<PAGE>   1


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

                                    FORM 10-Q

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

                     FOR THE QUARTER ENDED DECEMBER 31, 1997

                                       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 January
30, 1998 according to the records of the registrant's registrar and transfer
agent was 32,013,284.




<PAGE>   2



                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1997



                                    I N D E X

<TABLE>
<CAPTION>


PART I.       FINANCIAL INFORMATION                                         PAGE


<S>                                                                         <C>
Item 1.  Unaudited Financial Statements

         Unaudited Condensed Consolidated Balance Sheets 
            as of June 30, 1997 and December 31, 1997                        3

         Unaudited Condensed Consolidated Statements of Operations
            for the three months ended December 31, 1996 and 1997            4

         Unaudited Condensed Consolidated Statements of Operations
            for the six months ended December 31, 1996 and 1997              5

         Unaudited Condensed Consolidated Statements of Stockholders' 
            Equity (Net Capital Deficiency) for the six months ended 
            December 31, 1997                                                6

         Unaudited Condensed Consolidated Statements of Cash Flows
            for the six months ended December 31, 1996 and 1997              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 1.  Legal Proceedings                                                   32

Item 4.  Submission of Matters to a Vote of Security Holders                 32

Item 6.  Exhibits and reports on Form 8-K                                    32


SIGNATURES                                                                   33

</TABLE>


                                        2


<PAGE>   3



                                     PART 1

                           ALLIANCE GAMING CORPORATION
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                          (In 000's, except share data)
<TABLE>
<CAPTION>
                                                                                             June 30,        Dec. 31,
                                                                                               1997             1997
<S>                                                                                         <C>              <C> 
ASSETS
Current assets:
   Cash and cash equivalents                                                                $  28,924        $  27,047
   Accounts and notes receivable, net of allowance for doubtful
     accounts of $21,929 and $13,661                                                           87,701           87,450
   Inventories, net of reserves of $8,856 and $8,076                                           37,329           34,982
   Other current assets                                                                         9,627            8,483
                                                                                            ---------        ---------
     Total current assets                                                                     163,581          157,962
                                                                                            ---------        ---------
Long-term notes receivable, net of allowance for doubtful
   accounts of $1,972 and $1,547                                                                8,981            8,135
Leased equipment, net of accumulated depreciation of $3,377 and $3,821                          7,902            8,279
Property, plant and equipment, net of accumulated depreciation
     of $39,695 and $43,864                                                                    74,647           74,862
Excess of costs over net assets of acquired businesses, net of
   accumulated amortization of $1,723 and $2,045                                               62,098           61,104

Intangible assets, net of accumulated amortization of $9,626 and $10,885                       18,231           21,002
Other assets, net                                                                              16,576           16,001
                                                                                            ---------        ---------
         Total assets                                                                       $ 352,016        $ 347,345
                                                                                            =========        =========

LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
   Accounts payable                                                                         $  14,270        $   7,276
   Accrued liabilities                                                                         37,392           32,847
   Current maturities of long-term debt                                                         1,124            2,279
                                                                                            ---------        ---------
      Total current liabilities                                                                52,786           42,402
                                                                                            ---------        ---------
Term loan facilities                                                                             --            138,500
Senior Subordinated Notes due 2007, net of unamortized discount of $779                          --            149,221
Senior Secured Notes, net of unamortized discount                                             151,224               19
Other long-term debt, less current maturities                                                  21,491           26,587
Other liabilities                                                                              12,433           13,666
                                                                                            ---------        ---------
         Total liabilities                                                                    237,934          370,395
                                                                                            ---------        ---------

