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, 1998

                                       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 1, 1999  according  to the records of the  registrant's  registrar  and
transfer agent was 9,790,597.












<PAGE>


                          ALLIANCE GAMING CORPORATION
                                   FORM 10-Q

                    For the Quarter Ended December 31, 1998










                                   I N D E X



PART I.  FINANCIAL INFORMATION                                          Page


Item 1.     Unaudited Financial Statements

      Unaudited Condensed Consolidated Balance Sheets as of 
           June 30, 1998 and December 31, 1998                            3

      Unaudited Condensed Consolidated Statements of Operations
           for the three months ended December 31, 1997 and 1998          4

      Unaudited Condensed Consolidated Statements of Operations
           for the six months ended December 31, 1997 and 1998            5

      Unaudited Condensed Consolidated Statements of Stockholders'
           Deficiency for the six months ended December 31, 1998          6

      Unaudited Condensed Consolidated Statements of Cash Flows
           for the six months ended December 31, 1997 and 1998            7

      Notes to Unaudited Condensed Consolidated Financial Statements      8

Item 2.     Management's Discussion and Analysis of Financial 
            Condition and Results of Operations                          22



PART II. OTHER INFORMATION



Item 4.     Submission of Matters to a Vote of Security Holders          33

Item 6.     Exhibits and Reports on Form 8-K                             33


SIGNATURES                                                               34







<PAGE>


                                    PART I

                          ALLIANCE GAMING CORPORATION
                UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                        (In 000's, except share data)
                                                          June 30,    Dec. 31,
                                                            1998        1998
ASSETS
Current assets:
  Cash and cash equivalents                              $ 23,487     $20,518
  Accounts and notes receivable, net of allowance for 
   doubtful accounts of $11,932 and $11,756                93,459      83,232
  Inventories, net of reserves of $6,797 and $5,997        42,418      47,262
   Other current assets                                    11,711       7,733
                                                         --------    --------
   Total current assets                                   171,075     158,745
                                                          -------     -------
Long-term notes receivable, net of allowance for doubtful
  accounts of $1,109 and $996                               7,931       7,528
Leased equipment, net of accumulated depreciation of 
  $4,020 and $3,758                                         7,325       7,813
Property, plant and equipment, net of accumulated 
  depreciation of $46,090 and $52,815                      77,905      78,979
Excess of costs over net assets of acquired businesses, 
  net of accumulated amortization of $3,199 and $4,223     59,952      60,619

Intangible assets, net of accumulated amortization of 
  $13,358 and $15,611                                      26,732      27,158
Other assets, net                                          15,917      14,515
                                                          -------     -------
    Total assets                                         $366,837    $355,357
                                                         ========    ========

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
  Accounts payable                                       $ 10,477    $ 13,295
  Accrued liabilities                                      39,122      34,927
  Current maturities of long-term debt                      1,996       1,989
                                                           ------      ------
    Total current liabilities                              51,595      50,211
                                                          -------     -------
Term loan facilities                                      137,800     134,600
Senior Subordinated Notes due 2007, net                   149,245     149,272
Other long-term debt, less current maturities              36,912      31,499
Other liabilities                                          12,718      12,590
                                                           ------      ------
    Total liabilities                                     388,270     378,172

Minority interest                                           2,315       1,978
Commitments and contingencies Stockholders' deficiency:
  Special Stock, 10,000,000 shares authorized:
     Series E, $100 liquidation value; 137,317 shares 
      and 145,326 shares issued and outstanding            13,732      14,532
  Common Stock, $.10 par value; 50,000,000 shares 
     authorized; 9,178,000 shares and 9,790,000 shares 
     issued and outstanding                                 3,212       3,426
  Additional paid-in capital                              122,980     127,544
  Accumulated other comprehensive loss                    (13,946)     (7,712)
  Accumulated deficit                                    (149,726)   (162,583)
                                                         --------     -------
    Total stockholders' deficiency                        (23,748)    (24,793)  
                                                          -------     -------
        Total liabilities and stockholders' deficiency   $366,837    $355,357
                                                         ========    ========



       See notes to unaudited condensed consolidated financial statements.


<PAGE>


                         ALLIANCE GAMING CORPORATION
          UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                       (In 000's, except per share data)
                                                 Three Months Ended December 31,
                                                            1997       1998  
Revenues:
    Gaming equipment and systems                         $ 27,455   $ 22,499
    Wall machines and amusement games                      27,731     23,769
    Route operations                                       37,040     42,750
    Casino operations                                      14,488     14,892
                                                          -------    -------
                                                          106,714    103,910
Costs and expenses:
    Cost of gaming equipment and systems                   15,333     13,394
      Cost of wall machines and amusement games            15,165     14,674
      Cost of route operations                             28,635     33,516
      Cost of casino operations                             6,271      6,504
      Selling, general and administrative                  23,158     27,866
  Research and development                                  3,446      3,976
  Depreciation and amortization                             5,809      5,757
  Unusual items                                            (2,545)       -  
                                                           ------    -------
                                                           95,272    105,687

Operating income (loss)                                    11,442     (1,777)

Other income (expense):
    Interest income                                           210        141
    Interest expense                                       (7,497)    (7,502)
  Minority interest                                          (446)      (509)
    Other, net                                                 64       (355)
                                                            -----     -------
Income (loss) before income taxes                           3,773    (10,002)

Income tax (provision) benefit                               (427)       245
                                                           ------     ------
Net income (loss)                                           3,346     (9,757)

Special Stock dividends                                      (373)      (418)
                                                            ------    -------
Net income (loss) applicable to common shares              $2,973   $(10,175)
                                                           ======   =========

Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share                            $ 0.33     $(1.04)
                                                           ======     =======
Diluted earnings (loss) per share                          $ 0.31     $(1.04)  
                                                           ======     =======

Weighted average common shares outstanding                  9,135      9,789
Weighted average common and common share equivalents 
  outstanding                                               9,731      9,789



       See notes to unaudited condensed consolidated financial statements.




<PAGE>


                         ALLIANCE GAMING CORPORATION
          UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                         (In 000's, except share data)

                                                   Six Months Ended December 31,
                                                           1997        1998  
Revenues:
    Gaming equipment and systems                         $ 54,622    $44,441
    Wall machines and amusement games                      48,792     44,380
    Route operations                                       72,695     82,754
    Casino operations                                      28,576     31,106
                                                          -------    -------
                                                          204,685    202,681
Costs and expenses:
   Cost of gaming equipment and systems                    31,569     25,234
      Cost of wall machines and amusement games            26,733     26,742
      Cost of route operations                             55,823     64,645
      Cost of casino operations                            12,531     13,320
      Selling, general and administrative                  44,562     48,903
  Research and development                                  6,314      8,145
  Depreciation and amortization                            10,812     11,159
  Unusual items                                            (2,545)       -   
                                                          -------     -------
                                                          185,799     198,148

Operating income                                           18,886      4,533

Other income (expense):
    Interest income                                           441        373
    Interest expense                                      (13,566)   (15,405)
    Rainbow royalty                                          (587)       -
    Rainbow royalty buyout                                (19,000)       -
    Minority interest                                        (836)    (1,048)
    Other, net                                                 52       (547)
                                                          -------     -------

Loss before income taxes                                  (14,610)   (12,094)
Income tax (provision) benefit                               (920)        61
                                                           ------    -------
Loss before extraordinary item                            (15,530)   (12,033)
Extraordinary loss, without tax benefit (note 2)          (42,033)       -   
                                                          --------   -------
Net loss                                                  (57,563)   (12,033)

Special Stock dividends (note 2)                           (2,773)      (824)
Premium on repurchase/redemption of Series B Special
  Stock                                                   (16,553)         -   
Net loss applicable to common shares                     $(76,889)  $(12,857)

Basic and diluted loss per share:
  Loss before extraordinary item                           $(3.82)    $(1.34)
  Extraordinary loss                                        (4.61)        -   
                                                            -----      -----
   Net loss                                                $(8.43)    $(1.34)
                                                           =======    =======

Weighted average common shares outstanding                  9,118      9,607
Weighted average common and common share equivalents 
  outstanding                                               9,118      9,607

     See notes to unaudited condensed consolidated financial statements.

<PAGE>


                         ALLIANCE GAMING CORPORATION
   UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
                      Six Months Ended December 31, 1998
                                  (In 000's)

<TABLE>
<CAPTION>

                                                                                  Accumulated            Total
                                     Series E                         Additional     Other               Stock-
                                   Special Stock        Common Stock    Paid-in  Comprehensive Accum.   holders'
                                  Shares   Dollars    Shares   Dollars  Capital  Income (Loss) Deficit  Deficiency

<S>                                  <C>  <C>          <C>     <C>      <C>       <C>       <C>         <C>      
Balances at June 30, 1998            137  $ 13,732     9,178   $ 3,212  $122,980  $(13,946) $(149,726)  $(23,748)
Net loss                              --        --        --        --        --        --    (12,033)   (12,033)
Shares issued upon exercise of
  options and warrants                --        --       612       214     4,564        --         --      4,778
Special Stock dividends                8       800        --        --        --        --       (824)       (24)
Foreign currency translation
  adjustment                          --        --        --        --        --     6,234       --        6,234
                                     ---    ------     -----     -----   -------    ------   --------    -------                    

Balances at December 31, 1998        145  $ 14,532     9,790   $ 3,426  $127,544  $ (7,712) $(162,583)  $(24,793)
                                     ===  ========     =====   =======  ========  ========= ==========  =========

</TABLE>














     See notes to unaudited condensed consolidated financial statements.






