<PAGE>   1
================================================================================

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

                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

                     FOR THE QUARTER ENDED DECEMBER 31, 1996

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

                        FOR THE TRANSITION PERIOD FROM       TO

                          COMMISSION FILE NUMBER 0-4281
                           ALLIANCE GAMING CORPORATION
             (Exact name of registrant as specified in its charter)

            NEVADA                                 88-0104066
  (State or other jurisdiction of               (I.R.S. Employer
 incorporation or organization)                Identification No.)

                6601 S. BERMUDA RD.
              LAS VEGAS, NEVADA                      89119
(Address of principal executive offices)           (Zip Code)

                  REGISTRANT'S TELEPHONE NUMBER: (702) 270-7600

                                   ----------

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. 

[X] Yes [ ] No

The number of shares of Common Stock, $0.10 par value, outstanding as of
February 4, 1997 according to the records of the registrant's registrar and
transfer agent was 31,832,807.

================================================================================



<PAGE>   2


                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996



                                    I N D E X



<TABLE>
<CAPTION>
PART I.                             FINANCIAL INFORMATION                       PAGE
<S>      <C>                                                                    <C>
Item 1.  Unaudited Financial Statements

         Unaudited Condensed Consolidated Balance Sheets as of
           June 30, 1996 and December 31, 1996                                  3

         Unaudited Condensed Consolidated Statements of Operations
           for the three months ended December 31, 1995 and 1996                4

         Unaudited Condensed Consolidated Statements of Operations
           for the six months ended December 31, 1995 and 1996                  5

         Unaudited Condensed Consolidated Statements of Stockholder's
            Equity for the six months ended December 31, 1996                   6

         Unaudited Condensed Consolidated Statements of Cash Flows
           for the six months ended December 31, 1995 and 1996                  7

         Notes to Unaudited Condensed Consolidated Financial Statements         8

Item 2.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                            23



PART II. OTHER INFORMATION


Item 1.  Legal Proceedings                                                      37

Item 6.  Exhibits and reports on Form 8-K                                       37


SIGNATURES                                                                      38
</TABLE>





                                       2
<PAGE>   3
                                     PART 1

                           ALLIANCE GAMING CORPORATION
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                          (In 000's, except share data)

<TABLE>
<CAPTION>
                                                                                 June 30,        Dec. 31,
                                                                                  1996            1996
                                                                               ---------       ---------
<S>                                                                            <C>             <C>      
ASSETS
Current assets:
     Cash and cash equivalents                                                 $  48,057       $  29,401
     Accounts and notes receivable, net of allowance for doubtful
         accounts of $17,727 and $23,098                                          93,502         101,051
     Inventories, net                                                             41,656          40,196
     Other current assets                                                          8,354           6,597
                                                                               ---------       ---------
         Total current assets                                                    191,569         177,245
                                                                               ---------       ---------
Leased equipment, net                                                                482           3,743
Long-term notes receivable, net of allowance for doubtful
     accounts of $1,770 and $1,781                                                14,184          14,026
Property, plant and equipment, net of accumulated
     depreciation of $30,144 and $35,921                                          77,602          75,889
Excess of costs over net assets of acquired businesses, net of
     accumulated amortization of $422 and $1,150                                  60,292          60,590
Intangible assets, net of accumulated amortization of $5,216 and $7,495           20,247          18,231
Other assets, net                                                                 11,128          12,694
                                                                               ---------       ---------
                  Total assets                                                 $ 375,504       $ 362,418
                                                                               =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                          $  16,240       $  13,694
     Accrued liabilities                                                          38,543          39,677
     Current maturities of long-term debt and lines of credit                     25,777          14,482
                                                                               ---------       ---------
           Total current liabilities                                              80,560          67,853
                                                                               ---------       ---------
Senior secured notes, net of unamortized discount of  $3,071 and $2,928          150,929         151,072
Other long-term debt, less current maturities                                     14,638          13,051
Other liabilities                                                                  6,831           6,851
                                                                               ---------       ---------
                  Total liabilities                                              252,958         238,827
                                                                               ---------       ---------
Minority interest                                                                  1,148           1,193
Series B Special Stock, $.10 par value, $100 liquidation value; 684,551
     shares and 699,491 issued and outstanding, net of discount                   51,552          53,761

Commitments and contingencies

Stockholders' equity:
     Common Stock, $.10 par value; 175,000,000 shares authorized;
              31,763,000 shares and 31,835,000 issued and outstanding              3,176           3,184
     Series E Special Stock, $100 liquidation value; 113,160 and 116,872
              shares issued and outstanding                                       11,316          11,687
     Additional paid-in capital                                                  139,031         138,987
     Cumulative translation adjustment                                              (287)         (1,201)
     Accumulated deficit                                                         (83,390)        (84,020)
                                                                               ---------       ---------
         Total stockholders' equity                                               69,846          68,637
                                                                               ---------       ---------
               Total liabilities and stockholders' equity                      $ 375,504       $ 362,418
                                                                               =========       =========
</TABLE>



      See notes to unaudited condensed consolidated financial statements.



                                       3
<PAGE>   4
                           ALLIANCE GAMING CORPORATION
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                          (In 000's, except share data)
<TABLE>
<CAPTION>
                                                                    Three Months Ended December 31,
                                                                         1995            1996
                                                                      ---------       ---------
<S>                                                                   <C>             <C>      
Revenues:
    Gaming equipment and systems sales                                $       3       $  42,273
    Wall machine and amusement game sales                                   ---          42,293
    Gaming machine operations                                            26,325          31,692
    Casino operations                                                    11,359          12,445
                                                                      ---------       ---------

                                                                         37,687         128,703
                                                                      ---------       ---------

Costs and expenses:
     Cost of gaming equipment and systems sales                               1          26,483
     Cost of  wall machine and amusement game sales                         ---          20,317
     Cost of gaming machine operations                                   20,148          23,644
     Cost of casino operations                                            5,397           5,583
     Selling, general and administrative                                  7,010          28,113
     Provision for doubtful receivables                                      11           4,734
     Depreciation and amortization                                        2,419           5,920
     Direct merger costs                                                  4,760           ---
                                                                      ---------       ---------
                                                                         39,746         114,794
                                                                      ---------       ---------

Operating income (loss)                                                  (2,059)         13,909

Other income (expense):
    Interest income                                                         392             471
    Interest expense                                                     (2,081)         (5,628)
    Royalty fees                                                           (928)         (1,125)
    Minority interest in income                                            (132)           (285)
    Other, net                                                               53              53
                                                                      ---------       ---------
Income (loss) before income taxes                                        (4,755)          7,395

Income tax provision                                                      1,258           3,250
                                                                      ---------       ---------

Net income (loss)                                                        (6,013)          4,145

Special Stock dividends including repurchase premium                      ---             3,094
                                                                      ---------       ---------

Net income (loss) applicable to common shares                         $  (6,013)      $   1,051
                                                                      =========       =========

Net income (loss) per common share                                    $   (0.50)      $    0.03
                                                                      =========       =========

Weighted average common shares outstanding                               12,103          31,834
                                                                      =========       =========
</TABLE>




      See notes to unaudited condensed consolidated financial statements.



                                       4
<PAGE>   5
                           ALLIANCE GAMING CORPORATION
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                          (In 000's, except share data)

<TABLE>
<CAPTION>
                                                         Six Months Ended December 31,
                                                              1995            1996
                                                           ---------       ---------
<S>                                                        <C>             <C>      
Revenues:
    Gaming equipment and systems sales                     $       6       $  77,175
    Wall machine and amusement game sales                        ---          68,700
    Gaming machine operations                                 52,621          60,582
    Casino operations                                         23,602          25,158
                                                           ---------       ---------

                                                              76,229         231,615
                                                           ---------       ---------

Costs and expenses:
    Cost of gaming equipment and systems sales                     1          48,290
    Cost of  wall machine and amusement game sales               ---          35,421
    Cost of gaming machine operations                         40,361          45,539
    Cost of casino operations                                 11,313          10,958
    Selling, general and administrative                       13,703          50,393
    Provision for doubtful receivables                            32           6,309
    Depreciation and amortization                              4,906          11,141
    Unusual items                                              ---               700
                  Direct merger costs                          9,437           ---
                                                           ---------       ---------
                                                              79,753         208,751
                                                           ---------       ---------

Operating income (loss)                                       (3,524)         22,864

Other income (expense):
    Interest income                                              818           1,034
    Interest expense                                          (4,288)        (11,879)
    Royalty fees                                              (1,908)         (2,276)
    Minority interest in income                                 (276)           (426)
    Other, net                                                   535              52
                                                           ---------       ---------
Income (loss) before income taxes                             (8,643)          9,369

Income tax provision                                             788           4,588
                                                           ---------       ---------

Net income (loss)                                             (9,431)          4,781

Special Stock dividends including repurchase premium           ---             5,991
                                                           ---------       ---------

Net loss applicable to common shares                       $  (9,431)      $  (1,210)
                                                           =========       =========

Net loss per common share                                  $    (.79)      $    (.04)
                                                           =========       =========

Weighted average common shares outstanding                    11,879          31,802
                                                           =========       =========
</TABLE>




      See notes to unaudited condensed consolidated financial statements.




                                       5
<PAGE>   6


                           ALLIANCE GAMING CORPORATION
       UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                       Six Months Ended December 31, 1996
                                   (In 000's)


<TABLE>
<CAPTION>
                                                                                     Retained                Total
                                                       Series E         Additional   Earnings  Cumulative    Stock-
                                  Common Stock       Special Stock       Paid-in      (Accum.  Translation  holders'
                                 Shares  Dollars   Shares    Dollars     Capital     Deficit)   Adjustment   Equity
                                 ------  -------   ------    -------     -------     --------  -----------   ------
<S>                              <C>      <C>      <C>      <C>          <C>         <C>          <C>        <C>  
Balances at June 30, 1996        31,763   $3,176     113     $11,316     $139,031    $(83,390)    $(287)     $69,846

Net income                           -        -       -           -            -        4,7          -         4,781
Shares issued upon exercise of
  options                            75        8      -           -           115          -         -           123
Adjustments to  merger
  consideration                      (3)      -       -           -           (12)         -         -           (12)
Special Stock dividends              -        -        4         371           -       (5,411)       -        (5,040
Special Stock repurchase premium     -        -       -           -          (580)         -         -          (580)
Other                                -        -       -           -           433          -         -           433
Foreign currency translation
  adjustment                         -        -       -           -            -           -         -          (914)
                                 ------   ------     ---     -------     --------    --------   -------      -------
Balances at December 31, 1996    31,835   $3,184     117     $11,687     $138,987    $(84,020)  $(1,201)     $68,637
                                 ======   ======     ===     =======     ========    ========   =======      =======       
</TABLE>






      See notes to unaudited condensed consolidated financial statements.




                                       6
<PAGE>   7
                           ALLIANCE GAMING CORPORATION
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (In 000's)

<TABLE>
<CAPTION>
                                                                  Six Months Ended December 31,
                                                                    1995                  1996
                                                                  --------              --------
<S>                                                               <C>                   <C>     
Cash flows from operating activities:
    Net income (loss)                                              $(9,431)             $  4,781
        Adjustments to reconcile net income (loss)
          to net cash provided by operating activities:
        Depreciation and amortization                                4,906                11,141
        Amortization of debt discounts                                 118                   654
          Writedown of other assets                                    201                 1,153
        Loss on sale of assets                                         240                   275
        Provision for losses on receivables                             32                 6,309
          Other                                                        655                (1,625)
    Net change in operating assets and liabilities:
        Accounts and notes receivable                                  256               (13,521)
        Inventories                                                     12                (5,036)
        Other current assets                                         1,618                   898
        Accounts payable                                               537                (2,546)
        Accrued liabilities                                          1,630                 1,274
                                                                  --------              --------
            Net cash provided by operating activities                  774                 3,757

Cash flows from investing activities:
    Additions to property, plant and equipment                      (5,004)               (6,055)
    Proceeds from disposal of property and equipment                 2,218                 2,791
    Proceeds from sales of securities available for sale             8,015                 ---
    Other                                                           (2,599)               (1,534)
                                                                  --------              --------
        Net cash provided by (used in) investing activities          2,630                (4,798)

Cash flows from financing activities:
     Proceeds from long-term debt, net of expenses                     682                    41
     Reduction of long-term debt                                    (2,091)               (4,853)
     Net change in lines of credit                                   ---                  (9,564)
     Repurchase of Series B Special Stock                            ---                  (3,307)
     Issuance of common stock upon exercise of stock options         ---                     123
                                                                    ------              --------
            Net cash used in financing activities                   (1,409)              (17,560)

Effect of exchange rate changes on cash                              ---                     (55)

Cash and cash equivalents:
           Increase (decrease) for period                            1,995               (18,656)
           Balance, beginning of period                             13,734                48,057
                                                                  --------              --------
           Balance, end of period                                 $ 15,729              $ 29,401
                                                                  ========              ========
</TABLE>




       See notes to unaudited condensed consolidated financial statements.