Minority interest                                                                               1,546            1,590
Series B Special Stock, $.10 par value, $100 liquidation value; 754,198
   shares issued and outstanding at June 30, 1997, net of discount                             58,981             --
Commitments and contingencies Stockholders' equity (net capital deficiency):
   Special Stock, 10,000,000 shares authorized:
       Series E, $100 liquidation value; 123,689 shares and 129,749
         shares issued and outstanding                                                         12,368           12,975
   Common Stock, $.10 par value; 175,000,000 shares authorized;
       31,852,000 shares and 32,010,000 shares issued and outstanding                           3,185            3,201
   Additional paid-in capital                                                                 138,590          122,609
   Cumulative translation adjustment                                                          (11,719)         (14,220)
   Accumulated deficit                                                                        (88,869)        (149,205)
                                                                                            ---------        ---------
     Total stockholders' equity (net capital deficiency)                                       53,555          (24,640)
                                                                                            ---------        ---------
                  Total liabilities and stockholders' equity (net capital deficiency)       $ 352,016        $ 347,345
                                                                                            =========        =========
</TABLE>

       See notes to unaudited condensed consolidated financial statements.



                                       3
<PAGE>   4


                           ALLIANCE GAMING CORPORATION
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                          (In 000's, except share data)

<TABLE>
<CAPTION>
                                                                    Three Months Ended December 31,
                                                                          1996            1997
                                                                       ---------        ---------
<S>                                                                  <C>                <C> 
Revenues:
    Gaming equipment and systems                                       $  42,273        $  27,455
    Wall machines and amusement games                                     42,293           27,731
    Route operations                                                      31,692           37,040
    Casino operations                                                     12,445           14,488
                                                                       ---------        ---------

                                                                         128,703          106,714
                                                                       ---------        ---------

Costs and expenses:
   Cost of gaming equipment and systems                                   26,483           15,333
   Cost of wall machines and amusement games                              20,317           15,165
   Cost of route operations                                               23,644           28,635
   Cost of casino operations                                               5,583            6,271
   Selling, general and administrative                                    32,847           26,604
   Depreciation and amortization                                           5,920            5,809
   Unusual items                                                            --             (2,545)
                                                                       ---------        ---------
                                                                         114,794           95,272
                                                                       ---------        ---------

Operating income                                                          13,909           11,442

Other income (expense):
    Interest income                                                          471              210
    Interest expense                                                      (5,628)          (7,497)
    Rainbow royalty                                                       (1,125)            --
    Minority interest                                                       (285)            (446)
    Other, net                                                                53               64
                                                                       ---------        ---------
Income before income taxes                                                 7,395            3,773

Income tax provision                                                       3,250              427
                                                                       ---------        ---------

Net income                                                                 4,145            3,346

Special Stock dividends                                                   (3,094)            (373)
                                                                       ---------        ---------
Net income applicable to common shares                                 $   1,051        $   2,973
                                                                       =========        =========

Basic earnings per share                                               $    0.03        $    0.09
                                                                       =========        =========
Diluted earnings per share                                             $    0.03        $    0.09
                                                                       =========        =========

Weighted average common shares outstanding                                31,834           31,974
                                                                       =========        =========
Weighted average common and common share equivalents outstanding          32,540           34,058
                                                                       =========        =========
</TABLE>





       See notes to unaudited condensed consolidated financial statements.

                                       4

<PAGE>   5



                           ALLIANCE GAMING CORPORATION
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                          (In 000's, except share data)
<TABLE>
<CAPTION>

                                                                       Six Months Ended December 31,
                                                                          1996            1997
                                                                       ---------        ---------
<S>                                                                   <C>              <C> 
Revenues:
    Gaming equipment and systems                                       $  77,175        $  54,622
    Wall machines and amusement games                                     68,700           48,792
    Route operations                                                      60,582           72,695
    Casino operations                                                     25,158           28,576
                                                                       ---------        ---------
                                                                         231,615          204,685
Costs and expenses:
   Cost of gaming equipment and systems                                   48,290           31,569
   Cost of wall machines and amusement games                              35,421           26,733
   Cost of route operations                                               45,539           55,823
   Cost of casino operations                                              10,958           12,531
   Selling, general and administrative                                    56,702           50,876
   Depreciation and amortization                                          11,141           10,812
   Unusual items                                                             700           (2,545)
                                                                       ---------        ---------
                                                                         208,751          185,799
                                                                       ---------        ---------

Operating income                                                          22,864           18,886