<PAGE>


                         ALLIANCE GAMING CORPORATION
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (In 000's)


Six Months Ended December 31,
                                                            1997        1998
Cash flows from operating activities:
  Net loss                                               $(57,563)   $(12,033)
  Adjustments to reconcile net loss to net cash 
   provided by (used in) operating activities:
     Depreciation and amortization                         10,812      11,159
     Amortization of debt discounts                            19          26
     Extraordinary item                                    42,033           -
     Write down of other assets                             2,776         523
     Gain on sale of assets                                   (45)        (25)
     Provision for losses on (recovery of) doubtful 
      receivables                                          (6,886)        922
     Other                                                    572       1,293
  Net change in operating assets and liabilities:
     Accounts and notes receivable                          8,026      13,949
     Inventories                                             (754)     (6,551)
     Other current assets                                    (347)      3,394
     Accounts payable                                      (6,994)      2,603
     Accrued liabilities                                   (3,803)     (4,422)
                                                           ------      ------
Net cash provided by (used in) operating activities       (12,154)     10,838

Cash flows from investing activities:
  Additions to property, plant and equipment               (6,574)     (5,476)
  Proceeds from disposal of property and equipment            224          83
  Additions to other long term assets                      (1,974)     (3,216)
                                                           ------      ------
Net cash used in investing activities                      (8,324)     (8,609)

Cash flows from financing activities:
  Refinancing fees and expenses                           (32,752)          -
  Capitalized debt issuance costs                         (11,456)          -
  Proceeds from issuance of long-term debt                303,734           -
  Repayments of long-term debt                           (178,355)     (4,099)
  Net change in lines of credit                            14,674      (6,200)
  Repurchase/redemption of Series B Special Stock         (77,568)          -
  Proceeds from exercise of stock options and warrants        473       4,778
                                                          -------      ------
Net cash provided by (used in) financing activities        18,750      (5,521)

Effect of exchange rate changes on cash                      (149)        323
                                                            -----       -----

Cash and cash equivalents:
    Decrease for period                                    (1,877)     (2,969)
    Balance, beginning of period                           28,924      23,487
                                                           ------      ------
    Balance, end of period                                $27,047     $20,518 
                                                          =======     =======   


     See notes to unaudited condensed consolidated financial statements.


<PAGE>


                         ALLIANCE GAMING CORPORATION
        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                 Six Months Ended December 31, 1997 and 1998



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 as amended for the year ended June 30,
    1998. All  intercompany  accounts and  transactions  have been eliminated in
    consolidation.

    The accompanying  condensed  consolidated  financial  statements at June 30,
    1998 were derived from the audited consolidated financial statements, but do
    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.

2.  DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION

    Long-term  debt at June 30, 1998 and  December  31,  1998  consists of the
    following:

                                                          June 30,   Dec. 31,
                                                            1998      1998
                                                               (in 000's)
      10% Senior Subordinated Notes due 2007, net of 
        unamortized discount of $755 and $728            $149,245  $149,272
      Term loan facilities:
          Tranche B Term Loan                              74,438    72,642
          Tranche C Term Loan                              39,700    38,899
          Delayed Draw Term Facility                       25,000    24,459
      Revolving Credit Facility                            34,971    29,799
      Other, secured by related equipment                   2,599     2,289 
                                                           ------    ------
                                                          325,953   317,360
      Less current maturities                               1,996     1,989
                                                           ------    ------
      Long-term debt, less current maturities            $323,957  $315,371
                                                         ========  ========

    In August 1997 the Company completed a refinancing  transaction  whereby the
    Company  repaid  its 12 7/8%  Senior  Notes,  repurchased  its 15%  Series B
    Special  Stock,  and issued $150  million of Senior  Subordinated  Notes and
    entered into bank financing of $230 million. The bank financing provides for
    (i) term loans in the aggregate amount of up to $140 million, comprised of a
    $75 million  tranche with a 7 1/2-year term (the  "Tranche B Term Loan"),  a
    $40 million  tranche with an 8-year term (the "Tranche C Term Loan"),  and a
    $25 million tranche with a 7 1/2-year term (the "Delayed Draw Term Facility"
    and together  with the Tranche B Term Loan and the Tranche C Term Loan,  the
    "Term Loan  Facilities");  and (ii) a $90 million  revolving credit facility
    (the "Revolving  Credit  Facility") with a 6-year term. Each of these credit
    facilities are variable rate  borrowings in accordance with a credit grid as
    amended.  The interest rates which are currently at the highest level of the
    credit grid as amended and maturity dates are as follows:


<PAGE>


                         ALLIANCE GAMING CORPORATION
  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                 Six Months Ended December 31, 1997 and 1998

                                              Interest           Maturity
                                                Rates               Date
            Tranche B Term Loan          LIBOR + 3.25%  January 31, 2005
            Tranche C Term Loan          LIBOR + 3.50%     July 31, 2005
            Delayed Draw Term Facility   LIBOR + 3.25%  January 31, 2005
            Revolving Credit Facility    LIBOR + 2.75%     July 31, 2003

    The Revolving Credit Facility also allows for German Deutschemark borrowings
    at the euro deutschmark rate plus 2.75% (or 5.8% at December 31, 1998).

    The bank facility is  collateralized  by substantially all domestic property
    and is  guaranteed  by each  domestic  subsidiary  of the U.S.  Borrower and
    German Subsidiaries (both as defined), other than the entity which holds the
    Company's  interest  in its  Louisiana  operations  and  other  non-material
    subsidiaries  (as  defined),  and secured by both a U.S.  and German  Pledge
    Agreement  (both  as  defined).  The bank  facility  contains  a  number  of
    maintenance  covenants  and it and  the  Indenture  have  other  significant
    covenants that, among other things,  restrict the ability of the Company and
    certain  of  its  subsidiaries  to  dispose  of  assets,   incur  additional
    indebtedness  and  issue  preferred  stock,  pay  dividends  or  make  other
    distributions, enter into certain acquisitions,  repurchase equity interests
    (as defined) or subordinated indebtedness, issue or sell equity interests of
    the Company's subsidiaries (as defined),  engage in mergers or acquisitions,
    or engage in certain transactions with subsidiaries and affiliates, and that
    otherwise  restrict  corporate  activities.  Due to the low amount of EBITDA
    earned by the Company in the December 1998 quarter, the Company did not meet
    the original financial  covenants in the bank facility.  The Company and the
    banks have amended the current and future financial maintenance covenants in
    the bank  facility  effective  December 31, 1998 such that the Company is in
    compliance with such covenants.

    The Senior Subordinated Notes bear interest at 10%, are due in 2007, and are
    general unsecured  obligations of the Company,  ranking subordinate in right
    of  payment  to all  Senior  Debt (as  defined)  of the  Company,  including
    indebtedness under the bank facility.  The Senior Subordinated Notes will be
    fully  and  unconditionally   guaranteed  on  a  joint  and  several  senior
    subordinated   basis  by  all  existing  and  future   domestic   Restricted
    Subsidiaries  (as  defined) of the  Company,  subject to certain  exceptions
    including the partially-owned  entities through which its Mississippi casino
    and Louisiana route operations are conducted.  The Subsidiary Guarantees (as
    defined)  are  general  unsecured  obligations  of the  Guarantors,  ranking
    subordinate  in right of payment to all Senior Debt of the  Guarantors.  The
    Company will be able to designate  other current or future  subsidiaries  as
    Unrestricted   Subsidiaries   (as  defined)  under  certain   circumstances.
    Unrestricted  Subsidiaries  will  not be  required  to  issue  a  Subsidiary
    Guarantee and will not be subject to many of the  restrictive  covenants set
    forth in the Indenture pursuant to which the Senior  Subordinated Notes were
    issued.  The Indenture for the Company's Senior  Subordinated Notes contains
    various  covenants,   including  limitations  on  incurrence  of  additional
    indebtedness,   on   restricted   payments   and  on  dividend  and  payment
    restrictions  on  subsidiaries.  The  Senior  Subordinated  Notes may not be
    redeemed  for the  first  five  years.  Upon the  occurrence  of a Change of
    Control (as defined), the holders of the Senior Subordinated Notes will have
    the right to require the Company to purchase their notes at a price equal to
    101% of the  aggregate  principal  amount  thereof,  plus accrued and unpaid
    interest to the date of purchase.

    The  refinancing  transaction  was  completed  in September  1997,  and as a
    result,  the  Company  recorded  an  extraordinary  loss  of  $42.0  million
    consisting  of the $27.7  million  premium  paid to  repurchase  the  Senior
    Secured Notes, the payment of related transaction fees and expenses, and the
    charge-off of the  unamortized  debt discount and deferred  financing  fees.
    There  was no  tax  benefit  recognized  for  the  extraordinary  item  as a
    valuation  allowance was recorded to fully reserve the net operating  losses
    created.  The Company also recorded a $19.0  million  charge for the cost of
    the Rainbow  Royalty  Buyout.  Additionally,  the  Company  recorded a $16.6
    million  charge  to  equity  and a  corresponding  increase  in the net loss
    applicable to common shares for the  difference  between the carrying  value
    and the  liquidation  value of the Series B Special Stock,  all of which was
    redeemed on  September 8, 1997 at the  liquidation  price of $100 per share,
    plus accrued dividends.

3.  INCOME TAXES

    The Company's effective tax rate for the three and six months ended December
    31, 1997 and 1998 differs from the statutory rate of 35% due to state income
    taxes and the impact of taxes  applicable  to  earnings of Bally  Wulff.  In
    addition,  losses  at the  Company's  domestic  subsidiaries  add to the net
    operating loss carryforwards for which, no benefit is recorded in the income
    statement.

4.     SUPPLEMENTAL CASH FLOW INFORMATION

    The following supplemental information is related to the unaudited condensed
    consolidated statements of cash flows. For the six months ended December 31,
    1997 and 1998,  the Company  recorded  the  following  significant  non-cash
    items:
                                                   Six months ended December 31,
                                                            1997      1998
                                                               (In 000's)
    Reclassify other assets to property, plant and
    equipment                                             $  154    $  242
    Dividends for Series E and , for the 1997 period, 
      Series B Special Stock                               2,773       824
    Reclassify inventory to equipment                      3,101     2,842
    Translation rate adjustment                            2,352     5,911
    Reclassify other current assets to accrued liabilities     -       672

5.  LEGAL PROCEEDINGS

    Litigation

    On September 25, 1995, Bally Gaming  International,  Inc. ("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 filed suit against BGII and approximately 45 other
    defendants.  Each  defendant is involved in the gaming  business as 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 into playing 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 $1.0 billion,  and are
    asking that any damage awards be trebled under  applicable  Federal law. The
    case is in the discovery and motions  stage.  A trial date has not been set.
    Management believes the plaintiffs' lawsuit to be without merit. The Company
    intends to vigorously pursue all legal defenses available to it.

