			11,142,000
	Finance income		4,938,000		4,911,000			10,912,000
	Fee income		4,383,000		1,104,000			4,750,000
	Casino		896,000		1,714,000			1,356,000

			45,235,000		40,327,000			39,138,000

COSTS AND EXPENSES:
	Equipment sales and sales-type leases		6,339,000		17,310,000			9,764,000
	Depreciation on operating leases		19,631,000		9,388,000			7,642,000
	Interest		10,658,000		7,832,000			9,704,000
	Casino		1,483,000		2,555,000			1,270,000
	Selling, general and administrative		5,118,000		3,985,000			5,619,000
	Depreciation and amortization on other property		725,000		754,000			868,000
	Provision for doubtful accounts		218,000		141,000			147,000

			44,172,000		41,965,000			35,014,000

Income (loss) from continuing operations before income taxes (benefit) and extraordinary item			1,063,000		(1,638,000	)		4,124,000
Income taxes (benefit)			404,000		(528,000	)		1,872,000

Income (loss) from continuing operations before extraordinary item			659,000		(1,110,000	)		2,252,000
Loss from discontinued operations, net of income tax benefit					(3,269,000	)		(1,297,000	)
Extraordinary gain on early extinguishment of debt, net of income tax								475,000

Net income (loss)		$	659,000	$	(4,379,000	)	$	1,430,000

Net income (loss) per share:
Basic:
	Continuing operations before extraordinary item	$	0.17	$	(0.29	)	$	0.60
	Discontinued operations				(0.86	)		(0.35	)
	Extraordinary gain on early extinguishment of debt, less applicable tax							0.13

		$	0.17	$	(1.15	)	$	0.38

Diluted:
	Continuing operations before extraordinary item	$	0.17	$	(0.29	)	$	0.58
	Discontinued operations				(0.86	)		(0.33	)
	Extraordinary gain on early extinguishment of debt, less applicable tax							0.12

		$	0.17	$	(1.15	)	$	0.37

Weighted average shares outstanding:
	Basic		3,804,000		3,794,000			3,730,000
	Diluted		3,808,000		3,794,000			3,880,000

	Common Stock
	Shares	Par Value		Additional Paid-In Capital		Retained Earnings (Deficit)			Total
Balances, January 1, 2001	3,714,485	$	37,000	$	11,556,000	$	(751,000	)	$	10,842,000
Exercise of stock options, including tax benefit of $25,000	22,500				57,000					57,000
Issued pursuant to Employee Stock Purchase Plan	8,887				19,000					19,000
Issuance of stock purchase warrants					80,000					80,000
Net income							1,430,000			1,430,000

Balances, December 31, 2001	3,745,872		37,000		11,712,000		679,000			12,428,000
Exercise of stock options, including tax benefit of $12,000	48,500		1,000		90,000					91,000
Issued pursuant to Employee Stock Purchase Plan	5,606				10,000					10,000
Net loss							(4,379,000	)		(4,379,000	)

Balances, December 31, 2002	3,799,978		38,000		11,812,000		(3,700,000	)		8,150,000
Issued pursuant to Employee Stock Purchase Plan	6,244				7,000					7,000
Net income							659,000			659,000

Balances, December 31, 2003	3,806,222	$	38,000	$	11,819,000	$	(3,041,000	)	$	8,816,000

		2003			2002			2001
OPERATING ACTIVITIES
	Net cash provided by continuing activities	$	38,105,000		$	29,004,000		$	13,316,000
	Net cash used in discontinued operating activities					(1,568,000	)		(1,490,000	)

	Net cash provided by operating activities		38,105,000			27,436,000			11,826,000

INVESTING ACTIVITIES
	Purchases of equipment for leasing		(54,729,000	)		(33,539,000	)		(19,216,000	)
	Proceeds from sale of equipment		1,244,000			636,000			23,205,000
	Other		(98,000	)		(2,084,000	)

	Net cash provided by (used in) investing activities		(53,583,000	)		(34,987,000	)		3,989,000

FINANCING ACTIVITIES
	Proceeds from borrowings		75,478,000			36,565,000			51,810,000
	Repayments of borrowings		(45,080,000	)		(28,783,000	)		(65,290,000	)
	Increase in restricted cash		(9,509,000	)		(1,377,000	)
	Repayment of subordinated debt		(3,492,000	)		(2,925,000	)		(358,000	)
	Stock options exercised					91,000			57,000
	Proceeds from employee stock purchase plan		8,000			9,000			19,000

	Net cash provided by (used in) financing activities		17,405,000			3,580,000			(13,762,000	)

CHANGE IN CASH AND CASH EQUIVALENTS
	Net increase (decrease) during the year		1,927,000			(3,971,000	)		2,053,000
	Balance, beginning of year		115,000			4,086,000			2,033,000