                                       7
<PAGE>   8
                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                   SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996



1.         BASIS OF  PRESENTATION

           The accompanying unaudited interim condensed consolidated financial
           statements reflect all adjustments, consisting of normal recurring
           adjustments, which management believes are necessary to present
           fairly the financial position, results of operations and cash flows
           of Alliance Gaming Corporation ("Alliance or the "Company") for the
           respective periods presented. The results of operations for an
           interim period are not necessarily indicative of the results which
           may be expected for any other interim period or for the year as a
           whole. The accompanying unaudited interim condensed consolidated
           financial statements should be read in conjunction with the
           consolidated financial statements and notes in the Company's annual
           report on Form 10-K for the year ended June 30, 1996. All
           intercompany accounts and transactions have been eliminated in
           consolidation.

           The condensed consolidated balance sheet at June 30, 1996 was derived
           from audited consolidated financial statements, but does not include
           all disclosures required under generally accepted accounting
           principles. Certain reclassifications have been made to prior period
           financial statements to conform with current period presentation.

           On June 18, 1996, the Company completed the acquisition of all the
           outstanding shares of Bally Gaming International, Inc. ("BGII") (the
           "Merger"). The consideration paid consisted of approximately
           $77,243,000 in cash, $2,957,000 in the Company's common stock and
           $36,571,000 in the Company's Series B Special Stock, totaling $11.84
           per share for the 9,855,500 shares of BGII outstanding (excluding the
           1,000,000 shares beneficially owned by the Company prior to the
           Merger). The acquisition has been accounted for as a purchase and the
           results of operations of BGII have been included in the consolidated
           financial statements since June 18, 1996. The purchase price was
           allocated based on estimated fair values at the date of the
           acquisition. During the one year period following the Merger, the
           Company will make adjustments to the estimated fair values assigned
           to the assets acquired and liabilities assumed from BGII based on
           appraisals and other information received, which will result in
           changes to the excess of purchase price over the fair value of BGII
           assets acquired and liabilities assumed. The excess of purchase price
           over the BGII assets acquired is being amortized on a straight-line
           basis over 40 years and has been adjusted during the quarter ended
           December 31, 1996 for changes in fair values assigned to certain
           assets and liabilities.

2.         SUPPLEMENTAL CASH FLOW INFORMATION

           The following supplemental information is related to the condensed
           consolidated statements of cash flows. In the three months ended
           December 31, 1995 and 1996, the Company recorded the following
           significant non-cash items:

           During the six months ended December 31, 1996, the Company
           reclassified approximately $1,461,000 from other assets to equipment
           as gaming machines were manufactured and placed into service on the
           Nevada route, reclassified approximately $1,436,000 to property,
           plant and equipment from excess costs over net assets of acquired
           business based on recent appraisals received for certain German
           properties and reclassified approximately $6,496,000 from inventory
           to leased equipment. In addition, the Company recorded non-cash
           dividends for its Series E and Series B Special Stock in the amount
           of $5,411,000.

           During the six months ended December 31, 1995, the Company
           reclassified approximately $1,170,000 from other assets to equipment
           as gaming machines were manufactured and placed into service on the
           Nevada route. In addition, the Company recorded a non-cash unrealized
           loss on securities available for sale in the amount of $752,000
           recorded in the stockholders equity section, net of tax.



                                       8
<PAGE>   9
                          ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996


3.    LONG-TERM DEBT AND LINES OF CREDIT

      Long-term debt at June 30, 1996 and December 31, 1996 consists of the
following:

<TABLE>
<CAPTION>
                                                                                      June 30,        Dec. 31,
                                                                                        1996            1996
                                                                                       --------       --------
                                                                                              (in 000's)
         <S>                                                                           <C>            <C>

         12 7/8%  Senior Secured Notes due 2003, net of unamortized
              discount of $3,071,000 and  $2,928,000                                   $150,929       $151,072
         Bally Wulff revolving lines of credit                                          13,664         11,029
         Hospitality Franchise Systems note payable,
              secured by the assets of the Rainbow Casino                                 7,864          7,228
         Bally Gaming and Systems revolving line of credit                                7,525            596
         7.5% Convertible subordinated debentures due 2003, unsecured                     1,642          1,642
         Subordinated note payable to stockholder, net of discount                        2,268            ---
         Other, secured by related equipment                                              7,452          7,038
                                                                                       --------       --------
                                                                                        191,344        178,605
         Less current maturities                                                         25,777         14,482
                                                                                       --------       --------
         Long-term debt, less current maturities                                       $165,567       $164,123
                                                                                       ========       ========
</TABLE>

      In June 1996, the Company completed a public offering of $154,000,000
      aggregate principal amount of its 12 7/8% Senior Secured Notes due 2003
      (the "Senior Secured Notes") as part of the financing of the BGII Merger.
      Interest on the Senior Secured Notes is payable semi-annually in arrears
      on June 30 and December 30 of each year, commencing December 30, 1996. The
      Senior Secured Notes will mature on June 30, 2003. The Senior Secured
      Notes will be redeemable at the option of the Company, in whole or in
      part, at any time on or after June 30, 2000 at the redemption prices of
      104.292% for the twelve months beginning June 30, 2000, 102.146% for the
      twelve months beginning June 30, 2001 and 100% thereafter, plus accrued
      and unpaid interest, if any, to the date of redemption. Upon the
      occurrence of a change of control as defined in the indenture, the Company
      is required to make an offer to repurchase the Senior Secured Notes at a
      price equal to 101% of the principal amount thereof, plus accrued and
      unpaid interest, if any, to the date of repurchase. The Senior Secured
      Notes are secured by an exclusive pledge of the equity interests directly
      or indirectly held by the Company in its subsidiaries, except for the
      equity interests in BGII and its subsidiaries, but including the equity
      interest in Alliance Holding Company ("Holding"), which was formed to hold
      the equity interests of BGII and its subsidiaries. The Senior Secured
      Notes are fully and unconditionally guaranteed on a joint and several
      senior basis by each present and future subsidiary, as defined, of the
      Company, other than (i) the partially-owned entities through which the
      Company's Mississippi casino and Louisiana gaming machine operations are
      conducted and (ii) specified entities through which the Company's German
      operations are conducted. The indenture for the Company's Senior Secured
      Notes contains various covenants including limitations on incurrence of
      additional indebtedness, on restricted payments and on dividend and
      payment restrictions on subsidiaries.

      In June 1996, in response to a solicitation from the Company, holders of
      $83,358,000 aggregate principal amount of its 7.5% Convertible
      Subordinated Debentures ("Convertible Debentures") elected to exchange
      their Convertible Debentures for new debentures that converted at the time
      of the Merger into shares of the Company's common stock ($72,042,000
      principal amount) and shares of the Company's Series E Special 





                                       9
<PAGE>   10
                          ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996



      Stock ($11,316,000 principal amount). At December 31, 1996, $1,642,000 of
      Convertible Debentures remained outstanding.

      During 1995, Hospitality Franchise Systems, Inc. ("HFS") agreed to loan
      $7,750,000 to the Company's majority controlled subsidiary Rainbow Casino
      Vicksburg Partnership, L.P. ("RCVP") in connection with the construction
      of the Rainbow Casino. The loan amount was subsequently increased to
      $10,000,000. The note bears interest at 7.5% per annum and requires
      monthly payments of principal and interest over a 24-month period. In
      exchange for funding this loan, HFS is also entitled to receive in
      perpetuity a monthly royalty fee based on the casino's gaming revenues of
      12% on the first $40.0 million, 11% on the next $10.0 million, and 10%
      thereafter. The accompanying unaudited consolidated statement of
      operations for the six months ended December 31, 1995 and 1996 include
      approximately $1,908,000 and $2,276,000 of such royalties, respectively.

      In March 1992, Alfred H. Wilms, director and principal stockholder (and
      then Chairman of the Board of Directors and Chief Executive Officer) of
      the Company, committed to provide or cause others to provide a $6,500,000
      five year loan to Video Services, Inc. ("VSI"), the Company's controlled
      subsidiary, which loan was funded in full and was secured by a
      subordinated interest in all of VSI's present and future personal
      property. All scheduled principal and interest payments were made until
      September 1996 when the Company paid off the remaining principal and
      accrued interest balance totaling $2,826,000.

      During March 1993, the Bally Wulff entities obtained two bank lines of
      credit originally for the purpose of financing the acquisition of assets
      acquired from an independent distributor which has subsequently been
      utilized for general working capital purposes. The agreements provide for
      borrowings of DM16,000,000 (approximately $10,381,000 at December 31, 1996
      exchange rates) and DM1,250,000 (approximately $811,000 at December 31,
      1996), respectively. The DM1,250,000 line of credit was originally
      DM5,000,000 and has been, and will continue to be, reduced by DM250,000
      principal amount per quarter, and expires on March 31, 1998. Borrowings
      under this line of credit bear interest at 6.95%. The working capital
      revolving credit line of DM16,000,000 bears interest at a rate tied to an
      international borrowing rate plus 1% (4.46% at December 31, 1996) and is
      due on demand. These lines are collateralized by a pledge of the assets
      acquired. Approximately $454,000 was outstanding under these lines at
      December 31, 1996. In May 1993, the Bally Wulff entities obtained a
      DM16,300,000 (approximately $10,575,000 at December 31, 1996) revolving
      line of credit for general working capital purposes. This agreement bears
      interest at a rate tied to an international borrowing rate plus 1% (4.46%
      at December 31, 1996 exchange rates) and is due on demand. This line is
      collateralized by the receivables of the Bally Wulff entities.
      Approximately $10,575,000 was outstanding under this line at December 31,
      1996. During the quarter ended December 31, 1996, Bally Wulff refinanced
      an existing mortgage note to bring the borrowing under the same financial
      institution that provides the lines of credit discussed above. In
      accordance with the covenants for the Senior Secured Notes, the refinanced
      mortgage note bears approximately the same interest rate and has a stated
      maturity which is not shorter than its original maturity date.

      In March 1993, BGII's domestic subsidiary, Bally Gaming, Inc., obtained a
      bank revolving line of credit which, as amended, provides for borrowings
      tied to a percentage of Bally Gaming, Inc.'s eligible (as defined in the
      credit agreement) inventory and accounts receivable with a maximum
      borrowing capacity of $15,000,000. Borrowings under this agreement, which
      expires March 31, 1997, bear interest at 1.5% above the bank's prime rate
      (9.75% at December 31, 1996). The Company must pay an annual facility fee
      of one-half of one percent of the maximum borrowing capacity and a monthly
      unused line fee of one-quarter of one percent of the difference between
      the maximum borrowing capacity and the average daily outstanding balance
      during any month. This line of credit is collateralized by property, plant
      and equipment and the 




                                       10
<PAGE>   11
                          ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996



      eligible inventory and accounts receivable. The agreement and subsequent
      amendments also contain certain financial and other restrictive covenants,
      including the maintenance by Bally Gaming, Inc. of specified levels of
      minimum net working capital, working capital ratio, tangible net worth,
      net worth ratio, and minimum net income after taxes, all as defined in the
      credit agreement. Eligible borrowing capacity under this agreement at
      December 31, 1996 was $15,000,000. Approximately $596,000 was outstanding
      under this line at December 31, 1996.

      In January 1997, the Company received a commitment letter for a new
      working capital based line of credit which will provide for borrowings
      based on a percentage of Bally Gaming, Inc.'s eligible accounts receivable
      and inventory with a maximum borrowing capacity of $30,000,000, subject to
      the $40,000,000 maximum worldwide revolving credit limitation in the
      Company's indenture for the Senior Secured Notes. This line of credit
      would be collateralized by accounts receivable and inventory and will have
      no financial covenants other than a requirement to maintain minimum net
      worth. As currently contemplated, the Company will close on this new
      facility on March 31, 1997 upon expiration of the Company's existing line
      of credit.