    The Company is also a party to various lawsuits  relating to routine matters
    incidental to its business.  Management does not believe that the outcome of
    such litigation,  including the matters above, in the aggregate, will have a
    material adverse effect on the Company.


6.  UNUSUAL ITEMS

    In December 1997 the Company,  Alpha Hospitality and General Electric Credit
    Corporation  settled certain  customer notes receivable on which the Company
    had certain recourse  obligations.  The Company  contributed $2.5 million to
    the final settlement with the holder of the notes, and reversed $6.0 million
    of  reserves  previously  established  for these  recourse  obligations.  In
    addition,  as part of the  settlement  the Company  became the sole owner of
    approximately  566,000 shares of Alpha Hospitality common stock which trades
    on the NASDAQ Small Cap market. The Company is selling this stock within the
    limitations provided for in the settlement agreement.

    As a result  of  settling  a  dispute  over  the  exclusive  use of  certain
    technologies and changes in gaming  regulations,  the Company  evaluated the
    cash flow of  certain  of its  technology  assets,  in  accordance  with the
    provisions  of  Financial  Accounting  Standards  Board  Statement  No. 121,
    "Accounting for the Impairment of Long-Lived Assets and Long-lived Assets to
    be Disposed of," and  determined  certain items met the definition of having
    become impaired.  In December 1997 the Company recorded write-downs totaling
    $2.8 million for these items, which amount is included in unusual items.

    Additionally,  the Company  accrued  $0.7  million for the present  value of
    contractual  payments due to a former  member of the board of directors  who
    was not  re-elected  to the board at the December  1997 annual  shareholders
    meeting.

7.  COMPREHENSIVE INCOME (LOSS)

    As of July 1, 1998, the Company  adopted  Statement of Financial  Accounting
    Standards No. 130, "Reporting  Comprehensive  Income" ("SFAS 130"). SFAS 130
    establishes new rules for the reporting of  comprehensive  income (loss) and
    its components; however, the adoption of SFAS had no impact on the Company's
    net income (loss) or stockholders' deficiency. SFAS 130 requires the changes
    in the cumulative  translation  adjustment  account (which is a component of
    stockholders'   deficiency)   to  be  included  as  a  component   of  other
    comprehensive income (loss).

    During the six months ended  December 31, 1997 and 1998,  total  accumulated
    comprehensive  income  (loss)  amounted to $(2.5)  million and $6.2 million,
    respectively.

8.  REVERSE STOCK SPLIT

    On January 14, 1999 the Company's Board of Directors announced a one-for-3.5
    reverse stock split of its Common Stock effective  February 1, 1999 in order
    to maintain the listing of the Company's Common Stock on the NASDAQ National
    Market  System.  The  effects  of the  reverse  split  were  to  reduce  the
    authorized number of common shares from 175.0 million to 50.0 million and to
    decrease the number of shares of Common Stock  outstanding from 34.3 million
    to 9.8 million.  In  connection  with the reverse  split,  the share number,
    exercise  price and the trigger  prices,  as  applicable,  for the Company's
    stock  options  and  warrants  were  proportionately  adjusted.  In  lieu of
    fractional  shares  resulting  from the  reverse  split,  stockholders  will
    receive a cash payment from the sale of the aggregate  fractional  shares on
    the open market. The reverse split also impacted the conversion ratio on the
    Company's  Series E Special  Stock.  Each share of Series E Special Stock is
    now convertible  into 4.859 shares of Common Stock instead of 17.007 shares.
    All share and per share data  included in this report have been  restated to
    reflect the reverse split.


<PAGE>


9.  UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS

    The following unaudited  condensed  consolidating  financial  statements are
    presented to provide certain financial  information  regarding  guaranteeing
    and  non-guaranteeing  subsidiaries  in  relation  to the  Company's  Senior
    Subordinated  Notes which were issued in the  refinancing  transaction  (see
    note 2).  The  financial  information  presented  includes  Alliance  Gaming
    Corporation  (the "Parent") and its wholly-owned  guaranteeing  subsidiaries
    (together   the   "Parent   and   Guaranteeing   Subsidiaries"),   and   the
    non-guaranteeing  subsidiaries Video Services,  Inc., United Gaming Rainbow,
    BGI Australia Pty. Limited,  Bally Gaming de Puerto Rico, Inc., and Alliance
    Automaten  GmbH & Co. KG (the  subsidiary  that holds the  Company's  German
    interests)  (together  the  "Non-Guaranteeing  Subsidiaries").  The notes to
    consolidating  financial statements should be read in conjunction with these
    consolidating financial statements.


<PAGE>


                           ALLIANCE GAMING CORPORATION
   NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          CONSOLIDATING BALANCE SHEETS
                                  June 30, 1998
                                   (In 000's)
<TABLE>
<CAPTION>
                                                                            Alliance
                                                                             Gaming
                                     Parent and     Non-                   Corporation
                                    Guaranteeing  Guaranteeing   Adjust-       and
                                    Subsidiaries  Subsidiaries    ments    Subsidiaries
<S>                                    <C>         <C>          <C>          <C>        
ASSETS
Current assets:
Cash and cash equivalents              $ 8,609     $ 14,878     $            $ 23,487
Accounts and notes receivable, net      44,757       52,380       (3,678)      93,459
Inventories, net                        27,957       14,990         (529)      42,418
Other current assets                     7,998        3,713                    11,711
                                        ------       ------       ------       ------
   Total current assets                 89,321       85,961       (4,207)     171,075
                                       -------      -------       ------      -------
Long-term notes receivable, net         95,036        1,926      (89,031)       7,931
Leased equipment, net                        2        7,323                     7,325
Property, plant and equipment, net      45,052       32,853                    77,905
Excess of costs over net assets of 
  acquired businesses, net              39,963       19,989                    59,952
Intangible assets, net                  26,248          484                    26,732
Investment in subsidiaries             104,219                               (104,219)
Other assets, net                       22,453       (1,124)      (5,412)      15,917
                                       -------     --------       ------      -------
                                      $422,294     $147,412    $(202,869)    $366,837
                                      ========     ========    =========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable                      $  7,373      $ 3,104      $           $ 10,477
Accrued liabilities                     26,415       13,705         (998)      39,122
Current maturities of long-term debt     6,912       3,176        (8,092)       1,996
                                        ------       ------       ------       ------
  Total current liabilities             40,700       19,985       (9,090)      51,595
                                       -------      -------      -------      -------
Term loan facilities                   137,800                                137,800
Senior Subordinated Notes, net         149,245                                149,245
Other long-term debt, less current 
  maturities                           105,279       20,878      (89,245)      36,912
Other liabilities                       10,729        2,330         (341)      12,718
                                       -------       ------       ------       ------
  Total liabilities                    443,753       43,193      (98,676)     388,270
                                       -------       ------      -------      -------
Minority interest                        2,315                                  2,315
Commitments and contingencies Stockholders' 
  equity (deficiency):
Series E Special Stock                  13,732                                 13,732
Common Stock                             3,212       17,832      (17,832)       3,212
Additional paid-in capital             122,980       68,700      (68,700)     122,980
Accumulated other comprehensive loss  (13,946)      (14,140)      14,140      (13,946)
Retained earnings 
  (accumulated deficit)               (149,752)      31,827      (31,801)    (149,726)
                                      --------       ------      -------     --------
  Total stockholders' equity 
    (deficiency)                       (23,774)     104,219     (104,193)     (23,748)
                                       -------      -------     --------      -------
                                      $422,294     $147,412    $(202,869)    $366,837
                                      ========     ========    =========     ========
</TABLE>

                       See accompanying unaudited note.

<PAGE>


                          CONSOLIDATING BALANCE SHEETS

                                December 31, 1998
                                   (In 000's)
<TABLE>
<CAPTION>

                                                                            Alliance
                                                                             Gaming
                                     Parent and       Non-                 Corporation
                                    Guaranteeing  Guaranteeing   Adjust-      and
                                    Subsidiaries  Subsidiaries    ments   Subsidiaries
<S>                                   <C>          <C>           <C>         <C>       
ASSETS
Current assets:
Cash and cash equivalents             $  7,002     $ 13,516      $           $ 20,518
Accounts and notes receivable, net      34,423       52,470       (3,661)      83,232
Inventories, net                        32,392       15,399         (529)      47,262
Other current assets                     6,222        1,511                     7,733
                                        ------      -------       ------      -------
   Total current assets                 80,039       82,896       (4,190)     158,745
                                       -------      -------       ------      -------
Long-term notes receivable, net         97,848        1,883      (92,203)       7,528
Leased equipment, net                                 7,813                     7,813
Property, plant and equipment, net      46,363       32,616                    78,979
Excess of costs over net assets of 
  acquired businesses, net              39,434       21,185                    60,619
Intangible assets, net                  26,652          506                    27,158
Investment in subsidiaries              93,134                   (93,134)           -
Other assets, net                       25,375      (10,362)        (498)      14,515
                                       -------      -------      -------      -------
                                      $408,845     $136,537    $(190,025)    $355,357
                                      ========     ========    =========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable                      $ 10,276     $  3,019     $            $ 13,295
Accrued liabilities                     21,682       14,049         (804)      34,927
Current maturities of long-term debt     1,413        3,252       (2,676)       1,989
                                        ------       ------       ------       ------
  Total current liabilities             33,371       20,320       (3,480)      50,211
                                       -------      -------      -------      -------
Term loan facilities                   134,600                                134,600
Senior Subordinated Notes, net         149,272                                149,272
Other long-term debt, less current 
  maturities                           103,866       20,303      (92,670)      31,499
Other liabilities                       10,577        2,331         (318)      12,590
                                       -------      -------      -------      -------
  Total liabilities                    431,686       42,954      (96,468)     378,172
                                       -------       ------      -------      -------
Minority interest                        1,978                                  1,978
Commitments and contingencies Stockholders' equity (deficiency):
Series E Special Stock                  14,532                                 14,532
Common Stock                             3,426       17,832      (17,832)       3,426
Additional paid-in capital             127,544       68,700      (68,700)     127,544
Accumulated other comprehensive loss    (7,712)      (7,910)       7,910       (7,712)
Retained earnings (accumulated 
  deficit)                            (162,609)      14,961      (14,935)    (162,583)
                                      --------      -------      -------     --------
  Total stockholders' equity        
    (deficiency)                       (24,819)      93,583      (93,557)     (24,793)
                                       -------      -------     --------      -------
                                      $408,845     $136,537    $(190,025)    $355,357
                                      ========     ========    =========     ========
</TABLE>
                           
                        See accompanying unaudited note.