Other income (expense):
    Interest income                                                        1,034              441
    Interest expense                                                     (11,879)         (13,566)
    Rainbow royalty                                                       (2,276)            (587)
    Rainbow Royalty Buyout                                                  --            (19,000)
    Minority interest                                                       (426)            (836)
    Other, net                                                                52               52
                                                                       ---------        ---------
Income (loss) before income taxes                                          9,369          (14,610)
Income tax provision                                                       4,588              920
                                                                       ---------        ---------
Income (loss) before extraordinary item                                    4,781          (15,530)
Extraordinary loss, without tax benefit (note 2)                            --            (42,033)
                                                                       ---------        ---------
Net income (loss)                                                          4,781          (57,563)
Special Stock dividends (note 2)                                           5,411            2,773
Premium on repurchase/redemption of Series B Special Stock                   580           16,553
                                                                       ---------        ---------
Net loss applicable to common shares                                   $  (1,210)       $ (76,889)
                                                                       =========        =========

Basic earnings per share:
   Loss before extraordinary item                                      $   (0.04)       $   (1.09)
   Extraordinary loss                                                       --              (1.32)
                                                                       ---------        ---------
     Net loss                                                          $   (0.04)       $   (2.41)
                                                                       =========        =========

Diluted earnings per share:
   Loss before extraordinary item                                      $   (0.04)       $   (1.09)
   Extraordinary loss                                                       --              (1.32)
                                                                       ---------        ---------
     Net loss                                                          $   (0.04)       $   (2.41)
                                                                       =========        =========

Weighted average common shares outstanding                                31,802           31,913
                                                                       =========        =========
Weighted average common and common share equivalents outstanding          31,802           31,913
                                                                       =========        =========
</TABLE>


       See notes to unaudited condensed consolidated financial statements.

                                       5
<PAGE>   6



                           ALLIANCE GAMING CORPORATION
       UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            (NET CAPITAL DEFICIENCY)

                       Six Months Ended December 31, 1997
                                   (In 000's)

<TABLE>
<CAPTION>

                                                                                                                          
                                                                                                                          Total
                                                                                                                          Stock-
                                                                                                                          holders'
                                                               Series E           Additional              Cumulative    Equity (Net
                                    Common Stock             Special Stock          Paid-in     Accum.    Translation      Capital
                                  Shares    Dollars        Shares    Dollars        Capital    Deficit    Adjustment    Deficiency)
                                  ------    -------        ------    -------        -------    -------    ----------    -----------


<S>                               <C>      <C>             <C>     <C>            <C>        <C>          <C>          <C>      
Balances at June 30, 1997         31,852   $   3,185         123   $  12,368    $ 138,590    $ (88,869)   $ (11,719)   $  53,555

Net loss                            --          --          --          --           --        (57,563)        --        (57,563)
Shares issued upon
  exercise of options                138          14        --          --            459         --           --            473
Special Stock dividends             --          --             7         722         --         (2,773)        --         (2,051)
Conversion of Series E
  Special Stock to common             20           2        --          (115)         113         --           --           --
Special Stock redemption
  premium                           --          --          --          --        (16,553)        --           --        (16,553)
Foreign currency translation
  adjustment                        --          --          --          --           --           --         (2,501)      (2,501)
                               ---------   ---------   ---------   ---------    ---------    ---------    ---------    ---------

Balances at
  December 31, 1997               32,010   $   3,201         130   $  12,975    $ 122,609    $(149,205)   $ (14,220)   $ (24,640)
                               =========   =========   =========   =========    =========    =========    =========    =========
</TABLE>




       See notes to unaudited condensed consolidated financial statements.