4.    SERIES B SPECIAL STOCK

      During the quarter ended December 31, 1996, the Company purchased on the
      open market 17,500 shares of its Series B Special Stock for $1,654,000
      which represented a premium of $343,000 over the carrying value. For the
      six months ended December 31, 1996, the Company purchased on the open
      market 36,500 shares of its Series B Special Stock for $3,307,000 which
      represented a premium of $580,000 over the carrying value. The premium
      paid is reflected in the consolidated statement of stockholder's equity as
      a charge against additional paid-in capital, and is also deducted in
      computing net income applicable to common shareholders.

5.    INCOME TAXES

      The Company's effective tax rate for the three and six month periods ended
      December 31, 1996 differs from the statutory rate of 35% due to higher tax
      rates applicable to earnings of Bally Wulff, combined with the fact that
      earnings at the Company's domestic subsidiaries cannot be fully offset by
      the utilization of net operating loss carryforwards.

      The Company's effective tax rate for the three and six month periods ended
      December 31, 1995 differs from the statutory rate of 35% due to the book
      tax benefit related to the change in the unrealized gains and losses in
      the investments and securities available for sale, and the fact that net
      operating losses incurred during the period were fully reserved.

6.    LEGAL PROCEEDINGS

      LITIGATION RELATING TO THE BGII MERGER.

      On or about June 19, 1995, three purported class actions were filed in the
      Chancery Court of Delaware by BGII stockholders against BGII and its
      directors (the "Fiorella, Cignetti and Neuman Actions") in connection with
      the then-proposed merger of BGII with WMS ("WMS Merger"). Also on or about
      June 19, 1995, a purported class action was filed in the Delaware Court of
      Chancery by a BGII stockholder against BGII and its directors and the
      Company (the "Strougo Action") in connection with the tender offer and
      consent solicitation made by the Company (subsequently superseded by the
      execution of the Agreement and Plan of Merger in October 1995 between the
      Company and BGII). On or about July 6, 1995, the plaintiffs in the
      Fiorella, Cignetti, Neuman and Strougo Actions (collectively, the
      "Stockholder Plaintiffs") filed with the 



                                       11
<PAGE>   12
                          ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996

      Court a motion to consolidate the four actions. On or about July 27, 1995,
      certain of the Stockholder Plaintiffs filed an amended complaint that
      adopted certain allegations concerning self-dealing by BGII directors in
      connection with the merger agreement entered into with WMS (the "WMS
      Agreement"); added a claim relating to BGII's alleged failure to hold an
      annual meeting as required; and added WMS as defendant. The amended
      complaint also alleged that BGII intended, in violation of Delaware law,
      to sell Bally Wulff without first seeking stockholder approval of the
      sale. The action sought an order enjoining defendants from proceeding
      with, consummating or closing the WMS merger or rescinding it if it
      closed; preventing the sale of Bally Wulff without prior stockholder
      approval; declaring invalid BGII's agreement to pay WMS a fee if the WMS
      Agreement is terminated by BGII in certain circumstances; compelling an
      auction of BGII and the provision of due diligence to the Company;
      scheduling an immediate meeting of BGII stockholders; and awarding
      compensatory damages. The Company believes these claims to be without
      merit and intends to vigorously defend these actions.

      On October 23, 1995, WMS instituted a suit in New York State Court against
      BGII for BGII's failure to pay $4.8 million upon termination of the WMS
      Agreement. Management intends to vigorously defend this action. On
      November 22, 1995, BGII answered the complaint and brought counterclaims
      against WMS alleging that WMS repudiated and breached the WMS Agreement
      by, among other things, failing to act in good faith toward the
      consummation of the WMS Merger, advising BGII that it would not perform as
      agreed but would impose new conditions on the WMS Merger, acting in excess
      of its authority and undermining the ability of BGII to perform the WMS
      Agreement. On February 8, 1996 WMS moved for summary judgment. On April 2,
      1996, BGII opposed WMS's motion and cross-moved for summary judgment.

      On September 14, 1995, a stockholders' class and derivative action was
      commenced by Richard Iannone, a stockholder of the Company, against the
      Company, the members of its current Board of Directors and certain of its
      former directors in Federal District Court in Nevada asserting, among
      other matters, that the Company has wasted corporate assets in its efforts
      to acquire BGII and that the Company had made false and misleading
      statements and omissions in connection with the Company's then extant
      tender offer to purchase the shares of BGII. On December 12, 1996, the
      court dismissed the action in its entirety on the defendants' motion,
      ruling that the plantiff's sole federal cause of action failed to state a
      claim for relief. Following the ruling, in January 1997 the plaintiff
      agreed to waive his rights of appeal and to refrain from further
      litigation against the defendants, in exchange for the defendants'
      agreement not to seek an award of costs or the imposition of sanctions
      against the plaintiff or his counsel.

      OTHER LITIGATION

      On September 25, 1995, BGII was named as a defendant in a class action
      lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on
      behalf of himself and all others similarly situated (the "plaintiffs").
      The plaintiffs filed suit against BGII and approximately 45 other
      defendants (each a "defendant," and collectively the "defendants"). Each
      defendant is involved in the gaming business as either a gaming machine
      manufacturer, distributor, or casino operator. The class action lawsuit
      arises out of alleged fraudulent marketing and operation of casino video
      poker machines and electronic slot machines. The plaintiffs allege that
      the defendants have engaged in a course of fraudulent and misleading
      conduct intended to induce people to play their gaming machines based on a
      false belief concerning how those machines actually operate as well as the
      extent to which there is actually an opportunity to win on any given play.
      The plaintiffs allege that the defendants' actions constitute violations
      of the Racketeer Influenced and Corrupt Organizations Act (RICO) and give
      rise to claims of common law fraud and unjust enrichment. The plaintiffs
      are seeking monetary damages in excess of one billion dollars, and are
      asking that any damage awards be trebled under applicable Federal law.
      Management believes the plaintiffs' lawsuit to be without merit. The
      Company intends to vigorously pursue all legal defenses available to it.




                                       12
<PAGE>   13
                          ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996


      The Company has been named as a defendant in an action brought by
      Canpartners Investments IV and Cerberus Partners, which is currently
      pending in federal district court for the Southern District of New York.
      The Company entered into certain loan commitment letters with the
      plaintiffs in August 1995, contemplating that the plaintiffs would lend
      approximately $30.0 million to partially fund the Company's then pending
      hostile tender offer for BGII. The Company entered into a friendly Merger
      Agreement with BGII in October 1995 and did not use funds provided by the
      plaintiffs when effecting its acquisition of BGII in June 1996.The
      plaintiffs have asserted claims based upon the Company's alleged breach of
      loan commitment, and seek damages on various theories, ranging from $2.2
      million (breach of contract and fraudulent concealment) to in excess of
      $12.0 million (breach of duty of good faith and fair dealing). The Company
      believes that it has strong defenses to all of the claims and intends to
      defend the action vigorously.

      While the ultimate outcome of the matters described above is not presently
      determinable, management does not expect that the outcome will have a
      material adverse effect on the Company's results of operations, financial
      position or cash flows.

      The Company and its subsidiaries are also involved from time to time in
      various claims and legal actions arising in the ordinary course of
      business. Management believes that the ultimate outcome of these matters
      will not have a material adverse effect on the Company's consolidated
      financial statements taken as a whole.

7.    UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS

      The following unaudited consolidating financial statements are presented
      in columnar presentation as follows: the parent company and its
      wholly-owned "Guaranteeing Subsidiaries", its "Pledging Subsidiaries"
      consisting of VSI, Rainbow Casino Vicksburg L.P. and its non-pledging and
      non-guaranteeing subsidiary, Alliance Automaten GmbH & Co KG (the
      subsidiary that holds the Company's German interests). The "Pledging
      Subsidiaries" are shown separately because all of the Company's interest
      in these entities is pledged as collateral for the Senior Secured Notes.
      The unaudited note to consolidating financial statements should be read in
      conjunction with these unaudited consolidating financial statements.



                                       13
<PAGE>   14
                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                          CONSOLIDATING BALANCE SHEETS

                                  June 30, 1996
                                   (In 000's)

<TABLE>
<CAPTION>
                                                                                                                   Alliance
                                                                                    Non-Pledging                    Gaming
                                                      Parent and                        Non-                      Corporation
                                                     Guaranteeing      Pledging     Guaranteeing     Adjust-          and
                                                     Subsidiaries    Subsidiaries   Subsidiaries      ments      Subsidiaries
                                                     ------------    ------------   ------------        -----    ------------
<S>                                                <C>             <C>             <C>             <C>                      
ASSETS
Current assets:
   Cash and cash equivalents                       $  37,008       $   8,684       $   2,365       $               $  48,057
   Accounts and notes receivable, net                 39,326              35          55,439          (1,298)         93,502
   Inventories, net                                   24,073              12          17,571                          41,656
   Other current assets                                6,283             552           1,519                           8,354
                                                   ---------       ---------       ---------       ---------       ---------
         Total current assets                        106,690           9,283          76,894          (1,298)        191,569
                                                   ---------       ---------       ---------       ---------       ---------
Leased equipment, net                                                                    482                             482
Long-term notes receivable, net                       97,227                           1,773         (84,816)         14,184
Property, plant and equipment, net                    39,225          26,937          11,440                          77,602
Excess of costs over net assets of acquired
     businesses, net                                  36,890                          23,402                          60,292
Intangible assets, net                                19,826             420               1                          20,247
Investment in subsidiaries                           331,552                                        (331,552)
Other assets, net                                     17,794           2,682          (6,447)         (2,901)         11,128
                                                   ---------       ---------       ---------       ---------       ---------
                                                   $ 649,204       $  39,322       $ 107,545       $(420,567)      $ 375,504
                                                   =========       =========       =========       =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                $  14,408       $     213       $   4,226       $  (2,607)      $  16,240
   Accrued liabilities                                29,641           3,969           6,234          (1,301)         38,543
   Current maturities of long-term debt                8,200           3,913          13,664                          25,777
                                                   ---------       ---------       ---------       ---------       ---------
         Total current liabilities                    52,249           8,095          24,124          (3,908)         80,560
                                                   ---------       ---------       ---------       ---------       ---------
Senior Secured Notes due 2003, net                   150,929                                                         150,929
Other long-term debt, less current maturities         83,042          12,984           3,007         (84,395)         14,638
Other liabilities                                      7,344                                            (513)          6,831
                                                   ---------       ---------       ---------       ---------       ---------
        Total liabilities                            293,564          21,079          27,131         (88,816)        252,958
                                                   ---------       ---------       ---------       ---------       ---------

Minority interest                                      1,148                                                           1,148

Series B Special Stock                                51,552                                                          51,552

Commitments and contingencies

Stockholders' equity:
Common Stock                                           3,655               2          17,811         (18,292)          3,176
Series E Special Stock                                11,316                                                          11,316
Additional paid-in capital                           322,091           7,861          62,512        (253,433)        139,031
Cumulative translation adjustment                       (299)                           (275)            287            (287)
Retained earnings (accumulated deficit)              (33,823)         10,380             366         (60,313)        (83,390)
                                                   ---------       ---------       ---------       ---------       ---------
         Total stockholders' equity                  302,940          18,243          80,414        (331,751)         69,846
                                                   ---------       ---------       ---------       ---------       ---------
                                                   $ 649,204       $  39,322       $ 107,545       $(420,567)      $ 375,504
                                                   =========       =========       =========       =========       =========
</TABLE>


                        See accompanying unaudited note.