<PAGE>




                     CONSOLIDATING STATEMENTS OF OPERATIONS

                      Three Months Ended December 31, 1997
                                   (In 000's)
<TABLE>
<CAPTION>
                                                                           Alliance
                                                                            Gaming
                                    Parent and       Non-                 Corporation
                                   Guaranteeing  Guaranteeing    Adjust-      and
                                   Subsidiaries  Subsidiaries     ments   Subsidiaries
<S>                                    <C>          <C>          <C>         <C>     
Revenues:
  Gaming equipment and systems         $26,611      $ 2,293      $(1,449)    $ 27,455
  Wall machines and amusement games                  27,731                    27,731
  Route operations                      31,950        5,090                    37,040
  Casino operations                      3,439       11,049                    14,488
                                        ------       ------       ------       ------
                                        62,000       46,163       (1,449)     106,714
                                        ------       ------       ------      -------
Costs and expenses:
  Cost of gaming equipment and systems  15,268        1,588       (1,523)      15,333
  Cost of wall machines and amusement 
    games                                            15,165                    15,165
  Cost of route operations              25,324        3,311                    28,635
  Cost of casino operations              2,069        4,202                     6,271
  Selling, general and administrative   12,582       10,576                    23,158
  Research and development               2,691          755                     3,446
  Depreciation and amortization          3,459        2,350                     5,809
  Unusual items                         (2,545)                                (2,545)
                                        ------       ------       ------       ------
                                        58,848       37,947       (1,523)      95,272
                                        ------       ------       ------       ------
Operating income                         3,152        8,216           74       11,442

Earnings in consolidated subsidiaries    5,929                    (5,929)

Other income (expense):
  Interest income                          340           96         (226)         210
  Interest expense                      (7,265)        (458)         226       (7,497)
  Rainbow royalty                        1,296       (1,296)
  Minority interest                       (446)                                  (446)
  Other, net                               (33)          97                        64
                                        ------       ------       ------       ------
Income before income taxes               2,973        6,655       (5,855)       3,773
Income tax benefit (provision)             298         (725)                     (427)
                                        ------       ------       ------       ------
Net income                               3,271        5,930       (5,855)       3,346

Special Stock dividends                   (373)                                  (373)
                                        ------       ------       ------       ------
Net income applicable to common shares $ 2,898      $ 5,930      $(5,855)     $ 2,973
                                       =======      =======      ========     =======

</TABLE>

                          See accompanying unaudited note.


<PAGE>


                     CONSOLIDATING STATEMENTS OF OPERATIONS

                      Three Months Ended December 31, 1998
                                   (In 000's)
<TABLE>
<CAPTION>

                                                                           Alliance
                                                                            Gaming
                                    Parent and       Non-                 Corporation
                                   Guaranteeing  Guaranteeing    Adjust-       and
                                   Subsidiaries  Subsidiaries     ments   Subsidiaries
<S>                                    <C>          <C>          <C>          <C>    
Revenues:
  Gaming equipment and systems         $22,287      $ 3,005      $(2,793)     $22,499
  Wall machines and amusement games                  23,769                    23,769
  Route operations                      37,370        5,380                    42,750
  Casino operations                      3,553       11,339                    14,892
                                        ------       ------       ------      ------- 
                                        63,210       43,493       (2,793)     103,910
Costs and expenses:
  Cost of gaming equipment and systems  13,822        2,365       (2,793)      13,394
  Cost of wall machines and amusement 
    games                                            14,674                    14,674
  Cost of route operations              29,894        3,622                    33,516
  Cost of casino operations              2,123        4,381                     6,504
  Selling, general and administrative   16,107       11,759                    27,866
  Research and development               3,178          798                     3,976
  Depreciation and amortization          3,743        2,014                     5,757
                                        ------       ------       ------      -------
                                        68,867       39,613       (2,793)     105,687
                                        ------       ------       ------      -------
Operating income (loss)                 (5,657)       3,880                    (1,777)

Earnings in consolidated subsidiaries    2,149                    (2,149)

Other income (expense):
  Interest income                          228          104         (191)         141
  Interest expense                      (7,268)        (425)         191       (7,502)
  Rainbow royalty                        1,333       (1,333)
  Minority interest                       (509)                                  (509)
  Other, net                              (177)        (178)                     (355)
                                        ------       ------       ------       ------
Income (loss) before income taxes       (9,901)       2,048       (2,149)     (10,002)
Income tax benefit                         144          101                       245
                                         -----       ------       ------       ------
Net income (loss)                       (9,757)       2,149       (2,149)      (9,757)

Special Stock dividends                   (418)                                  (418)
                                         -----       ------       ------       ------
Net income (loss) applicable to common 
  shares                              $(10,175)      $2,149      $(2,149)    $(10,175)
                                      =========      ======      ========    =========

</TABLE>

                              See accompanying unaudited note.

<PAGE>



                       CONSOLIDATING STATEMENTS OF OPERATIONS

                      Six Months Ended December 31, 1997
                                  (In 000's)
<TABLE>
<CAPTION>

                                                                           Alliance
                                                                            Gaming
                                    Parent and       Non-                 Corporation
                                   Guaranteeing  Guaranteeing    Adjust-        and
                                   Subsidiaries  Subsidiaries    ments    Subsidiaries
<S>                                    <C>          <C>          <C>           <C>  
Revenues:
  Gaming equipment and systems         $53,134      $ 5,040     $ (3,552)     $54,622
  Wall machines and amusement games                  48,792                    48,792
  Route operations                      62,715        9,980                    72,695
  Casino operations                      6,728       21,848                    28,576
                                        ------       ------       ------      -------
                                       122,577       85,660       (3,552)     204,685
                                       -------      -------      -------     --------
Costs and expenses:
  Cost of gaming equipment and systems  31,548        3,631       (3,610)      31,569
  Cost of wall machines and amusement 
    games                                            26,733                    26,733
  Cost of route operations              49,376        6,447                    55,823
  Cost of casino operations              4,167        8,364                    12,531
  Selling, general and administrative   23,785       20,777                    44,562
  Research and development               4,842        1,472                     6,314
  Depreciation and amortization          6,385        4,427                    10,812
  Unusual items                         (2,545)                                (2,545) 
                                       -------       ------       ------      -------
                                       117,558       71,851       (3,610)     185,799
                                       -------      -------      -------      -------
Operating income                         5,019       13,809           58       18,886

Earnings in consolidated subsidiaries    9,127                    (9,127)

Other income (expense):
  Interest income                          632          207         (398)         441
  Interest expense                     (13,068)        (896)         398      (13,566)
  Rainbow royalty                        1,976       (2,563)                     (587)
  Rainbow royalty buyout               (19,000)                               (19,000)
  Minority interest                       (836)                                  (836)
  Other, net                                31           21                        52
                                        ------       ------       ------      -------
Income (loss) before income taxes      (16,119)      10,578       (9,069)     (14,610)
Income tax benefit (provision)             531       (1,451)                     (920)
                                       -------      -------      -------      -------
Net income (loss) before extraordinary 
  item                                 (15,588)       9,127       (9,069)     (15,530)
Extraordinary loss, without tax benefit(42,033)                               (42,033)
                                       -------       ------       ------      -------
Net income (loss)                      (57,621)       9,127       (9,069)     (57,563)

Special Stock dividends                 (2,773)                                (2,773)
Premium on redemption of Series B 
  Special Stock                        (16,553)                               (16,553)
                                       -------       ------       ------      -------
Net income (loss) applicable to common 
  shares                              $(76,947)     $ 9,127      $(9,069)    $(76,889)
                                      =========     =======      ========    =========

</TABLE>


                            See accompanying unaudited note.


<PAGE>



                       CONSOLIDATING STATEMENTS OF OPERATIONS
                      Six Months Ended December 31, 1998
                                  (In 000's)

<TABLE>
<CAPTION>
                                                                               Alliance
                                                                                Gaming
                                       Parent and       Non-                 Corporation
                                     Guaranteeing   Guaranteeing    Adjust-       and
                                     Subsidiaries   Subsidiaries     ments   Subsidiaries
<S>                                       <C>          <C>         <C>           <C>    
Revenues:
  Gaming equipment and systems            $42,458      $ 6,077     $ (4,094)     $44,441
  Wall machines and amusement games                     44,391          (11)      44,380
  Route operations                         72,259       10,495                    82,754
  Casino operations                         6,860       24,246                    31,106
                                           ------     --------      -------      -------
                                          121,577       85,209       (4,105)     202,681
                                          -------     --------      -------     --------
Costs and expenses:
  Cost of gaming equipment and systems     24,613        4,715       (4,094)      25,234
  Cost of wall machines and amusement 
    games                                               26,753          (11)      26,742
  Cost of route operations                 57,710        6,935                    64,645
  Cost of casino operations                 4,162        9,158                    13,320
  Selling, general and administrative      27,969       20,934                    48,903
  Research and development                  6,589        1,556                     8,145
  Depreciation and amortization             7,415        3,744                    11,159 
                                           ------     --------      -------      -------
                                          128,458       73,795       (4,105)     198,148
                                         --------      -------      -------     --------
Operating income (loss)                    (6,881)      11,414                     4,533

Earnings in consolidated subsidiaries       7,251                    (7,251)

Other income (expense):  
  Interest income                             543          208         (378)         373
  Interest expense                        (14,969)        (814)         378      (15,405)
  Rainbow royalty                           2,840       (2,840)
  Minority interest                        (1,048)                                (1,048)
  Other, net                                 (190)        (357)                     (547)
                                           ------       ------      -------       ------
Income (loss) before income taxes         (12,454)       7,611       (7,251)     (12,094)
Income tax benefit (provision)                421         (360)                       61
                                           ------       ------      -------       ------
Net income (loss)                         (12,033)       7,251       (7,251)     (12,033)

Special Stock dividends                      (824)                                  (824)
                                           ------      -------      -------       ------
Net income (loss) applicable to common 
  shares                                 $(12,857)     $ 7,251      $(7,251)    $(12,857)
                                          =======        =====       ======      =======

</TABLE>

                            See accompanying unaudited note.