	Balance, end of year	$	2,042,000		$	115,000		$	4,086,000

		Options Available for Grant		Options Outstanding		Weighted Average Exercise Price Per Share
Balances, January 1, 2001		49,000		895,000		$	3.49
	Increases in number of shares available	250,000		—			—
	Granted	(242,000	)	242,000			3.01
	Exercised	—		(23,000	)		1.42
	Canceled	133,000		(133,000	)		2.31

Balances, December 31, 2001		190,000		981,000			3.54
	Granted	(142,000	)	142,000			2.70
	Exercised	—		(48,000	)		1.62
	Canceled	340,000		(340,000	)		3.45
	Number of shares made available through 2002 Plan	800,000

Balances, December 31, 2002		1,188,000		735,000			3.53
	Expiration of 1993 Stock Option Plan	(588,000	)	—			—
	Granted	(15,000	)	15,000			1.93
	Exercised	—		—			—
	Canceled	200,000		(200,000	)		4.15

Balances, December 31, 2003		785,000		550,000		$	5.22

Options exercisable at December 31, 2003				331,000		$	3.61

			2003			2002			2001
Reconciliation of net income (loss) to net cash provided by (used in) operating activities:
	Income (loss) from continuing operations and extraordinary gain from early extinguishments of debt, net of income tax		$	659,000		$	(1,110,000	)	$	2,727,000
	Depreciation on operating leases			19,631,000			9,388,000			7,642,000
	Depreciation on other property			635,000			754,000			868,000
	Collection and asset impairment provisions			377,000			(639,000	)		(1,092,000	)
	Deferred income taxes			367,000			(287,000	)		1,620,000
	Debt extinguishments discounts									(870,000	)
	Originations of notes and direct finance leases receivables			(18,987,000	)		(22,668,000	)		(22,109,000	)
	Proceeds from:
		Sale or discounting of notes and leases receivables		6,018,000			7,727,000			5,235,000
		Collections on notes and direct finance leases receivables		12,155,000			22,081,000			20,220,000
	Gain on sale of financial assets			(387,000	)		(532,000	)		(343,000	)
	Changes in operating assets and liabilities:
		Accounts receivable		6,952,000			(232,000	)		1,913,000
		Equipment held for sale or lease		1,322,000			2,047,000			1,332,000
		Accounts payable and accrued expenses		7,461,000			12,091,000			1,246,000
		Customer deposits		1,239,000			1,620,000			(3,248,000	)
	Other, net			663,000			(1,236,000	)		(1,825,000	)

		Net cash provided by continuing operating activities	$	38,105,000		$	29,004,000		$	13,316,000

	Loss from discontinued operations, net of income tax benefit					$	(3,269,000	)	$	(1,297,000	)
	Deferred income taxes						(1,558,000	)		(1,078,000	)
	Collection and asset impairment provisions						823,000			549,000
	Depreciation on other property						66,000			78,000
	Amortization of intangibles									258,000
	Write-off of amounts invested in discontinued operations						2,370,000

		Net cash used by discontinued operating activities				$	(1,568,000	)	$	(1,490,000	)

Cash paid during the year for:
	Interest		$	9,314,000		$	7,823,000		$	8,422,000
	Income taxes			36,599			350,000
Significant non-cash financing and investing activities:
	Note payable extinguished with disposition of capital lease		$	12,732,000
	Equipment sold to lessee, paid for after year end					$	7,609,000
	Leases of equipment previously held for sale or lease								$	900,000
	Operating leases converted to direct finance leases upon exercise of purchase options									18,511,000
	Exchange of notes receivable, direct finance leases and equipment under operating leases for business acquired									2,277,000
	Liabilities incurred for purchase of website									750,000

			Additions
Description	Balance at beginning of year		Charged to costs and expenses(1)		Charged to other accounts		Deductions			Balance at end of year
Year ended December 31, 2003:
Allowance for doubtful accounts (deducted from accounts receivable)	$	1,095	$	218	$	—	$	(1,302	)	$	11

Allowance for obsolescence (deducted from equipment held for sale or lease)	$	739	$	159	$	421	$	(480	)	$	839

Allowance for impairment (deducted from equipment under operating lease)	$	—	$	360	$	—	$	(317	)	$	43

Year ended December 31, 2002:
Allowance for doubtful accounts (deducted from accounts receivable)	$	1,067	$	126	$	—	$	(98	)	$	1,095

Allowance for obsolescence (deducted from equipment held for sale or lease)	$	583	$	634	$	176	$	(654	)	$	739

Year ended December 31, 2001:
Allowance for doubtful accounts (deducted from accounts receivable)	$	1,697	$	651	$	—	$	(1,281	)	$	1,067

Allowance for obsolescence (deducted from equipment held for sale or lease)	$	199	$	1,082	$	—	$	(698	)	$	583

Allowance for impairment (deducted from equipment under operating leases)	$	297	$	239	$	—	$	(536	)	$	—