                                       14
<PAGE>   15
                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




                          CONSOLIDATING BALANCE SHEETS


                                December 31, 1996
                                   (In 000's)

<TABLE>
<CAPTION>
                                                                                                                  Alliance
                                                                                Non-Pledging                       Gaming
                                                  Parent and                        Non-                        Corporation
                                                 Guaranteeing      Pledging     Guaranteeing        Adjust-         and
                                                 Subsidiaries    Subsidiaries   Subsidiaries         ments      Subsidiaries
                                                 ------------    ------------   ------------         -----      ------------
<S>                                                    <C>             <C>            <C>           <C>                   
ASSETS
Current assets:
   Cash and cash equivalents                       $  12,735       $  10,021       $   6,645       $               $  29,401
   Accounts and notes receivable, net                 41,807              31          60,369          (1,156)        101,051
   Inventories, net                                   22,499              15          18,840          (1,158)         40,196
   Other current assets                                5,092             349           1,156                           6,597
                                                   ---------       ---------       ---------       ---------       ---------
     Total current assets                             82,133          10,416          87,010          (2,314)        177,245
                                                   ---------       ---------       ---------       ---------       ---------
Leased equipment, net                                                                  3,743                           3,743
Long-term notes receivable, net                       95,729                           2,677         (84,380)         14,026
Property, plant and equipment, net                    40,265          26,793           8,831                          75,889
Excess of costs over net assets of acquired
  businesses, net                                     37,513                          23,312            (235)         60,590
Intangible assets, net                                17,901             329               1                          18,231
Investment in subsidiaries                           365,121                                        (365,121)
Other assets, net                                     16,383           2,363          (6,137)             85          12,694
                                                   ---------       ---------       ---------       ---------       ---------
                                                   $ 655,045       $  39,901       $ 119,437       $(451,965)      $ 362,418
                                                   =========       =========       =========       =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                $  10,977       $     471       $   2,177       $      69       $  13,694
   Accrued liabilities                                20,600           3,839          15,604            (366)         39,677
   Current maturities of long term-debt                1,209           3,020          11,029            (776)         14,482
                                                   ---------       ---------       ---------       ---------       ---------
         Total current liabilities                    32,786           7,330          28,810          (1,073)         67,853
                                                   ---------       ---------       ---------       ---------       ---------
Senior Secured Notes due 2003, net                   151,072                                                         151,072
Other long-term debt, less current maturities         82,717          10,602           3,732         (84,000)         13,051
Other liabilities                                      7,289                              35            (473)          6,851
                                                   ---------       ---------       ---------       ---------       ---------
   Total liabilities                                 273,864          17,932          32,577         (85,546)        238,827
                                                   ---------       ---------       ---------       ---------       ---------

Minority interest                                      1,193                                                           1,193

Series B Special Stock                                53,761                                                          53,761

Commitments and contingencies

Stockholders' equity:
Common Stock                                           3,663               1          17,811         (18,291)          3,184
Series E Special Stock                                11,687                                                          11,687
Additional paid-in capital                           321,573           7,861          62,512        (252,959)        138,987
Cumulative translation adjustment                     (1,169)                         (1,236)          1,204          (1,201)
Retained earnings (Accumulated deficit)               (9,527)         14,107           7,773         (96,373)        (84,020)
                                                   ---------       ---------       ---------       ---------       ---------
     Total stockholders' equity                      326,227          21,969          86,860        (366,419)         68,637
                                                   ---------       ---------       ---------       ---------       ---------
                                                   $ 655,045       $  39,901       $ 119,437       $(451,965)      $ 362,418
                                                   =========       =========       =========       =========       =========
</TABLE>



                        See accompanying unaudited note.



                                       15
<PAGE>   16
                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




                     CONSOLIDATING STATEMENTS OF OPERATIONS

                      Three Months Ended December 31, 1995
                                   (In 000's)

<TABLE>
<CAPTION>
                                                                                         Alliance
                                                                                          Gaming
                                            Parent and                                 Corporation
                                           Guaranteeing      Pledging       Adjust-        and
                                           Subsidiaries    Subsidiaries      ments     Subsidiaries
                                           ------------    ------------      -----     ------------
<S>                                          <C>            <C>            <C>            <C>     
Revenues:
   Gaming machine operations                 $ 22,411       $  4,047       $   (133)      $ 26,325
   Casino and tavern operations                 4,005          7,956           (602)        11,359
   Gaming equipment sales                           3                                            3
                                             --------       --------       --------       --------
                                               26,419         12,003           (735)        37,687
                                             --------       --------       --------       --------
Costs and expenses:
   Cost of gaming machine operations           17,720          2,561           (133)        20,148
   Cost of casino and tavern operations         2,562          2,904            (69)         5,397
   Cost of gaming equipment sales                   1                                            1
   Selling, general and administrative          4,659          2,789           (438)         7,010
   Provision for doubtful receivables                             11                            11
   Depreciation and amortization                1,874            545                         2,419
   Direct merger costs                          4,760                                        4,760
                                             --------       --------       --------       --------
                                               31,576          8,810           (640)        39,746
                                             --------       --------       --------       --------

Operating income (loss)                        (5,157)         3,193            (95)        (2,059)

Loss from consolidated subsidiaries            (2,354)                        2,354

Other income (expense):
   Interest income                                428             89           (125)           392
   Interest expense                            (1,738)          (468)           125         (2,081)
   Royalty fees                                                 (928)                         (928)
   Minority interest in income                                  (132)                         (132)
   Other, net                                      71            117           (135)            53
                                             --------       --------       --------       --------

Income (loss) before income taxes              (8,750)         1,871          2,124         (4,755)

Income tax provision (benefit)                  1,190            298           (230)         1,258
                                             --------       --------       --------       --------

Net income (loss)                            $ (9,940)      $  1,573       $  2,354       $ (6,013)
                                             ========       ========       ========       ========
</TABLE>







                        See accompanying unaudited note.




                                       16
<PAGE>   17
                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



                     CONSOLIDATING STATEMENTS OF OPERATIONS

                      Three Months Ended December 31, 1996
                                   (In 000's)

<TABLE>
<CAPTION>
                                                                                                                   Alliance  
                                                                                  Non-Pledging                      Gaming   
                                                   Parent and                         Non-                        Corporation
                                                  Guaranteeing      Pledging      Guaranteeing      Adjust-           and    
                                                  Subsidiaries    Subsidiaries    Subsidiaries       ments       Subsidiaries
                                                  ------------    ------------    ------------       -----       ------------
<S>                                                <C>             <C>                             <C>             <C>      
Revenues:
   Gaming equipment and systems sales              $  41,255       $               $   2,664       $  (1,646)      $  42,273
   Wall machine and amusement game sales                                              42,309             (16)         42,293
   Gaming machine operations                          27,179           4,513                                          31,692
   Casino operations                                   2,931           9,514                                          12,445
                                                   ---------       ---------       ---------       ---------       ---------
                                                      71,365          14,027          44,973          (1,662)        128,703
                                                   ---------       ---------       ---------       ---------       ---------
Costs and expenses:
   Cost of gaming equipment and systems sales         25,178                           2,121            (816)         26,483
   Cost of wall machines and amusement
       game sales                                                                     20,317                          20,317
   Cost of gaming machine operations                  20,735           2,909                                          23,644
   Cost of casino operations                           1,896           3,687                                           5,583
   Selling, general and administrative                16,116           2,983           9,072             (58)         28,113
   Provision for doubtful receivables                  2,297                           2,437                           4,734
   Depreciation and amortization                       3,343             584           1,993                           5,920
                                                   ---------       ---------       ---------       ---------       ---------
                                                      69,565          10,163          35,940            (874)        114,794
                                                   ---------       ---------       ---------       ---------       ---------
Operating income                                       1,800           3,864           9,033            (788)         13,909

Earnings from consolidated subsidiaries               15,865                                         (15,865)

Other income (expense):
   Interest income                                     3,237              80                          (2,846)            471
   Interest expense                                   (8,021)           (303)           (150)          2,846          (5,628)
   Royalty fees                                                       (1,125)                                         (1,125)
   Minority interest in income                          (285)                                                           (285)
   Other, net                                             92             (22)                            (17)             53 
                                                   ---------       ---------       ---------       ---------       ---------
Income (loss) before income taxes                     12,688           2,494           8,883         (16,670)          7,395

Income tax provision (benefit)                          (115)            241           3,124                           3,250
                                                   ---------       ---------       ---------       ---------       ---------
Net income (loss)                                     12,803           2,253           5,759         (16,670)          4,145
Special Stock dividends                               (3,094)                                                         (3,094)
                                                   ---------       ---------       ---------       ---------       ---------

Net income (loss) applicable to
    common shares                                  $   9,709       $   2,253       $   5,759       $ (16,670)      $   1,051
                                                   =========       =========       =========       =========       =========
</TABLE>



                        See accompanying unaudited note.




                                       17
<PAGE>   18
                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





                     CONSOLIDATING STATEMENTS OF OPERATIONS

                       Six Months Ended December 31, 1995
                                   (In 000's)

<TABLE>
<CAPTION>
                                                                                         Alliance
                                                                                          Gaming
                                            Parent and                                  Corporation
                                           Guaranteeing      Pledging      Adjust-          and
                                           Subsidiaries    Subsidiaries     ments       Subsidiaries
                                           ------------    ------------     -----       ------------
<S>                                          <C>            <C>            <C>            <C>
Revenues:
   Gaming machine operations                 $ 45,127       $  7,831       $   (337)      $ 52,621
   Casino and tavern operations                 8,629         16,259         (1,286)        23,602
   Gaming equipment sales                           6                                            6
                                             --------       --------       --------       --------
                                               53,762         24,090         (1,623)        76,229
                                             --------       --------       --------       --------
Costs and expenses:
   Cost of gaming machine operations           35,753          4,945           (337)        40,361
   Cost of casino and tavern operations         5,513          5,979           (179)        11,313
   Cost of gaming equipment sales                   1                                            1
   Selling, general and administrative          9,425          5,215           (937)        13,703
   Provision for doubtful receivables              10             22                            32
   Depreciation and amortization                3,833          1,073                         4,906
   Direct merger costs                          9,437                                        9,437
                                             --------       --------       --------       --------
                                               63,972         17,234         (1,453)        79,753
                                             --------       --------       --------       --------

Operating income (loss)                       (10,210)         6,856           (170)        (3,524)

Loss from consolidated subsidiaries            (3,873)                        3,873

Other income (expense):
   Interest income                                907            149           (238)           818
   Interest expense                            (3,496)        (1,030)           238         (4,288)
   Royalty fees                                               (1,908)                       (1,908)
   Minority interest in income                                  (276)                         (276)
   Other, net                                     422            429           (316)           535
                                             --------       --------       --------       --------

Income (loss) before income taxes             (16,250)         4,220          3,387         (8,643)

Income tax provision (benefit)                    655            619           (486)           788
                                             --------       --------       --------       --------

Net income (loss)                            $(16,905)      $  3,601       $  3,873       $ (9,431)
                                             ========       ========       ========       ========
</TABLE>




                        See accompanying unaudited note.



                                       18
<PAGE>   19
                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





                     CONSOLIDATING STATEMENTS OF OPERATIONS

                       Six Months Ended December 31, 1996
                                   (In 000's)

<TABLE>
<CAPTION>
                                                                                                                Alliance
                                                                                Non-Pledging                      Gaming
                                                  Parent and                        Non-                        Corporation
                                                 Guaranteeing      Pledging     Guaranteeing      Adjust-           and
                                                 Subsidiaries    Subsidiaries   Subsidiaries       ments        Subsidiaries
                                                 ------------    ------------   ------------       -----        ------------
<S>                                                <C>             <C>            <C>             <C>             <C>
Revenues:
   Gaming equipment and systems sales              $  74,889       $               $   5,665       $  (3,379)      $  77,175
   Wall machine and amusement game sales                                              68,736             (36)         68,700
   Gaming machine operations                          51,749           8,833                                          60,582
   Casino operations                                   6,047          19,111                                          25,158
                                                   ---------       ---------       ---------       ---------       ---------
                                                     132,685          27,944          74,401          (3,415)        231,615
                                                   ---------       ---------       ---------       ---------       ---------
Costs and expenses:
   Cost of gaming equipment and systems sales         46,264                           4,550          (2,524)         48,290
   Cost of wall machines and amusement
     game sales                                                                       35,421                          35,421
   Cost of gaming machine operations                  39,853           5,686                                          45,539
   Cost of casino operations                           3,783           7,175                                          10,958
   Selling, general and administrative                28,308           5,798          16,407            (120)         50,393
   Provision for doubtful receivables                  3,477                           2,832                           6,309
   Depreciation and amortization                       6,593           1,140           3,408                          11,141
   Unusual items                                         700                                                             700
                                                   ---------       ---------       ---------       ---------       ---------
                                                     128,978          19,799          62,618          (2,644)        208,751
                                                   ---------       ---------       ---------       ---------       ---------
Operating income                                       3,707           8,145          11,783            (771)         22,864

Earnings from consolidated subsidiaries               25,431                                         (25,431)

Other income (expense):
   Interest income                                     6,921             170                          (6,057)          1,034
   Interest expense                                  (16,413)         (1,168)           (355)          6,057         (11,879)
   Royalty fees                                                       (2,276)                                         (2,276)
   Minority interest in income                          (426)                                                           (426)
   Other, net                                            (43)            130                             (35)             52
                                                   ---------       ---------       ---------       ---------       ---------
Income (loss) before income taxes                     19,177           5,001          11,428         (26,237)          9,369

Income tax provision (benefit)                          (421)            752           4,257                           4,588
                                                   ---------       ---------       ---------       ---------       ---------
Net income (loss)                                     19,598           4,249           7,171         (26,237)          4,781
Special Stock dividends                               (5,991)                                                         (5,991)
                                                   ---------       ---------       ---------       ---------       ---------

Net income (loss) applicable to
    common shares                                  $  13,607       $   4,249       $   7,171       $ (26,237)      $  (1,210)
                                                   =========       =========       =========       =========       =========
</TABLE>



                        See accompanying unaudited note.