<PAGE>


                    CONSOLIDATING STATEMENTS OF CASH FLOWS
                      Six Months Ended December 31, 1997
                                  (In 000's)

<TABLE>
<CAPTION>
                                                                                             Alliance
                                                                                               Gaming
                                                        Parent and       Non-               Corporation
                                                       Guaranteeing  Guaranteeing  Adjust-       and
                                                       Subsidiaries  Subsidiaries   ments   Subsidiaries
<S>                                                      <C>           <C>       <C>         <C>    
Net cash provided by (used in) 
 operating activities                                    $(26,736)     $ 8,231   $ 6,351     $(12,154)
                                                          -------       ------    ------      -------
Cash flows from investing activities:
   Additions to property and equipment                     (4,415)      (2,159)                (6,574)
   Proceeds from disposal of property and equipment             3          221                    224
   Other                                                   (1,827)        (147)                (1,974)
                                                            -----         ----     -----       ------  
      Net cash used in investing activities                (6,239)      (2,085)                (8,324)
                                                           ------       ------     -----       ------
Cash flows from financing activities:
  Refinancing fees and expenses                           (32,752)                            (32,752)
  Capitalized new debt issue costs                        (11,456)                            (11,456)
  Proceeds from long-term debt                            303,734        7,279    (7,279)     303,734
  Repayments of long-term debt                           (170,728)      (8,555)      928     (178,355)
  Net change in lines of credit                             8,631        6,043                 14,674
  Redemption of Series B Special Stock                    (77,568)                            (77,568)
  Proceeds from exercise of stock options                     473                                 473
  Dividends received (paid)                                 7,084       (7,084)                 
                                                          -------     --------  --------      -------
      Net cash provided by (used in) financing
               activities                                  27,418       (2,317)   (6,351)      18,750
                                                          -------     --------  --------      -------

Effect of exchange rate changes on cash                                   (149)                  (149)
                                                          -------     --------  --------      -------

Cash and cash equivalents:
   Increase (decrease) for period                          (5,557)       3,680                 (1,877)
   Balance, beginning of period                            16,462       12,462                 28,924
                                                          -------     -------    -------      -------
  Balance, end of period                                  $10,905      $16,142  $     --      $27,047
                                                          =======      =======  ========      =======


</TABLE>


                            See accompanying unaudited note.




<PAGE>



                    CONSOLIDATING STATEMENTS OF CASH FLOWS
                      Six Months Ended December 31, 1998
                                  (In 000's)

<TABLE>
<CAPTION>


                                                                                              Alliance
                                                                                               Gaming
                                                        Parent and      Non-                 Corporation
                                                       Guaranteeing  Guaranteeing  Adjust-      and
                                                       Subsidiaries  Subsidiaries   ments    Subsidiaries
<S>                                                       <C>          <C>       <C>          <C>   
Net cash provided by (used in)
 operating activities                                     $(7,619)     $19,743   $(1,286)     $10,838
                                                           ------       ------    ------      -------
Cash flows from investing activities:
   Additions to property and equipment                     (4,227)      (1,249)                (5,476)
   Proceeds from disposal of property and equipment            54           29                     83
   Additions to other long term assets                     (3,135)         (81)                (3,216)
                                                           ------       ------    ------       ------
      Net cash used in investing activities                (7,308)      (1,301)                (8,609)
                                                          -------       ------    ------       ------
Cash flows from financing activities:
  Repayments of long-term debt                             (3,858)      (1,527)    1,286       (4,099)
  Net change in lines of credit                            (6,200)                             (6,200)
  Proceeds from exercise of stock options and warrants      4,778                               4,778
  Dividends received (paid)                                18,600      (18,600)                     - 
                                                          -------      -------   -------      -------
      Net cash provided by (used in) financing
               activities                                  13,320      (20,127)    1,286       (5,521)
                                                          -------      -------    ------      -------

Effect of exchange rate changes on cash                                    323                    323
                                                          -------      -------   -------      -------

Cash and cash equivalents:
   Decrease for period                                     (1,607)      (1,362)                (2,969)
   Balance, beginning of period                             8,609       14,878                 23,487
                                                           ------      -------                -------
  Balance, end of period                                   $7,002      $13,516  $     --      $20,518
                                                           ======      =======  ========      =======

</TABLE>

                       See accompanying unaudited note.



<PAGE>



Debt and Lines of Credit

Long-term  debt and  lines  of  credit  at  December  31,  1998  consist  of the
following:
<TABLE>
<CAPTION>

                                                                                             Alliance
                                                                                              Gaming
                                                        Parent and     Non-                Corporation
                                                      Guaranteeing  Guaranteeing  Adjust-       and
                                                      Subsidiaries  Subsidiaries   ments   Subsidiaries
                                                                              (in 000's)
<S>                                                      <C>            <C>      <C>         <C>  
10% Senior Subordinated Notes due
    2007, net of unamortized discount                    $149,272                            $149,272
Term loan facilities:
  Tranche B Term Loan                                      72,642                              72,642
  Tranche C Term Loan                                      38,899                              38,899
  Delayed Draw Term Facility                               24,459                              24,459
Revolving Credit Facility                                  16,500       13,299                 29,799
Intercompany notes payable                                 87,365        7,980   (95,345)         -
Other                                                          13        2,276                  2,289
                                                         --------      ------- ---------      -------
                                                          389,150       23,555   (95,345)     317,360 
Less current maturities                                     1,413        3,252    (2,676)       1,989 
                                                          -------      -------    ------      -------
Long-term debt, less current
  maturities                                             $387,737      $20,303  $(92,669)    $315,371
                                                         ========      =======  ========     ========
</TABLE>

<PAGE>


                         ALLIANCE GAMING CORPORATION
                                   FORM 10-Q

                    For the Quarter Ended December 31, 1998




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

Liquidity and Capital Resources

At December 31, 1998,  based on the terms of the $90.0 million  Revolving Credit
Facility, the Company would have been able to borrow $61.4 million, of which the
Company had borrowings of approximately $29.8 million outstanding. The borrowing
base for the revolving  credit  facility  consists of eligible  receivables  and
inventory, as defined in the credit agreement.

At December 31, 1998, the Company had $20.5 million in cash and cash equivalents
and $31.6 million in unborrowed  availability  on its revolving  credit facility
pursuant to the borrowing base limitations contained in the credit agreement. In
addition,  the Company had working capital of  approximately  $108.5 million,  a
decrease of  approximately  $11.0 million from June 30, 1998, which is explained
below.  Consolidated  cash and cash  equivalents  at December 31, 1998  includes
approximately  $15.9  million  of cash  which is  utilized  in Casino  and Route
Operations which is held in vaults, cages or change banks.

The Company is in compliance with the financial and operational  covenants under
both the bank  credit  agreement  as amended  and the  Indenture  for the Senior
Subordinated Notes.

Management  believes  that cash flow from  operating  activities,  cash and cash
equivalents held and the  availability  under the revolving credit facility will
provide the Company with sufficient capital resources and liquidity. At December
31,  1998,  the Company  did not have any  significant  commitments  for capital
expenditures.

Working Capital

During the six months ended December 31, 1998,  working capital  decreased $11.0
million to $108.5 million. The primary fluctuations in working capital were: (i)
a decrease in accounts  receivable  resulting  from cash  collections  and lower
revenues,  (ii) an  increase in  inventory  due to  customer  imposed  delays in
shipping product and inventory manufactured in anticipation of new product sales
expected in the March  1999  quarter,  (iii) a decrease in other current  assets
resulting  from  amortizing  prepaid  expenses,   (iv)  a  decrease  in  accrued
liabilities due to payments of accrued  interest  payable and a final payment in
settlement  of  litigation,  (v) the  impact of  foreign  exchange  fluctuations
between the dollar and the deutschemark on all working capital categories,  (vi)
increases in accounts  payable  based on the  increase in  inventory  levels and
timing of payments, and (vii) the corresponding impact of the above listed items
on cash and cash equivalents.

Cash Flow

During the six months ended  December 31, 1998,  $10.8 million was provided from
operating  activities  resulting from a net decrease in accounts  receivable,  a
decrease in other current assets,  an increase in accounts payable and increased
depreciation  and  amortization,  partially offset by a net loss, an increase in
inventories  primarily at Bally  Gaming and  Systems,  and a decrease in accrued
expenses based on timing of interest payments.

During the six months  ended  December 31, 1998 the Company used $8.6 million of
cash in investing  activities  primarily  resulting from $5.5 million in capital
expenditures,  $2.0  million  of  payments  made  in  acquiring  the  rights  to
manufacture and distribute several gaming products, and $0.9 million of payments
in acquiring gaming rights of route locations.

During  the six  months  ended  December  31,  1998,  $5.5  million  was used by
financing  activities  primarily resulting from $10.3 million used to reduce the
Company's  long-term  debt,  partially  offset  by the  cash  proceeds  from the
exercise of certain warrants to purchase common stock.

The following is a summary of the Company's  earnings  before  interest,  taxes,
depreciation and amortization (EBITDA) by business unit:

                                 Three Months Ending        Six Months Ending 
                                      December 31,              December 31,
                                    1997       1998           1997       1998
                                                 (In $000's)
EBITDA by Business Unit:
Bally Gaming and Systems          $ 2,781   $ (3,532)       $ 5,927   $ (2,572)
Wall Machines and Amusement Games   5,210      1,287          7,811      4,432
Route Operations                    6,048      6,035         12,382     11,713
Casino Operations                   4,956      4,605          9,213     10,047
Corporate Administrative Expenses  (4,289)    (4,415)        (8,180)    (7,928)
Unusual Items                       2,545        -            2,545       -   
                                  -------    -------        -------    --------
    EBITDA                        $17,251    $ 3,980        $29,698    $15,692 
                                  =======    =======        =======    ========

The Company  believes  that the  analysis  of EBITDA 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.

The bank  credit  facility  is  collateralized  by  substantially  all  domestic
property and is guaranteed by each domestic  subsidiary of the U.S. Borrower and
German  Subsidiaries  (both as  defined),  other than the entity which holds the
Company's   interest  in  its  Louisiana   operations  and  other   non-material
subsidiaries  (as  defined),  and  secured  by  both a U.S.  and  German  Pledge
Agreement (both as defined).  The bank facility contains a number of maintenance
covenants and it and the indenture have other significant  covenants that, among
other  things,   restrict  the  ability  of  the  Company  and  certain  of  its
subsidiaries  to  dispose  of  assets,  incur  additional  indebtedness,   issue
preferred stock, pay dividends or make other  distributions,  enter into certain
acquisitions,   repurchase   equity   interests  (as  defined)  or  subordinated
indebtedness,  issue or sell equity interests of the Company's  subsidiaries (as
defined),  engage in mergers or acquisitions,  or engage in certain transactions
with  subsidiaries  and  affiliates,   and  that  otherwise  restrict  corporate
activities.  Due to the low  amount  of  EBITDA  earned  by the  Company  in the
December 1998 quarter,  the Company did not meet the financial  covenants in the
Bank Credit  Facility.  The  Company and the banks have  amended the current and
future financial  maintenance  covenants in the bank facility effective December
31, 1998 such that the Company is in compliance with such covenants.

Customer Financing

Management  believes  that customer  financing  terms and leasing have become an
increasingly  important  competitive factor for the Bally Gaming and Systems and
Wall Machine and  Amusement  Games  business  units,  respectively.  Competitive
conditions  sometimes  require  Gaming  Equipment and Systems to grant  extended
payment terms on gaming machines, systems and other gaming equipment, especially
for  sales  in  emerging   markets.   While  these   financings   are   normally
collateralized  by such  equipment,  the resale value of the  collateral  in the
event of default may be less than the amount financed.  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.  Bally  Wulff  provides   customer   financing  for
approximately  15% of  its  sales  and  also  provides  lease  financing  to its
customers.  Lease terms are generally for six months, but are also available for
12 and 43 month terms.

Year 2000

The Year 2000 readiness issue,  which is common to most businesses,  arises from
the inability of information systems, and other time and date sensitive products
and systems, to properly recognize and process date-sensitive information on and
beyond  January 1, 2000. The result could create errors in information or system
failures. Assessments of the potential cost and effects of Year 2000 issues vary
significantly  among  businesses,  and it is extremely  difficult to predict the
actual impact. Recognizing this uncertainty, management has and is continuing to
actively  analyze,  assess  and plan for  various  Year 2000  issues  across its
businesses.

The Year 2000 issue has an impact on both information  technology ("IT") systems
and non-IT systems,  such as its manufacturing  systems and physical  facilities
including,  but  not  limited  to,  security  systems  and  utilities.  Although
management  believes  that a majority of the  Company's IT systems are Year 2000
ready, such systems still have to be tested for Year 2000 readiness. The Company
plans to replace or upgrade those  systems that are  identified as non-Year 2000
ready during calendar 1999. Certain IT systems previously identified as non-Year
2000  compliant are being  upgraded or replaced which should be complete by June
30, 1999.  Non-IT system issues are more difficult to identify and resolve.  The
Company is actively  identifying non-IT Year 2000 issues concerning its products
and services,  as well as its physical facility  locations.  As non-IT areas are
identified,  management  formulates  the  necessary  actions  to ensure  minimal
disruption to its business processes.  Management engaged outside consultants to
assist  and  advise  management  in its  assessment  process  and  received  the
consultant's  final report.  The Company has already  started to implement their
recommendations,   such  as  establishing  a  centralized   project   management
organization  to  lead  the  Company   through  its  Year  2000  efforts.   This
organization  will include  dedicated  outside  resources and internal  business
representatives.   Although   management  believes  that  its  efforts  will  be
successful  and the  costs  will be  immaterial  to its  consolidated  financial
position and results of operations, it also recognizes that any failure or delay
could  cause a  disruption  in its  business  and have a  significant  financial
impact. To minimize this potential impact,  the Company is actively planning and
designing a contingency plan to support critical business processes.

The Company has also initiated  efforts to ensure the Year 2000 readiness of its
products  and  services.  As part of its  assessment  of  current  products  and
services,  the Company is  currently  upgrading  all current  Bally  Systems SDS
customers to version 7.0  software,  for which the Company has  developed a Year
2000 compliance "patch" which is currently being distributed.  The Company plans
to have all customers  upgraded to version 7.0 with the patch by July 1999.  The
Company is in the final  stages of testing  version 7.1 of the  software,  which
will be  Year  2000  compliant.  The  Company  expects  to  begin  shipping  and
distributing  version 7.1 by March 1999.  Customers  are also being advised that
the IBM or Unix  operating  systems  they are  using  must also be  upgraded  to
versions that are Year 2000 compliant.  Bally Systems has obtained the operating
system  upgrades  from the vendors and has offered to assist users in installing
the  upgrade.  The  Company  has  also  tested  most  of  the  current  products
manufactured  in the United  States and  Germany  in recent  years to  determine
compliance  with Year 2000. The Company is actively  evaluating its strategy and
legal obligations for any communication to its customers.

Management  continues to  formulate  new plans and update  existing  plans as it
progresses  in its research and  investigation.  The Year 2000  readiness of its
customers  varies,  and the Company is encouraging its customers to evaluate and
prepare  their own  systems.  These  efforts by  customers  to address Year 2000
issues may affect the demand for certain  products and  services;  however,  the
impact to the revenue or any change in revenue patterns is highly uncertain.

The Company has also initiated  efforts to assess the Year 2000 readiness of its
key suppliers and business partners.  The Company's  direction in this effort is
to ensure the  adequacy of  resources  and  supplies to minimize  any  potential
business interruptions.  Management plans to complete this part of its Year 2000
readiness  plan in the early part of  calendar  1999.  As part of the  Company's
contingency plans,  management will begin to identify and solidify relationships
with and access to alternative suppliers and resources to ensure the support and
continuation of its critical business operations.

     The Year 2000 issue presents a number of other risks and uncertainties that
could impact the Company,  such as public  utility  failures,  potential  claims
against it for damages arising from products and services that are not Year 2000
compliant,  and the  responsibility of certain government and gaming commissions
of the various  jurisdictions  where the Company  conducts  business.  While the
Company  continues  to believe  the Year 2000  issues  described  above will not
materially affect its consolidated  financial position or results of operations,
it remains uncertain as to what extent, if any, the Company may be impacted.

Euro Currency Conversion

The  Company's  Bally  Wulff  subsidiary  uses  the  German  deutschmark  as its
functional currency.  The new Euro currency will replace the deutschmark as well
as most other European currencies after a phase in period which began January 1,
1999. As most of Bally Wulff's  transactions  are within Germany,  the switch to
the Euro is not  expected  to have a material  impact on  revenues,  expenses or
income.  The Company's  products can be brought into Euro compliance by moving a
switch  inside the wall  machine.  The cost of the new front glass  showing Euro
denominations will be borne by the customers.

The Company currently has borrowings outstanding on its line of credit facility,
a portion of which has a floating rate of interest tied to the Euro  deutschmark
rate.  Upon the full  implementation  of the Euro,  as of January  1, 2002,  the
interest  rate will be tied to this new index.  The impact of the change in this
index, if any, is not known and can not be quantified at this time.


<PAGE>


Results of Operations:

General

The Company  operates  through four  business  units:  (i) gaming  equipment and
systems,  (ii) wall machines and amusement games  (consisting of the manufacture
and  distribution  of  wall-mounted  gaming  machines and  distribution of other
recreational  and amusement  machines),  (iii) route  operations and (iv) casino
operations.

The following tables set forth the combined revenues and operating income (loss)
for the four business  units for the three months and six months ended  December
31, 1997 and 1998:

                                  Three Months Ending         Six Months Ending 
                                       December 31,              December 31,
                                     1997       1998           1997       1998
                                                   (In $000's)
Revenues:
 Bally Gaming and Systems         $ 27,455   $ 22,499       $ 54,622   $ 44,441
 Wall Machines and Amusement Games  27,731     23,769         48,792     44,380
 Route Operations                   37,040     42,750         72,695     82,754
 Casino Operations                  14,488     14,892         28,576     31,106
                                   -------    -------        -------    -------
Total Revenues                    $106,714   $103,910       $204,685   $202,681 
                                  ========   ========       ========   ========

Operating Income (Loss):
 Bally Gaming and Systems          $ 1,655    $(4,454)       $ 3,527   $ (4,307)
 Wall Machines and Amusement Games   3,423        122          4,867      2,279
 Route Operations                    4,053      3,361          8,442      6,437
 Casino Operations                   4,447      4,023          8,199      8,885
 Corporate Administrative Expenses  (4,681)    (4,829)        (8,694)    (8,761)
 Unusual Items                       2,545        -            2,545       -   
                                   -------    -------        -------    -------
Total Operating Income (Loss)      $11,442   $ (1,777)       $18,886    $ 4,533 
                                   =======   =========       =======    =======

Three Months Ended December 31, 1997 and 1998

Bally Gaming and Systems

For the quarter ended December 31, 1998,  Bally Gaming and Systems business unit
reported  revenues of $22.5  million,  a decrease of 18% compared to revenues of
$27.5  million in the prior year  quarter.  Bally Gaming  reported unit sales of
approximately  1,800 new gaming  machines,  a decrease  of 47%  compared to unit
sales of approximately 3,400 in the prior year quarter. By market segment, Bally
Gaming's unit sales for the quarter  consisted of approximately 200 units to the
Nevada and Atlantic City markets,  1,200 units to international  markets and 400
units to riverboats, Native American and other domestic markets. The decrease in
number of units shipped resulted from several customers  delaying their delivery
requirements until the March 1999 quarter and a slowdown in replacement  demand.
Bally  Gaming  reported  revenues  from the sale of new gaming  machines of $8.9
million,  a decrease of 49% compared to $17.5  million in the prior year quarter
due to lower unit volume and a 3% decrease  in average  selling  prices over the
prior year quarter. Bally Systems reported revenues of $6.5 million, an increase
of 18% compared to revenues of $5.5 million in the prior year quarter.