                                       19
<PAGE>   20
                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                       Six Months Ended December 31, 1995
                                   (In 000's)
<TABLE>
<CAPTION>
                                                                                                      Alliance
                                                                                                       Gaming
                                                        Parent and                                  Corporation
                                                        Guaranteeing    Pledging       Adjust-          and
                                                        Subsidiaries   Subsidiaries     ments       Subsidiaries
                                                        ------------   ------------     -----       ------------
<S>                                                        <C>             <C>              <C>            <C>
Cash flows from operating activities:
       Net cash provided by (used in)
       operating activities                                (5,555)         5,540            789            774
                                                         --------       --------       --------       --------
Cash flows from investing activities:
   Additions to property and equipment                     (3,454)        (1,550)                       (5,004)
   Proceeds from disposal of property and equipment         2,089            129                         2,218
   Net sale of securities available for sale                8,015                                        8,015
   Other                                                   (2,599)                                      (2,599)
                                                         --------       --------       --------       --------
       Net cash provided by  (used in)
       investing activities                                 4,051         (1,421)                        2,630
                                                         --------       --------       --------       --------
Cash flows from financing activities:
   Proceeds from long-term debt, net of expenses              533          1,288         (1,139)           682
   Reduction of long-term debt                               (121)        (2,320)           350         (2,091)
                                                         --------       --------       --------       --------
       Net cash provided by (used in)
              financing activities                            412         (1,032)          (789)        (1,409)
                                                         --------       --------       --------       --------

Cash and cash equivalents:
   Increase (decrease) for period                          (1,092)         3,087                         1,995
   Balance, beginning of period                             8,235          5,499                        13,734
                                                         --------       --------       --------       --------
   Balance, end of period                                $  7,143       $  8,586     $     --         $ 15,729
                                                         ========       ========       ========       ========
</TABLE>




                        See accompanying unaudited note.



                                       20
<PAGE>   21
                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                       Six Months Ended December 31, 1996
                                   (In 000's)
<TABLE>
<CAPTION>
                                                                                                                     Alliance   
                                                                                    Non-Pledging                       Gaming   
                                                       Parent and                       Non-                        Corporation 
                                                      Guaranteeing      Pledging    Guaranteeing      Adjust-           and     
                                                      Subsidiaries    Subsidiaries  Subsidiaries       ments        Subsidiaries
                                                      ------------  ------------    ------------      ------        ------------
<S>                                                      <C>            <C>            <C>          <C>              <C>     
Cash flows from operating activities:
       Net cash provided by (used in)
         operating activities                              (8,780)         6,024          6,132            381          3,757
                                                         --------       --------       --------       --------       --------
Cash flows from investing activities:
   Additions to property, plant and equipment              (3,498)          (905)        (1,652)                       (6,055)
   Proceeds from disposal of property and equipment            39              4          2,748                         2,791
   Other                                                   (1,534)                                                     (1,534)
                                                         --------       --------       --------       --------       --------
       Net cash used in investing activities               (4,993)          (901)         1,096                        (4,798)
                                                         --------       --------       --------       --------       --------
Cash flows from financing activities:
   Proceeds from long-term debt                                41                                                          41
   Reduction of long-term debt                               (428)        (3,786)          (258)          (381)        (4,853)
   Net change in lines of credit                           (6,929)                       (2,635)                       (9,564)
   Repurchase of Series B Special Stock                    (3,307)                                                     (3,307)
   Issuance of common stock upon exercise of
     stock options                                            123                                                         123
                                                         --------       --------       --------       --------       --------
       Net cash used in financing activities              (10,500)        (3,786)        (2,893)          (381)       (17,560)
                                                         --------       --------       --------       --------       --------

Effect of exchange rate changes on cash                                                     (55)                          (55)
Cash and cash equivalents:
   Increase (decrease) for period                         (24,273)         1,337          4,280                       (18,656)
   Balance, beginning of period                            37,008          8,684          2,365                        48,057
                                                         --------       --------       --------       --------       --------
   Balance, end of period                                $ 12,735       $ 10,021       $  6,645       $   --         $ 29,401
                                                         ========       ========       ========       ========       ========
</TABLE>




                        See accompanying unaudited note.





                                       21
<PAGE>   22
                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



DEBT AND LINES OF CREDIT

Long-term debt and lines of credit at December 31, 1996, consist of the
following (in 000's):

<TABLE>
<CAPTION>
                                                                                                                      Alliance   
                                                                              Non-Pledging                             Gaming    
                                           Parent and                             Non-                               Corporation 
                                          Guaranteeing        Pledging        Guaranteeing          Adjust-              and     
                                          Subsidiaries      Subsidiaries      Subsidiaries           ments           Subsidiaries
                                          ------------      ------------      ------------           -----           ------------

<S>                                        <C>               <C>                <C>                <C>                <C>      
12 7/8% Senior Secured notes due
   2003, net of unamortized discount       $ 151,072         $                  $                  $                  $ 151,072
Hospitality Franchise Systems
   note payable                                                  7,228                                                    7,228
Bally Wulff revolving line of credit                                               11,029                                11,029
Bally Gaming and Systems line of credit          596                                                                        596
7.5% Convertible subordinated
   debentures due 2003                         1,642                                                                      1,642
Intercompany note payable                     80,292                                                 (80,292)
Other                                          1,396             6,394              3,732             (4,484)             7,038
                                           ---------         ---------          ---------          ---------          ---------
                                             234,998            13,622             14,761            (84,776)           178,605
Less current maturities                        1,209             3,020             11,029               (776)            14,482
                                           ---------         ---------          ---------          ---------          ---------
Long-term debt, less current
   maturities                              $ 233,789         $  10,602          $   3,732          $ (84,000)         $ 164,123
                                           =========         =========          =========          =========          =========
</TABLE>



                                       22
<PAGE>   23
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996




ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

On June 18, 1996, the Company completed the acquisition of all the outstanding
shares of BGII. The consideration paid consisted of $77,243,000 in cash,
$2,957,000 in the Company's common stock and $36,571,000 in the Company's Series
B Special Stock and totaled $11.84 per share for the 9,855,500 shares
outstanding (excluding the 1,000,000 shares beneficially owned by the Company
prior to the Merger). The Company incurred direct merger costs of approximately
$4,760,000 and $0 during the three months ended December 31, 1995, and 1996,
respectively and $9,437,000 and $0 during the six months ended December 31,
1995, and 1996, respectively. Such costs include legal, accounting, transaction
financing fees, public and investor relations and printing costs and related
costs.

At December 31, 1996, the Company had $29,401,000 in cash and cash equivalents
and $25,142,000 in availability on existing revolving lines of credit
(representing a paydown in the lines of credit since June 30, 1996 of
$9,564,000). In addition the Company had working capital of approximately
$109,392,000, a decrease of approximately $1,617,000 from June 30, 1996.
Consolidated cash and cash equivalents at December 31, 1996 includes
approximately $9,000,000 of cash which is utilized in gaming operations which is
held in vaults, cages or change banks.

The following table presents an analysis of the consolidated working capital at
June 30, 1996 and December 31, 1996 and the components of the changes from the
prior period:

<TABLE>
<CAPTION>
                                                   June 30,      Dec. 31,       Total
                                                     1996          1996         Change
                                                   --------      --------      --------
                                                               (In $000's)
<S>                                                <C>           <C>           <C>      
         Cash and Cash Equivalents                 $ 48,057      $ 29,401      $(18,656)
         Accounts and Notes Receivable, net          93,502       101,051         7,549
         Inventories, net                            41,656        40,196        (1,460)
         Other Current Assets, net                    8,354         6,597        (1,757)
                                                   --------      --------      --------
            Total Current Assets                    191,569       177,245       (14,324)

         Accounts Payable                            16,240        13,694         2,546
         Accrued Liabilities                         38,543        39,677        (1,134)
         Current Maturities of Long Term Debt        25,777        14,482        11,295
                                                   --------      --------      --------
            Total Current Liabilities                80,560        67,853        12,707
                                                   --------      --------      --------

         Net Working Capital                       $111,009      $109,392      $ (1,617)
                                                   ========      ========      ========
</TABLE>

The following are the significant changes in the components of the Company's
working capital during the six months ended December 31, 1996:

Cash and Cash Equivalents

The net change in cash and cash equivalents resulted from earnings before
interest, taxes, depreciation and amortization, offset by: cash used for capital
expenditures, cash used for principal reductions of the revolving lines of
credit borrowings associated with Bally Gaming and Systems of $6,929,000 and
Bally Wulff of $2,635,000, to fully pay a loan associated with VSI in the amount
of $2,826,000, and payments made for accrued direct merger costs, accrued
compensation, and the 




                                       23
<PAGE>   24
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996




accrued distribution payable to the limited partner in the Rainbow Casino
Vicksburg Partnership, L.P., and $3,307,000 of cash used to purchase shares of
Series B Special Stock. The Company also made its first semi-annual interest
payment on the Senior Secured Notes on December 30, 1996.

Other Current Assets and Liabilities

During the six months ended December 31, 1996, the Company's accounts and notes
receiveables increased in an amount proportionate to the increase in sales
activities and were impacted by the financing terms to customers, particularly
in the emerging markets. Inventories decreased primarily due to increased sales
and by the non-cash impact of the movement of the dollar versus the deutchmark.
Combined accounts payable and accrued liabilities decreased over the prior year
period due to the payments made for accrued direct merger costs, accrued
compensation, and the accrued distribution payable to the limited partner in the
Rainbow Casino Vicksburg Partnership, L.P.

Current Maturities of Long Term Debt

During the six months ended December 31, 1996, current maturities of long term
debt were reduced primarily due to the principal reductions of revolving line of
credit borrowings associated with Bally Gaming and Systems and Bally Wulff, and
to a lesser extent, the payment of a subordinated loan associated with VSI,
partially offset by the reclassification to current maturities of long-term debt
of certain debt instruments which now have maturities less than one year.

Cash Flow and Other Information

Cash provided by operating activities for the six months ended December 31, 1996
increased approximately $2,983,000 from amounts reported for the same period in
1995. Significant changes in operating assets and liabilities in the 1996 period
from the 1995 period were caused by (1) net income of $4,781,000 compared to a
net loss of $9,431,000 in the prior year period, (2) an increase in net current
and long-term accounts and notes receivable of $13,777,000 due to increased
sales activity and greater customer financing on current period sales especially
at Bally Wulff, (3) an increase in inventories of $5,048,000 primarily related
to increased production activity, (4) a decrease of $3,083,000 in accounts
payable and (5) a decrease of $356,000 in accrued liabilities and other
payables. Significant non-cash items added to net income in the computation of
cash flows from operating activities for the six months ended December 31, 1996
include $11,141,000 of depreciation and amortization representing an increase of
$6,235,000 over the prior year period and a provision for doubtful receivables
of $6,309,000 representing an increase of $6,277,000 over the prior year period.

Cash flows used in investing activities for the six months ended December 31,
1996 increased by $7,428,000 from the same period in 1995. The increase is
primarily the result of the net sale of securities available for sale during the
prior period totaling $8,015,000 compared to $0 in the current period and
increased capital expenditures of $1,051,000.

Cash flows used in financing activities for the six months ended December 31,
1996 increased $16,151,000 from the same period in 1995. The increase was
primarily the result of cash used for principal reductions of long term debt and
reduction of revolving line of credit borrowings in the amount of $9,500,000,
payment of the remaining principal and accrued interest balance of the loan
associated with VSI totaling $2,826,000 and the repurchase for $3,307,000 of
36,500 shares of the Company's Series B Special Stock.



                                       24
<PAGE>   25
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996



In the prospectus for the Senior Secured Notes and Series B Special Stock issued
to finance the Merger, the Company had presented adjusted operating cash flow
for the combined companies which consists of the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA"), net of casino royalty
and minority interest and adjusted to exclude direct merger costs and unusual
items and, in periods prior to the Merger, as further adjusted to include BGII's
results for the entire period and to assume cost savings synergies resulting
from the Merger and to adjust business development expenses to an assumed annual
amount of $3,000,000. The Company experienced an increase in adjusted operating
cash flow from $9,880,000 in the three months ended December 31, 1995 to
$18,419,000 in the three months ended December 31, 1996. In addition, the
Company experienced a significant increase in adjusted operating cash flow from
$19,129,000 in the six months ended December 31, 1995 to $32,202,000 in the six
months ended December 31, 1996, Each of the Company's four business units
contributed to these improvements.

The following is summary of EBITDA, as adjusted by business unit reconciled to
adjusted operating cash flows:

<TABLE>
<CAPTION>
                                            Three Months Ended December 31,    Six Months Ended December 31,
                                                  1995(a)        1996(a)         1995(a)         1996(a)
                                                 --------       --------       --------          --------
                                                                    (In $000's)
<S>                                              <C>            <C>            <C>               <C>     
EBITDA by Business Unit:
Bally Gaming and Systems                         $  3,625       $  6,328       $  6,035          $ 11,771
Bally Wulff                                         2,498         10,841          5,657            14,911
Gaming Machine Operations                           4,069          4,958          8,052(b)          9,722(b)
Casino Operations                                   2,267          2,875          5,043(b)          6,154(b)
Corporate Administrative Expenses and Other        (3,991)        (6,583)        (8,658)          (10,556)
Direct Merger Costs                                (6,486)         ---          (11,437)            ---
Unusual Items                                      (1,800)         ---           (3,329)             (700)
                                                 --------       --------       --------          --------
    EBITDA, as adjusted                               182         18,419          1,363            31,302
Adjustments:
Direct Merger Costs                                 6,486          ---           11,437             ---
Unusual Items or Non-recurring Charges              2,100          ---            4,029               900
Development Expense                                  (138)         ---             (200)(c)         ---
Synergy Cost Savings                                1,250          ---            2,500 (d)         ---
                                                 --------       --------       --------          --------
     Adjusted Operating Cash Flows               $  9,880       $ 18,419       $ 19,129          $ 32,202
                                                 ========       ========       ========          ========
</TABLE>

----------

(a)   Includes the consolidated results of the Company (including BGII) for the
      three and six month periods ended December 31, 1996 and the combined
      historical results of the Company and BGII for the three and six month
      periods ended December 31, 1995.

(b)   Minority interest and, for Casino Operations, casino royalty have been
      offset against business unit EBITDA.

(c)   Adjusts business development expense for the three and six months ended
      December 31, 1995 to an assumed annual amount of $3,000,000. Actual
      business development expenses for the three and six month periods ended
      December 31, 1996 was $518,000 and $1,056,000, respectively, and is
      included in corporate administrative expenses.

(d)   Adjusts for estimated synergy cost savings including elimination of
      certain duplicative costs, such as facility, legal, accounting, and
      compensation.

The Company believes that the above analysis of adjusted operating cash flows is
a useful adjunct to net income, cash flow and other GAAP measurements. However,
this information should not be construed as an alternative to net income or any
other GAAP measure of performance as an indicator of the Company's performance
or to GAAP-defined cash flows generated by operating, investing and financing
activities as an indicator of cash flows or a measure of liquidity.




                                       25
<PAGE>   26
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996


During March 1993, Bally Wulff obtained two bank revolving lines of credit that
currently provide for borrowings up to DM 17,250,000 (approximately $11,192,000
at December 31, 1996 exchange rates) of which approximately $454,000 had been
borrowed at December 31, 1996. In May 1993, Bally Wulff obtained a working
capital line of credit that provides for borrowings up to DM 16,300,000
(approximately $10,575,000 at December 31, 1996 exchange rates) all of which had
been borrowed at December 31, 1996. Bally Gaming, Inc., BGII's domestic
subsidiary, obtained a bank revolving line of credit in March 1993 which, as
amended, provides for borrowings tied to a percentage of Bally Gaming, Inc.'s
eligible (as defined in the credit agreement) inventory and accounts receivable
with a maximum borrowing capacity of $15,000,000 with the expiration date of
March 31, 1997. At December 31, 1996 Bally Gaming, Inc.'s eligible borrowing
capacity under this agreement was approximately $15,000,000 of which $596,000
was outstanding. Through bank credit agreements at Bally Wulff and Bally Gaming,
Inc., the Company has unused lines of credit of approximately $25,142,000 at
December 31, 1996. In January 1997, the Company received a commitment letter for
a new working capital based line of credit which will provide for borrowings
based on a percentage of Bally Gaming, Inc.'s eligible accounts receivable and
inventory with a maximum borrowing capacity of $30,000,000, subject to the
$40,000,000 maximum worldwide revolving credit limitation in the Company's
indenture for the Senior Secured Notes. This line of credit would be
collateralized by accounts receivable and inventory and will have no financial
covenants other than maintenance of minimum net worth. As currently
contemplated, the Company will close on this new facility on March 31, 1997 upon
expiration of the Company's existing line of credit.

The indenture for the Company's Senior Secured Notes contains various covenants
including limitations on incurrence of additional indebtedness, on restricted
payments and on dividend and payment restrictions on subsidiaries. The Company
does not have any material capital expenditure commitments at December 31, 1996.
The Company anticipates that cash flow from operations and borrowings available
under existing lines of credit will be sufficient to fund its cash needs for at
least the next twelve months.

Management believes that customer financing terms have become an increasingly
important competitive factor for the Bally Gaming and Systems business unit.
Competitive conditions sometimes require Bally Gaming and Systems to grant
extended payment terms on gaming machines systems and other gaming equipment.
While these financings are normally collateralized by such equipment, the resale
value of the collateral in the event of a default may be less than the amount
financed. In conjunction with sales by Bally Gaming and Systems, with recourse
to the Company, of certain trade receivables to third parties, the Company had
guaranteed amounts due from various customers of approximately $12,850,000 at
December 31, 1996. The Company has reserved approximately $8,400,000 at December
31, 1996 for all of its sales of receivables with recourse to the Company. It is
possible that one or more customers whose obligation has been guaranteed by
Bally Gaming and Systems may be unable to make payments as such amounts become
due. In such event, Bally Gaming and Systems may become responsible for
repayment of at least a portion of such amounts over the term of the
receivables. In general, under the terms of these contracts, the Company may be
responsible for monthly payments of the outstanding obligations. Accordingly,
the Company will have greater exposure to the financial condition of its
customers in emerging markets than has historically been the case in established
markets like Nevada and Atlantic City. In August 1996, the Company received
demand notices from the holder of notes related to one customer's trade
receivables for which payments were in arrears from December 1995 and in
December 1996, the holder of the notes filed suit against the Company to seek
payment from the Company. The lawsuit is for approximately $3,600,000. In order
to be competitive in meeting customer demand for financing of gaming equipment
in emerging markets, the Company plans to continue to evaluate the need to
involve third-party finance companies or secure additional financing, although
there is no assurance that such additional financing will be obtained. Bally
Wulff provides customer financing for approximately 20% of its sales, and
management expects this practice temporarily to increase during the latter half
of fiscal 1997.




                                       26
<PAGE>   27
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996


In March 1992, Alfred H. Wilms, director and principal stockholder (and then
Chairman of the Board of Directors and Chief Executive Officer) of the Company,
committed to provide or cause others to provide a $6,500,000 five-year loan to
VSI, the Company's controlled subsidiary, which loan was funded in full and was
secured by a subordinated interest in all of VSI's present and future personal
property. All scheduled principal and interest payments were made until
September 1996 when the remaining principal and accrued interest thereon
totaling $2,826,000 was paid.

RESULTS OF OPERATIONS:

THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996

General

The company operates through four business units: (i) Bally Gaming and Systems,
(ii) Bally Wulff (consisting of the manufacture and distribution of wall-mounted
gaming machines and distribution of other recreational and amusement machines),
(iii) gaming machine operations and (iv) casino operations. The results of
operations of the BGII business units have been consolidated since June 18,
1996. However, to enhance comparability to prior periods, the following
discussion presents the results of the operations of the BGII business units
for the three months ended December 31, 1995 which was prior to the Merger and 
therefore such results are not included in the accompanying consolidated 
financial statements.

The following tables set forth the combined revenues and operating income (loss)
for the four business units for the three months ended December 31, 1995 and
1996:

<TABLE>
<CAPTION>
                                                 1995          1996
                                               --------      --------
                                                     (In 000's)
         <S>                                   <C>           <C>     
         REVENUES:                       
           Bally Gaming and Systems            $ 32,460      $ 42,273
           Bally Wulff                           27,845        42,293
           Gaming Machine Operations             26,328        31,692
           Casino Operations                     11,359        12,445
                                               --------      --------
         TOTAL REVENUES                        $ 97,992      $128,703
                                               ========      ========
</TABLE>
                                    
<TABLE>
<CAPTION>
                                                 1995          1996     
                                               --------      --------   
                                                     (In 000's)           
         <S>                                   <C>           <C>       
         OPERATING INCOME (LOSS) (a):                                   
           Bally Gaming and Systems               3,164         4,955   
           Bally Wulff                              793         8,858   
           Gaming Machine Operations              2,504(a)      3,187(a)
           Casino Operations                      1,812(a)      2,383(a)
           Corporate and Other                   (4,745)       (6,885)  
                                               --------      --------   
           SUBTOTAL                               3,528        12,498   
           Direct merger costs                   (6,486)        ---     
           Unusual items                         (1,800)        ---     
                                               --------      --------   
         TOTAL OPERATING INCOME (LOSS) (a):    $ (4,758)     $ 12,498   
                                               ========      ========   
</TABLE>

(a) Net of minority interest and, for Casino Operations, net of casino royalty.




                                       27
<PAGE>   28
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996



BALLY GAMING AND SYSTEMS

For the quarter ended December 31, 1996, Bally Gaming and Systems reported
revenues of $42.3 million, an increase of 30%, compared to revenues of $32.5
million in the prior year quarter. Bally Gaming reported unit sales of
approximately 5,500 new gaming machines, an increase of 38%, compared to unit
sales of approximately 4,000 in the prior year quarter. The volume improvement
resulted primarily from a general increase in replacement demand from existing
casinos and a greater number of new casino openings in the 1996 quarter. By
market segment, Bally Gaming's unit sales for the quarter consisted of
approximately 2,900 units to the Nevada and Atlantic City markets, 1,900 units
to international markets and 700 units to riverboats, Native American and other
domestic markets. Bally Gaming reported revenues from the sale of new gaming
machines of $30.4 million, an increase of 57%, compared to $19.3 million in the
prior year quarter due to higher unit volume and higher average selling prices.
Bally Systems reported relatively flat revenues of $7.6 million compared to the
prior year quarter. Bally Systems revenues for the period included revenues from
new installations at New York-New York and Casino Niagara as well as partial
shipment to both the Harrah's Riverboat and Players Island Casino in St. Louis.

For the quarter ended December 31, 1996, gross profit margins improved to 37.3%
from 36.5% in the prior year quarter. The gross margin improvement resulted
primarily from the favorable impact of greater production volume in the
Company's manufacturing facility, partially offset by the effect of higher
international sales which traditionally have lower profit margins. Bally Gaming
and Systems reported operating income of $5.0 million, an increase of 57%,
compared to operating income of $3.2 million in the prior year quarter. The
operating income improvement resulted primarily from the aforementioned revenue
and gross margin increases, partially offset by an increase in selling, general
and administrative expenses and an increased provision for doubtful receivables,
including amounts related to a customer in Turkey, where the government recently
forced the closure of casinos.