For the quarter ended December 31, 1998,  gross profit margins  decreased to 41%
from 44% in the prior year  quarter.  The  decrease was due  principally  to the
increase in international sales which traditionally have lower margins,  and the
impact of lower utilization at the manufacturing facility, partially offset by a
greater  percentage of higher margin Systems revenues.  Bally Gaming and Systems
reported an operating loss of $4.5 million  compared to operating income of $1.7
million in the prior year quarter.  The decrease resulted from lower revenues, a
lower gross margin percentage, higher selling, general and administrative costs,
and higher  research  and  development  costs.  Research and  development  costs
totaled $3.2  million,  an increase of 18 percent  over the prior year  quarter,
resulting  from the  Company's  ongoing  efforts to expand its new and  existing
product offerings. Selling, general and administrative expenses increased due to
higher marketing costs related to new product launches and the implementation of
a product management organization focus.

Wall Machines and Amusement Games

For the quarter ended December 31, 1998,  the Wall Machines and Amusement  Games
business unit reported revenues of $23.8 million,  a decrease of 14% compared to
revenues  of $27.7  million  in the prior year  quarter.  The  revenue  decrease
resulted  primarily  from a 29% decrease in unit  shipments of new wall machines
due to lower market demand,  a 3% percent  decrease in the average selling price
of new wall machines due to  competitive  pricing  pressures,  a 15% decrease in
amusement game  distribution  revenues and a 18% decrease in leased wall machine
revenues as discussed below. The foreign currency fluctuation of the German mark
versus the U.S.  dollar  increased  revenues and EBITDA by $1.2 million and less
than $0.1 million, respectively, during the 1998 quarter.

Wall  Machines and  Amusement  Games  continued  to develop its leasing  program
whereby new and used wall machines and new and used  amusement  games are leased
to customers  pursuant to operating  leases.  These leases provide Wall Machines
and Amusement Games with a stream of revenues and cash flow over the life of the
leases,  which range from six months to three and one half years. Lease revenues
decreased as the total number of machines out on lease  decreased by 15% between
quarters and the average  monthly lease rate decreased by 13% due to competitive
pricing pressures.

For the quarter ended  December 31, 1998,  gross profit margin  decreased to 38%
from 45% in the prior year  quarter  This  decrease  was due to the  unfavorable
impact of lower average  selling prices for new wall machines,  higher volume of
trade-ins  of used  equipment  on the  sales  of new  wall  machines  and  lower
utilization of the  manufacturing  facility.  Wall Machines and Amusement  Games
reported operating income of $0.1 million, compared to $3.4 million in the prior
year  quarter.  The decrease in  operating  income was  primarily  due to higher
selling, general and administrative expenses resulting from the costs of a trade
show as the prior year quarter did not include  expenses for a trade show, costs
incurred with the change in management  brought about by hiring a new president,
decreased   revenues  and  lower  gross  margins,   partially  offset  by  lower
depreciation expense resulting from a lower installed base of leased equipment.

Route Operations

For the quarter  ended  December 31, 1998,  the Route  Operations  business unit
reported  revenues of $42.8 million,  an increase of 15% compared to revenues of
$37.0  million in the prior year  quarter.  Revenues  for the Nevada  operations
increased  17% as net win per gaming  machine per day  increased  to $55.50 from
$53.60 in the prior year quarter,  while the average  number of gaming  machines
increased to 7,250 from 6,390 in the prior year quarter primarily resulting from
the  additional  machines added as a result of new locations and taking over the
contracts  to  operate  locations  previously  served by  competitors.  Revenues
continue  to be  strong in  Southern  Nevada,  particularly  in  Gamblers  Bonus
locations.  As of December 31, 1998, the Gamblers Bonus product was installed in
approximately  2,300 gaming  machines at 200  locations  statewide or 32% of its
installed  base  of  gaming  machines.  Revenues  for the  Louisiana  operations
increased  6% as net win per gaming  machine  per day  increased  to $78.90 from
$74.20  in the prior  year  quarter.  The  average  number  of  gaming  machines
increased slightly to 742 from 740.

For the quarter ended December 31, 1998, cost of revenues increased 17% to $33.5
million compared to $28.6 million in the prior year quarter.  As a percentage of
revenues,  cost of revenues increased to 78% from 77% in the prior year quarter.
Nevada route  operations cost of revenues  increased 18%, and as a percentage of
revenues  increased to 80% from 79% in the prior year quarter  primarily  due to
the lower margins in the Northern Nevada route locations.  Louisiana  operations
cost of  revenues  increased  9%,  and as a  percentage  of  revenues  increased
slightly to 67% from 65% in the prior year  quarter due to an increase in direct
costs,  primarily health  insurance  costs.  The Route Operations  business unit
reported  operating  income of $3.4  million,  a  decrease  of 17%  compared  to
operating  income of $4.1  million in the prior year  quarter.  The  decrease in
operating  income resulted  primarily from higher direct costs,  higher selling,
general and administrative  expenses,  primarily  increased  marketing costs and
salaries  and wages and an  increase  in  depreciation  from an  increase in the
number of gaming machines deployed, partially offset by higher revenues.

Casino Operations

     For the quarter ended  December 31, 1998,  the Casino  Operations  business
unit reported revenues of $14.9 million,  an increase of 3% compared to revenues
of $14.5  million in the prior year  quarter.  This  increase was a result of 3%
increases  at both the  Rainbow  Hotel  Casino  and the Rail  City  Casino.  The
improvement at the Rainbow Hotel Casino was  attributable  to an increase in the
average gaming machine net win per day of 4% to $147 from $142 in the prior year
quarter  coupled  with a 3% increase in the average  number of gaming  machines,
partially offset by a lower number of table games. The number of gaming machines
decreased from the September  1998 quarter as a result of  temporarily  removing
machines  as part of an  internal  remodeling  project  which will be  completed
during the June 1999 quarter.  The revenue  improvement  at the Rail City Casino
was attributable to an increase in the average gaming machine net win per day of
10% to $65 from $59 in the prior year  quarter  and a 3% increase in the average
number of gaming machines, partially offset by a lower number of table games and
lower food and beverage revenues.

For the  quarter  ended  December  31,  1998,  the cost of  revenues  for Casino
Operations  increased 4% to $6.5  million  compared to $6.3 million in the prior
year quarter but, as a percentage  of revenues,  remained  stable at 43% between
quarters as costs increased  proportionally  with the increase in revenues.  The
Casino  Operations  business unit reported  operating income of $4.0 million,  a
decrease of 9% compared to  operating  income of $4.4  million in the prior year
quarter. The decrease in operating income resulted from higher selling,  general
and administrative expenses, primarily higher promotional and marketing costs at
the Rainbow Hotel Casino,  and an increase in  depreciation  from an increase in
the number of gaming machines at both casinos,  partially offset by the increase
in revenues.

Consolidated

Total revenues for the quarter ended December 31, 1998, were $103.9  million,  a
decrease of 3% compared to revenues of $106.7 million in the prior year quarter.
The  decrease is  primarily  due to the  aforementioned  increases  at the Route
Operations and Casino  Operations  business units, more than offset by decreases
in Bally  Gaming and Systems and Wall  Machines  and  Amusement  Games  business
units.

Cost of revenues for the quarter ended December 31, 1998, were $68.1 million, an
increase  of 4%  compared to $65.4  million in the prior year  quarter.  Cost of
revenues as a  percentage  of total  revenues  increased  to 65% from 61% in the
prior year  quarter as  increases  at the Bally  Gaming  and  Systems,  the Wall
Machines  and  Amusement  Games and the Route  Operations  business  units  were
partially  offset by stable  costs as a  percentage  of  revenues  at the Casino
Operations business unit.

Selling,  general and administrative expenses for the quarter ended December 31,
1998 were  approximately  $27.9  million,  an increase  20% compared to costs of
$23.2 million for the prior year  quarter.  This increase is due to increases in
expenses at all of the business units, and an increase in Corporate expenses.

Research  and  development  costs for the quarter  ended  December 31, 1998 were
approximately $4.0 million, an increase of 15% compared to costs of $3.4 million
in the prior  year.  This  increase  is due to  increases  in costs at the Bally
Gaming and Systems and the Wall Machines and Amusement Games business units.

Depreciation  and  amortization for the quarter ended December 31, 1998 remained
constant at $5.8  million  with the prior year quarter as increases at the Route
Operations and Casino Operations  business units were offset by decreases at the
Bally Gaming and Systems and the Wall  Machines  and  Amusement  Games  business
units.

Net Interest Expense and Income Taxes

Net interest  expense in the three months ended  December 31, 1998  increased to
$7.4  million  from  $7.3  million  in the 1997  quarter.  The  increase  is due
primarily  to a higher  average  amount of  working  capital  borrowings  in the
current quarter,  partially offset by lower interest rates.  During the quarter,
the  Company  reduced  its  total  indebtedness  by $10  million,  primarily  by
principal repayments and reducing working capital borrowings.

The Company  recorded an income tax benefit of $0.2 million in the quarter ended
December  31, 1998  compared to an income tax  provision  of $0.4 million in the
prior fiscal year quarter.  The current  quarter benefit is primarily due to tax
losses,  which  will be carried  back for the Bally  Wullf  entities,  partially
offset by various state income tax provisions.

Six Months Ended December 31, 1997 and 1998

Bally Gaming  and Systems

For the six months ended December 31, 1998 the Bally Gaming and Systems business
unit reported revenues of $44.4 million,  a decrease of 19% compared to revenues
of $54.6 million in the prior year period.  Bally Gaming  reported unit sales of
approximately  4,000 new gaming  machines,  a decrease  of 48%  compared to unit
sales of approximately 7,600 in the prior year period. By market segment,  Bally
Gaming's unit sales for the period consisted of approximately 1,000 units to the
Nevada and Atlantic City markets,  2,300 units to international  markets and 700
units to riverboats, Native American and other domestic markets. The decrease in
number of units shipped resulted  primarily from lower  replacement  demand from
existing  casinos,  coupled  with  several  customers  delaying  their  delivery
requirements to the March 1999 quarter.  Bally Gaming reported revenues from the
sale of new gaming  machines of $20.9  million,  a decrease  of 45%  compared to
$38.0  million in the prior year  quarter  due to lower  unit  volume  partially
offset by a 5%  increase in average  selling  price of new gaming  machines.  In
addition,  Systems sales increased to $11.2 million  compared to $8.8 million in
the prior year period.