BALLY WULFF

For the quarter ended December 31, 1996, Bally Wulff reported revenues of $42.3
million, an increase of 52%, compared to revenues of $27.8 million in the prior
year quarter. The revenue improvement resulted primarily from a 265% increase in
new wall machine units sold. Management estimates that the majority of the
revenue improvement was based on attaining increased market share and the
balance of the increase resulted from a change in German regulations effective
January 1, 1997, requiring all wall machines to have internal meters to track
play. In addition, Bally Wulff enhanced its leasing program whereby new wall
machines are leased to customers pursuant to operating leases which provide a
stream of revenues and cash flow over the life of the leases which range from
six months to three years. For the 1996 quarter, Bally Wulff leased
approximately 2,200 new wall machines compared to 200 new wall machines in the
prior year quarter. Revenues from amusement game sales were unfavorably impacted
as operators weighted their mix of capital expenditures toward new wall
machines. The currency translation impact of the fluctuation of the German mark
versus the U.S. dollar reduced revenues by $3.2 million during the 1996 quarter.

For the quarter ended December 31, 1996, gross profit margin improved to 52.0%
from 34.4% in the prior year quarter. The gross margin improvement resulted
primarily from the favorable impact of greater production volume in Bally
Wulff's production facility. Bally Wulff reported operating income of $8.9
million, an increase of 1,017%, compared to $0.8 million in the prior year
quarter. The operating income improvement resulted primarily from the
aforementioned revenue and gross margin increases, partially offset by a higher
provision for doubtful receivables as well as an increase in selling, general
and administrative expenses due primarily to increased marketing costs.



                                       28
<PAGE>   29
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996


GAMING MACHINE OPERATIONS

For the quarter ended December 31, 1996, the gaming machine operations business
unit reported revenues of $31.7 million, an increase of 20%, compared to
revenues of $26.3 million in the prior year quarter. Louisiana revenues
increased 11% as net win per gaming machine per day increased 5% to $67.19 from
$63.95 in the prior year quarter. Nevada revenues increased 22% as net win per
gaming machine per day increased 13% to $51.99 from $46.11 in the prior year
quarter, while the average number of gaming machines increased to 5,660 from
5,283 in the prior year quarter. The improvement in net win per gaming machine
per day in Nevada resulted primarily from the continuing favorable impact of
Gamblers Bonus, a cardless slot player's club and player tracking system
launched in December 1995. The increase in the average number of gaming machines
in Nevada reflects the addition of approximately 150 gaming machines in Northern
Nevada operated by Bally Gaming prior to the Merger and the continued roll-out
of the Gamblers Bonus machines. Gamblers Bonus is currently installed in 99
locations representing 1,191 machines in Southern Nevada. In mid-December the
Company began to provide this product in Northern Nevada.

For the quarter ended December 31, 1996, cost of revenues increased 17% to $23.6
million compared to $20.1 million in the prior year quarter. As a percentage of
revenues, cost of revenues improved to 74.6% from 76.5% in the prior year
quarter. Louisiana cost of revenues, increased 14% and, as a percentage of
revenues, increased slightly to 64.5% from 62.9% in the prior year quarter
primarily due to an increase in gaming taxes and license fees. Nevada cost of
revenues increased 18% but, as a percentage of revenues, improved to 76.3% from
78.9% in the prior year quarter primarily due to higher revenues while costs
associated with new and renewed contracts remained relatively flat. The gaming
machine operations business unit reported operating income, net of minority
interest, of $3.2 million, an increase of 28% compared to operating income of
$2.5 million in the prior year quarter. The operating income improvement
resulted primarily from the aforementioned increase in revenues and relatively
stable operating costs as a percentage of revenues, partially offset by an
increased provision for doubtful receivables for the Nevada operation and an
increase in selling, general and administrative expenses principally for greater
advertising costs for the Louisiana operation.

On November 5, 1996 voters in Louisiana approved a proposition to allow video
poker to continue in six of the seven parishes in which the Company operates at
the Fairgrounds racetrack and within the associated off-track betting locations
in the greater New Orleans area. In the one parish in which the Company operates
where video poker was voted down, the Company will be allowed to continue to
conduct business through June 30, 1999. The two off-track betting locations in
this parish accounted for 13% of the VSI revenues and less than $0.4 million of
EBITDA for the year ended June 30, 1996. Voters also approved video poker in
three parishes in the New Orleans area where the Company currently does not
operate, creating potential expansion opportunities.

CASINO OPERATIONS

For the quarter ended December 31, 1996, the casino operations business unit
reported revenues of $12.4 million, an increase of 19%, compared to revenues of
$10.5 million in the prior year quarter excluding revenues from casinos and
taverns subsequently closed. This increase is due to a 22% increase at the
Rainbow Casino and a 9% increase at the Plantation Casino. The improvement at
the Rainbow Casino was attributable to the continuing impact of its direct
marketing campaigns and a higher average market share than in the prior year
quarter. Revenues from the Plantation Casino improved as revenues in the prior
year quarter had been negatively impacted by an internal remodeling project.

For the quarter ended December 31, 1996, the cost of revenues for casino
operations increased 18% to $5.6 million compared to $4.7 million in the prior
year quarter but, as a percentage of revenues, remained virtually the same
compared to the prior year quarter as costs increased proportionately with
higher revenues.




                                       29
<PAGE>   30
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996



For the quarter ended December 31, 1996, the casino operations business unit
reported operating income, net of casino royalty and minority interest, of $2.4
million, an increase of 33%, compared to operating income of $1.8 million in the
prior year quarter. The operating income improvement resulted from the
aforementioned increase in revenues and stable operating costs as a percentage
of revenues, partially offset by a slight increase in selling, general and
administrative costs.

REVENUES AND EXPENSES FOR CLOSED CASINOS AND TAVERNS

During the year ended June 30, 1996, the Company disposed of or terminated
operations at several small casinos and taverns as these operations were not
deemed to be compatible with the Company's long-term growth strategy. The
Company does not believe these businesses constitute a disposal of a segment of
a business, as defined in APB Opinion 30, and therefore the results of
operations from these businesses are included in the applicable revenue and
expense captions in the consolidated statements of operations. No revenues or
expenses were reported for these properties in the quarter ended December 31,
1996. For the quarter ended December 31, 1995, revenues for these properties are
included in casino operations revenues and totaled $0.9 million. The related
costs of revenues are included in cost of casino operations and totaled $0.6
million. The related selling, general and administrative expenses are included
in selling, general and administrative expenses and totaled $0.4 million.

CONSOLIDATED

As previously discussed, the Company acquired BGII on June 18, 1996. Therefore
the consolidated results of operations for the three months ended December 31,
1996 include the results of operations of BGII while the consolidated results
for the three months ended December 31, 1995 do not include BGII's results. The
discussion below does not include results for BGII in the 1995 quarter.

Total revenues for the quarter ended December 31, 1996, were $128.7 million, an
increase of 241% compared to revenues of $37.7 million in the prior year
quarter. This increase is due to including $84.6 million of revenues from BGII
in the 1996 quarter as well as the aforementioned increases in revenues at both
the gaming machine operations and casino operations business units.

Cost of revenues for the quarter ended December 31, 1996, were $76.0 million, an
increase of 199% compared to $25.5 million in the prior year quarter due to the
inclusion of $46.8 million of BGII cost of revenues in the 1996 quarter as well
as the aforementioned increases in cost of revenues at both the gaming machine
operations and casino operations business units. Cost of revenues as a
percentage of total revenues improved to 59.1% from 67.5% in the prior year
quarter due to the aforementioned improvement at the gaming machine operations
and a stable cost percentage at the casino operations business units as well as
the impact of the inclusion of the BGII business units.

Corporate administrative expenses for the quarter ended December 31, 1996, were
$6.6 million, an increase of 203% compared to corporate administrative costs of
$2.2 million in the prior year quarter. This increase is due to inclusion of
BGII corporate administrative expenses and higher legal and professional fees in
the 1996 quarter, partially offset by cost savings such as elimination of
certain duplicative costs. Corporate administrative expenses include salaries
and wages, related taxes and benefits, rent, professional fees and other
expenses associated with maintaining the corporate office and providing
centralized corporate services for the Company.

Exclusive of the corporate administrative expenses noted above, selling, general
and administrative expenses for the quarter ended December 31, 1996, were $21.5
million, an increase of 336% compared to selling general and administrative
costs of $4.9 million in the prior year quarter. This increase is due to the
inclusion of $16.4 million of BGII selling, general and 




                                       30
<PAGE>   31
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996

administrative expenses in the 1996 quarter and the aforementioned increase at
both the gaming machine operations and casino operations business units
partially offset by the decrease in expenses as the result of the aforementioned
disposed or terminated operations at several small casinos and taverns.

Provisions for bad debt for the quarter ended December 31, 1996, increased $4.7
million from the prior fiscal year quarter. The increase was due to the impact
of including BGII's operations in the 1996 quarter and the aforementioned
increase of the provision for the Bally Wulff and the gaming machine operations
business units. Depreciation and amortization for the quarter ended December 31,
1996 was $5.9 million, an increase of 145% compared to depreciation and
amortization of $2.4 million in the prior year quarter. This increase is due to
the inclusion of BGII depreciation and amortization in the 1996 quarter, higher
depreciation and amortization in the gaming machine operations business unit and
the impact of amortizing goodwill and other intangibles acquired in the BGII
Merger.

During the quarter ended December 31, 1995, the Company expensed direct merger
costs related to the pursuit of BGII totaling $4.8 million. Such costs included
legal, accounting, financial advisory, printer, SEC filing fees and other
related expenses.


NET INTEREST EXPENSE AND INCOME TAXES

Net interest expense in the quarter ended December 31, 1996, increased to $5.2
million, an increase of 205% compared to the net interest expense of $1.7
million in the prior year quarter. The increase is primarily due to interest on
the Company's 12 7/8% Senior Secured Notes due 2003 which were issued in June
1996, partially offset by lower interest expense on the Company's 7 1/2%
Convertible Debentures due 2003, substantially all of which were converted into
equity as part of the financing of the BGII merger.

The Company recorded an income tax provision of $3.2 million in the quarter
ended December 31, 1996, compared to a provision of $1.3 million in the prior
fiscal year quarter. The current quarter provision is primarily due to income
taxes related to Bally Wulff. The current year's quarter effective tax rate is
44% which resulted from taxable income currently being generated in Germany
which has a higher effective rate than in the U.S. Changes in the Company's
organization structure for the German operations, which became effective for
German tax purposes January 1, 1997, should reduce the Company's effective tax
rate on world-wide earnings in future periods.

SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996

General

To enhance the comparability to prior periods, the following discussion includes
the results of the operations of BGII for the six months ended December 31, 1995
which was prior to the Merger and therefore such results are not included in the
accompanying unaudited consolidated financial statements.




                                       31
<PAGE>   32
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996





The following tables set forth the combined revenues and operating income (loss)
for the four business units for the six months ended December 31, 1995 and 1996:

<TABLE>
<CAPTION>
                                            1995            1996
                                          --------        --------
                                                  (In 000's)
         <S>                              <C>             <C>     
         REVENUES:
           Bally Gaming and Systems       $ 60,178      $ 77,175
           Bally Wulff                      51,599        68,700
           Gaming Machine Operations        52,627        60,582
           Casino Operations                23,601        25,158
                                          --------      --------
         TOTAL REVENUES                   $188,005      $231,615
                                          ========      ========
</TABLE>


<TABLE>
<CAPTION>
                                                   1995              1996
                                                 --------          --------
                                                          (In 000's)
         <S>                                     <C>               <C>     
         OPERATING INCOME (LOSS) (a):
           Bally Gaming and Systems              $  5,039          $  9,050
           Bally Wulff                              2,381            11,522
           Gaming Machine Operations                4,911(a)          6,243(a)
           Casino Operations                        4,146(a)          5,193(a)
           Corporate and Other                    (10,410)          (11,146)
                                                 --------          --------
           SUBTOTAL                                 6,067            20,862
           Direct merger costs                    (11,437)            ---
           Unusual items                           (3,329)             (700)
                                                 --------          --------
         TOTAL OPERATING INCOME (LOSS) (a):      $ (8,699)         $ 20,162
                                                 ========          ========
</TABLE>

(a) Net of minority interest and, for Casino Operations, net of casino royalty.