For the six months ended December 31, 1998 gross profit margins  improved to 43%
from 42% in the prior year period.  The increase was due principally to a higher
proportion of higher margin System revenues  partially  offset by an increase in
lower  margin  international  sales and the impact of lower  utilization  at the
manufacturing  facility in the current  year  period.  Bally  Gaming and Systems
reported an operating loss of $4.3 million, compared to operating income of $3.5
million for the prior year period.  The decrease in  operating  income  resulted
primarily  from lower  revenues,  higher  selling,  general  and  administrative
expenses,  primarily  higher marketing costs related to new product launches and
the  implementation  of a  product  management  organization  focus  and  higher
research and development costs, partially offset by improved gross margins.

Wall Machines and Amusement Games

For the six months  ended  December 31, 1998,  the Wall  Machines and  Amusement
Games  business  unit  reported  revenues  of $44.4  million,  a decrease  of 9%
compared to revenues of $48.8  million in the prior year  period.  The  currency
translation  impact of the fluctuation of the German mark versus the U.S. dollar
increased  revenues by $1.7 million during the current year period.  The revenue
decrease  resulted  primarily  from a 22% decrease in unit shipments of new wall
machines  due to lower  market  demand,  a 7% decrease  in leased  wall  machine
revenues due to a lower  installed base of leased machines and a 15% decrease in
amusement game distribution revenues, partially offset by a 45% increase in used
wall machine revenues as a result of having a higher used machine inventory.

Wall  Machines and  Amusement  Games  continued  to develop its leasing  program
whereby new and used wall machines and new and used  amusement  games are leased
to customers  pursuant to  operating  leases  which  provide  Wall  Machines and
Amusement  Games  with a stream of  revenues  and cash flow over the life of the
leases,  which range from six months to three and one half years.  Wall Machines
and Amusement  Games  experienced  an 8% increase in units leased during the six
months  ended   December  31,  1998  compared  to  the  prior  year  period  and
approximately 4,800 machines are currently out on lease.

For the six months ended December 31, 1998, gross profit margin decreased to 40%
from 45% in the  prior  year  period.  The  decrease  in gross  margin  resulted
primarily  from higher volume of trade-ins of used  equipment on the sale of new
wall  machines,  higher  fixed costs per unit due to lower sales volume and by a
decrease in higher margin lease  revenues.  Wall  Machines and  Amusement  Games
reported  operating  income of $2.3 million compared to operating income of $4.9
million in the prior year  period.  The decrease in  operating  income  resulted
primarily from the aforementioned  decrease in revenues and lower gross margins,
partially offset by lower selling, general and administrative expenses.

Route Operations

For the six months ended December 31, 1998, the Route  Operations  business unit
reported  revenues of $82.8 million,  an increase of 14% compared to revenues of
$72.7  million  in the prior  year  period.  Nevada  route  operations  revenues
increased 15% as net win per gaming  machine per day increased 2% to $54.00 from
$53.00 in the prior year  period,  while the average  number of gaming  machines
increased 13% to 7,190 from 6,390 in the prior year period.  The increase in the
average number of gaming  machines in Nevada  reflects the  additional  machines
added for new  locations  and taking  over the  contracts  to operate  locations
previously served by competitors.  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.
Louisiana route operations  revenues  increased 5% as net win per gaming machine
per day  increased  5% to $78.00  from  $74.50 in the prior year  period and the
average number of gaming machines increased 1% to 730 machines.

For the six months  ended  December 31, 1998,  Nevada route  operations  cost of
revenues  increased 17% and, as a percentage of revenues,  increased to 80% from
79% in the prior year  period  primarily  due to lower  margins in the  northern
Nevada route and higher direct costs,  primarily  increased  salaries and wages.
Louisiana route operations cost of revenues  increased 8% and as a percentage of
revenues increased to 66% from 65% in the prior year period due to higher direct
costs,  primarily  increased health insurance costs.  Route Operations  reported
operating income of $6.4 million, a decrease of 24% compared to operating income
of $8.4 million in the prior year  quarter.  The  decrease in  operating  income
resulted  primarily by the increase in operating  costs, an increase in selling,
general and administrative expenses due to increases in advertising and salaries
and wages,  and an increase in depreciation  expense as a result of the increase
in the number of gaming machines  deployed,  partially offset by the increase in
revenues.

Casino Operations

For the six months ended December 31, 1998, the Casino Operations  business unit
reported  revenues of $31.1  million,  an increase of 9% compared to revenues of
$28.6 million in the prior year period.  This increase  reflects an 11% increase
at the  Rainbow  Hotel  Casino and a 2% increase  at the Rail City  Casino.  The
improvement at the Rainbow Hotel Casino was  attributable  to an increase in the
average gaming machine net win per day of 9% to $152 from $140 in the prior year
quarter coupled with a 6% increase in the average number of gaming machines. The
increase in revenues  at the Rail City Casino  resulted  from an increase in the
average  gaming  machine net win per day of 8% to $62 from $57 in the prior year
quarter and a 3% increase in the average  number of gaming  machines,  partially
offset by lower food and beverage revenues.

For the six months  ended  December  31,  1998,  the cost of revenues for Casino
Operations  increased 6% to $13.3 million compared to $12.5 million in the prior
year period but, as a percentage  of  revenues,  improved to 43% from 44% in the
prior year period.  Casino Operations reported operating income of $8.9 million,
an increase of 8% compared to operating income of $8.2 million in the prior year
period.  The  operating  income  improvement  resulted  from the  aforementioned
increase in revenues and a decrease in the  percentage  of cost of revenues as a
percentage of revenues,  partially offset by an increase in selling, general and
administrative expenses primarily due to higher promotion and marketing costs.

Consolidated

Total revenues for the six months ended December 31, 1998,  were $202.7 million,
a decrease of 1% compared to revenues of $204.7 million in the prior year period
as the improvements at the Route Operations and Casino Operations business units
and were more than  offset by  decreases  in  revenues  at the Bally  Gaming and
Systems and Wall Machines and Amusement Games business units.

Cost of  revenues  for the six months  ended  December  31,  1998,  were  $129.9
million,  an increase of 3% compared to $126.7 million in the prior year period.
Cost of revenues as a percentage of total revenues  increased to 64% from 62% in
the prior year period as the  improvements  at the Bally  Gaming and Systems and
Casino Operations  business units were more than offset by increases at the Wall
Machines and Amusement Games and Route Operations business units.

Selling,  general and administrative  expenses for the six months ended December
31, 1998 were approximately  $48.9 million, an increase of 10% compared to costs
of $44.6 million for the prior year quarter. This increase is due to an increase
in expenses at the Bally Gaming and Systems, the Route Operations and the Casino
Operations  business  units,  partially  offset by a decrease in expenses at the
Wall  Machines and  Amusement  Games  business  unit and a decrease in Corporate
expenses.

Research and  development  costs for the six months ended December 31, 1998 were
approximately $8.1 million, an increase of 29% compared to costs of $6.3 million
in the prior  year.  This  increase  is due to  increases  in costs at the Bally
Gaming and Systems and the Wall Machines and Amusement Games business units.

Depreciation  and  amortization  for the six months ended  December 31, 1998 was
$11.2 million,  a 3% increase compared to depreciation and amortization of $10.8
million  in the prior year  quarter as  increases  at the Route  Operations  and
Casino Operations business units were partially offset by decreases at the Bally
Gaming and Systems and the Wall Machines and Amusement Games business units.

Net Interest Expense and Income Taxes

Net  interest  expense in the six months ended  December  31, 1998  increased to
$15.0 million compared to the net interest expense of $13.1 million in the prior
year  period.  The  increase is due  primarily  to higher  interest  costs which
resulted  from  the  additional  debt  taken on in the  Refinancing  Transaction
completed  in  September  1997 and a higher  average  amount of working  capital
borrowings  in the  current  period,  partially  offset  by the  elimination  of
interest on the 12 7/8% Senior Secured Notes and lower interest rates.

The Company  recorded  an income tax  benefit of $0.1  million in the six months
ended  December  31, 1998  compared to a provision  of $0.9 million in the prior
year period. The current year benefit is due primarily to tax losses, which will
be carried back for the Bally Wulff entities,  partially offset by various state
income tax provisions.

                                  * * * * *

The  information  contained  in this  Form  10-Q may  contain  "forward-looking"
statements  within the meaning of section 27A of the  Securities Act of 1933, as
amended,  and  Section 21E of the  Securities  Act of 1933,  as amended,  and is
subject to the safe harbor created thereby.  Such information involves important
risks and uncertainties  that could  significantly  affect results in the future
and,  accordingly,  such results may differ from those  expressed in any forward
looking statements herein. Future operating results may be adversely affected as
a result of a number of factors such as the Company's high leverage, its holding
company structure, its operating history and recent losses,  competition,  risks
of product  development,  customer  financing,  sales to non-traditional  gaming
markets, foreign operations,  dependence on key personnel,  strict regulation by
gaming  authorities,  gaming  taxes and value added taxes,  uncertain  effect of
National  Gambling  Commission,  and other risks including Year 2000 issues,  as
detailed  from time to time in the  Company's  filings with the  Securities  and
Exchange Commission.



<PAGE>




                                   PART II


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

          On December 3, 1998, the Company held its annual shareholders  meeting
          at which the  shareholders  were asked to vote on the  election of two
          directors.  Of the  34,261,167  shares  of common  stock  outstanding,
          18,990,871  shares were voted for, and  10,450,459  withheld  from Mr.
          Jacques  Andre;  18,990,851  shares  were  voted for,  and  10,450,479
          withheld from Mr. Michael Hirschfeld.

Item 6.   Exhibits and Reports on Form 8-K

          a.    Exhibits

          4. (ii)     Second Amendment to the Credit Agreement.

          11    Computation of per share amounts

          27.1  Financial Data Schedule

          27.2  Restated Financial Data Schedule

          b.    Reports on Form 8-K

                No  reports  on Form 8-K were filed  during  the  quarter  ended
December 31, 1998.





<PAGE>


                                  SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act  of  1934  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto authorized.



    ALLIANCE GAMING CORPORATION
         (Registrant)





    By      /s/ Morris Goldstein              
          President and Chief Executive Officer
          (Principal Executive Officer)




    By      /s/ Scott D. Schweinfurth        
          Sr. Vice President, Chief Financial
          Officer and Treasurer (Principal
          Financial and Accounting Officer)