BALLY GAMING AND SYSTEMS

For the six months ended December 31, 1996, Bally Gaming and Systems reported
revenues of $77.2 million, an increase of 28%, compared to revenues of $60.2
million in the prior year period. Bally Gaming reported unit sales of
approximately 10,400 new gaming machines, an increase of 38% compared to unit
sales of approximately 7,500 in the prior year period. The volume improvement
resulted primarily from sales to Casino Niagara in Niagara Falls, Canada where
Bally Gaming placed approximately 1,500 new gaming machines, representing 50% of
the casino floor, as well as a general increase in replacement demand from
existing casinos and a greater number of new casino openings in the six months
ended December 31, 1996. By market segment, Bally Gaming's unit sales for the
period consisted of approximately 4,600 units to the Nevada and Atlantic City
markets, 4,400 units to international markets and 1,400 units to riverboats,
Native American and other domestic markets. Bally Gaming reported revenues from
the sale of new gaming machines of $54.7 million, an increase of 43%, compared
to $38.1 million in the prior year quarter due to higher unit volume and higher
average selling prices. Bally Systems reported revenues of $12.8 million, an
increase of 33%, compared to revenues of $9.6 million in the prior year period.
Bally Systems revenue improvement resulted primarily from increased shipments to
new installations such as New-York-New York, Casino Niagara and Casino Rama, and
partial shipments to both the Harrah's Riverboat and Players Island Casino in
St. Louis.

For the six months ended December 31, 1996, gross profit margins improved to
37.4% from 35.8% in the prior year period. The gross margin improvement resulted
primarily from the favorable impact of greater production volume in the
Company's 


                                       32
<PAGE>   33
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996



manufacturing facility, partially offset by the effect of higher
international sales which traditionally have lower profit margins. Bally Gaming
and Systems reported operating income of $9.0 million, an increase of 80%,
compared to operating income of $5.0 million in the prior year period. The
operating income improvement resulted primarily from the aforementioned revenue
and gross margin increases, partially offset by greater selling, general and
administrative expenses and an increased provision for doubtful receivables
including amounts related to a customer in Turkey, where the government recently
forced the closure of casinos.

BALLY WULFF

For the six months ended December 31, 1996, Bally Wulff reported revenues of
$68.7 million, an increase of 33%, compared to revenues of $51.6 million in the
prior year period. The revenue improvement resulted primarily from a 143%
increase in new wall machine units sold as Bally Wulff expanded its market share
and demand increased as a result of a change in German regulations effective
January 1, 1997, requiring all wall machines to have internal meters to track
play. In addition, Bally Wulff enhanced its leasing program whereby new wall
machines are leased to customers pursuant to operating leases which provide a
stream of revenues and cash flows over the term of the leases which range from
six months to three years. For the six months ended December 31, 1996, Bally
Wulff leased approximately 2,500 new wall machines compared to 500 new wall
machines in the prior year quarter. Revenues from amusement game sales were
unfavorably impacted as operators weighted their mix of capital expenditures
toward new wall machines. The currency translation impact of the fluctuation of
the German mark versus the U.S. dollar reduced revenues by $5.2 million during
the 1996 period.

For the six months ended December 31, 1996, gross profit margin improved to
48.4% from 37.1% in the prior year quarter. The gross margin improvement
resulted primarily from the favorable impact of greater production volume in
Bally Wulff's production facility. Bally Wulff reported operating income of
$11.5 million, an increase of 384%, compared to $2.4 million in the prior year
period. The operating income improvement resulted primarily from the
aforementioned revenue and gross margin increases, partially offset by an
increased provision for doubtful receivables as well as higher selling, general
and administrative expenses due to increased marketing costs.

GAMING MACHINE OPERATIONS

For the six months ended December 31, 1996, the gaming machine operations
business unit reported revenues of $60.6 million, an increase of 15%, compared
to revenues of $52.6 million in the prior year period. Louisiana revenues
increased 13% as net win per gaming machine per day increased 9% to $67.59 from
$61.98 in the prior year period, partially offset by a decline in the average
number of gaming machines to 671 from 685 in the prior year period. Nevada
revenues increased 15% as net win per gaming machine per day increased 9% to
$50.70 from $46.50 in the prior year period, while the average number of gaming
machines increased to 5,606 from 5,277 in the prior year period. The improvement
in net win per gaming machine per day in Nevada resulted primarily from the
continuing favorable impact of Gamblers Bonus, a cardless slot player's club and
player tracking system launched in December 1995. The increase in the average
number of gaming machines in Nevada reflects the addition of approximately 150
gaming machines in Northern Nevada operated by Bally Gaming prior to the Merger
and the continued roll-out of the Gamblers Bonus machines.

For the six months ended December 31, 1996, cost of revenues increased 13% to
$45.5 million compared to $40.3 million in the prior year period. As a
percentage of revenues, cost of revenues improved to 75.2% from 76.6% in the
prior year period. Louisiana cost of revenues, increased 17% and, as a
percentage of revenues increased slightly to 64.4% from 62.3% in the prior year
quarter primarily due to the new location which opened in October 1995 and an
increase in gaming taxes and license fees. Nevada cost of revenues increased 12%
but, as a percentage of revenues, improved to 77.0% from 79.1% in the prior year
period primarily due to higher revenues while costs associated with new and
renewed contracts remained 




                                       33
<PAGE>   34
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996



relatively flat. The gaming machine operations business unit reported operating
income, net of minority interest, of $6.2 million, an increase of 27% compared
to operating income of $4.9 million in the prior year quarter. The operating
income improvement resulted primarily from the aforementioned increase in
revenues, and an improvement in operating costs as a percentage of revenues,
partially offset by an increase in selling, general and administrative expenses,
primarily greater marketing costs at the Louisiana operations and an increased
provision for doubtful receivables for the Nevada operations.

CASINO OPERATIONS

For the six months ended December 31, 1996, the casino operations business unit
reported revenues of $25.2 million, an increase of 17%, compared to revenues of
$21.5 million in the prior year period excluding revenues from casinos and
taverns subsequently closed. This increase is due to a 20% increase at the
Rainbow Casino and a 9% increase at the Plantation Casino. The improvement at
the Rainbow Casino was attributable to the continuing impact of its direct
marketing campaigns and a higher average market share than in the prior year
period. Revenues from the Plantation Casino improved as revenues in the prior
year quarter had been negatively impacted by an internal remodeling project.

For the six months ended December 31, 1996, the cost of revenues for casino
operations increased 13% to $11.0 million compared to $9.7 million in the prior
year period but, as a percentage of revenues, improved to 43.6% from 45.2% in
the prior year quarter due to higher revenues with relatively stable costs.

For the six months ended December 31, 1996, the casino operations business unit
reported operating income, net of casino royalty and minority interest, of $5.2
million, an increase of 25%, compared to operating income of $4.1 million in the
prior year period. The operating income improvement resulted from the
aforementioned increase in revenues and an improvement in operating costs as a
percentage of revenues, partially offset by an increase in selling, general and
administrative expenses due to higher advertising and promotional costs at the
Rainbow Casino operations.

REVENUES AND EXPENSES FOR CLOSED CASINOS AND TAVERNS

During the year ended June 30, 1996, the Company disposed of or terminated
operations at several small casinos and taverns as these operations were not
deemed to be compatible with the Company's long-term growth strategy. No
revenues or expenses were reported for these properties in the six months ended
December 31, 1996. For the six months ended December 31, 1995, revenues for
these properties are included in casino operations revenues and totaled $2.1
million. The related costs of revenues are included in casino operations cost of
revenues and totaled $1.7 million. The related selling, general and
administrative expenses are included in selling, general and administrative
expenses and totaled $0.7 million.

CONSOLIDATED

As previously discussed, the Company acquired BGII on June 18, 1996. Therefore
the consolidated results of operations for the six months ended December 31,
1996 include the results of operations of BGII while the consolidated results
for the six months ended December 31, 1995 do not include BGII's results. The
discussion below does not include results for BGII in the 1995 period.

Total revenues for the six months ended December 31, 1996, were $231.6 million,
an increase of 204% compared to revenues of $76.2 million in the prior year
period. This increase is due to including $145.9 million of revenues from BGII
in the 1996 period as well as the aforementioned increases in revenues at both
the gaming machine operations and casino operations business units.




                                       34
<PAGE>   35
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996


Cost of revenues for the six months ended December 31, 1996, were $140.2
million, an increase of 172% compared to $51.7 million in the prior year period
due to the inclusion of $83.7 million of BGII cost of revenues in the 1996
period as well as the aforementioned increases in cost of revenues at both the
gaming machine operations and casino operations business units. Cost of revenues
as a percentage of total revenues improved to 60.5% from 67.8% in the prior year
quarter due to the aforementioned improvements at both the gaming machine
operations and casino operations business units as well as the impact of the
inclusion of the BGII business units.

Corporate administrative expenses for the six months ended December 31, 1996,
were $10.6 million, an increase of 147% compared to corporate administrative
costs of $4.3 million in the prior year period. This increase is due to
inclusion of BGII corporate administrative expenses and higher legal and
professional fees in the 1996 period, partially offset by synergy cost savings
such as elimination of certain duplicative costs. Corporate administrative
expenses include salaries and wages, related taxes and benefits, rent,
professional fees and other expenses associated with maintaining the corporate
office and providing centralized corporate services for the Company.

Exclusive of the corporate administrative expenses noted above, selling, general
and administrative expenses for the six months ended December 31, 1996, were
$39.8 million, an increase of 321% compared to selling general and
administrative costs of $9.5 million in the prior year quarter. This increase is
due to the inclusion of $29.7 million of BGII selling, general and
administrative expenses in the 1996 period and the aforementioned increase at
both the gaming machine operations and casino operations business units
partially offset by the decrease in expenses as the result of the aforementioned
disposed or terminated operations at several small casinos and taverns.

Provisions for bad debt for the six months ended December 31, 1996, increased
$6.3 million from the prior fiscal year period. The increase was due to the
impact of including BGII's operations in the 1996 period and the aforementioned
increase of the provision for the Bally Gaming and Systems, Bally Wulff and
gaming machine operations business units. Depreciation and amortization for the
six months ended December 31, 1996 was $11.1 million, an increase of 127%
compared to depreciation and amortization of $4.9 million in the prior year
period. This increase is due to the inclusion of BGII depreciation and
amortization in the 1996 quarter, higher depreciation and amortization in the
gaming machine operations business unit and the impact of amortizing goodwill
and other intangibles acquired in the BGII Merger.

During the six months ended December 31, 1996, the Company incurred unusual
charges of $0.7 million related primarily to separation costs of Alliance
personnel subsequent to the Merger. During the six months ended December 31,
1995, the Company expensed direct merger costs related to the pursuit of BGII
totaling $9.4 million. Such costs included legal, accounting, financial
advisory, printer, SEC filing fees and other related expenses.


NET INTEREST EXPENSE AND INCOME TAXES

Net interest expense in the six months ended December 31, 1996, increased to
$10.8 million, an increase of 209% compared to the net interest expense of $3.5
million in the prior year period. The increase is primarily due to interest on
the Company's 12 7/8% Senior Secured Notes due 2003 which were issued in June
1996, partially offset by lower interest expense on the Company's 7 1/2%
Convertible Debentures due 2003, substantially all of which were converted into
equity as part of the financing of the Merger.

The Company recorded an income tax provision of $4.6 million in the six months
ended December 31, 1996 compared to a provision of $0.8 million in the prior
fiscal year period. The current fiscal year provision is primarily due to income
taxes related to Bally Wulff.




                                       35
<PAGE>   36
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1996

                                    * * * * *

The information contained in this Form 10-Q may contain forward-looking
statements that involve risks and uncertainties, including, but not limited to,
the impact of competitive products and pricing, product demand and market
acceptance risks, the presence of competitors with greater financial resources,
product development and commercialization risks, costs associated with the
integration and administration of acquired operations, capacity and supply
constraints or difficulties, the results of financing efforts and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.




                                       36