                                       6



<PAGE>   7



                           ALLIANCE GAMING CORPORATION
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (In 000's)
<TABLE>
<CAPTION>


                                                            Six Months Ended December 31,
                                                                1996            1997
                                                                ----            ----
<S>                                                         <C>           <C>   
Cash flows from operating activities:
    Net income (loss)                                         $   4,781    $ (57,563)
    Adjustments to reconcile net income (loss)
    to net cash provided (used in) by operating activities:
       Depreciation and amortization                             11,141       10,812
       Amortization of debt discounts                               654           19
       Extraordinary item                                          --         42,033
       Write down of other assets                                 1,153        2,776
       Loss (gain) on sale of assets                                275          (45)
       Provision for losses on (recovery of) receivables          6,309       (6,886)
       Other                                                     (1,625)         572
    Net change in operating assets and liabilities:
       Accounts and notes receivable                            (13,521)       8,026
       Inventories                                               (5,036)        (754)
       Other current assets                                         898         (347)
       Accounts payable                                          (2,546)      (6,994)
       Accrued liabilities                                        1,274       (3,803)
                                                              ---------    ---------
         Net cash provided by (used in) operating activities      3,757      (12,154)

Cash flows from investing activities:
    Additions to property, plant and equipment                   (6,055)      (6,574)
    Proceeds from disposal of property and equipment              2,791          224
    Other                                                        (1,534)      (1,974)
                                                              ---------    ---------
         Net cash used in investing activities                   (4,798)      (8,324)

Cash flows from financing activities:
    Refinancing fees and expenses                                  --        (32,752)
    Capitalized debt issue costs                                   --        (11,456)
    Proceeds from issuance of long-term debt                         41      303,734
    Reduction of long-term debt                                  (4,853)    (178,355)
    Net change in lines of credit                                (9,564)      14,674
    Repurchase/redemption of Series B Special Stock              (3,307)     (77,568)
    Proceeds from exercise of stock options                         123          473
                                                              ---------    ---------
      Net cash provided by (used in) financing activities       (17,560)      18,750

Effect of exchange rate changes on cash                             (55)        (149)

Cash and cash equivalents:
      Decrease for period                                       (18,656)      (1,877)
      Balance, beginning of period                               48,057       28,924
                                                              ---------    ---------
      Balance, end of period                                  $  29,401    $  27,047
                                                              =========    =========
</TABLE>


       See notes to unaudited condensed consolidated financial statements.

                                       7
<PAGE>   8



                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997


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, 1997. All intercompany accounts and transactions have been eliminated
      in consolidation.

      The accompanying condensed consolidated financial statements at June 30,
      1997 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 AND LINES OF CREDIT

      As discussed in detail below, substantially all of the Company's
      indebtedness shown below at June 30, 1997 was repaid as part of the
      Refinancing (as defined below). Long-term debt at June 30, 1997, prior to
      the Refinancing and at December 31, 1997, after the Refinancing, consists
      of the following:

<TABLE>
<CAPTION>
                                                                     June 30,          Dec. 31,
                                                                       1997              1997
                                                                       ----              ----
                                                                            (in 000's)
<S>                                                                    <C>               <C>
10% Senior Subordinated Notes due 2007, net of unamortized
    discount of $779,000                                             $   --           $149,221
Tranche B Term Loan                                                      --             74,813
Tranche C Term Loan                                                      --             39,900
Delayed Draw Term Facility                                               --             25,000
Revolving Credit Facility                                                --             24,243
12 7/8% Senior Secured Notes due 2003, net of unamortized
    discount of $2,776,000 and $0                                     151,224               19
Bally Wulff revolving lines of credit                                   9,611             --
Hospitality Franchise Systems note payable,
    secured by the assets of the Rainbow Casino                         6,569             --
7.5% Convertible subordinated debentures due 2003, unsecured            1,642             --
Other, secured by related equipment                                     4,793            3,410
                                                                     --------         --------
                                                                      173,839          316,606
Less current maturities                                                 1,124            2,279
                                                                     --------         --------
Long-term debt, less current maturities                              $172,715         $314,327
                                                                     ========         ========
</TABLE>

      In August 1997 the Company effected a series of related transactions (as
      described below, the "Refinancing"). The Refinancing consisted of the
      private placement of $150 million of Senior Subordinated Notes and the
      closing of $230 million of bank financing. The bank financing provides for
      (i) term loans in the aggregate amount of up to $140.0 million, comprised
      of a $75.0 million tranche with a 7 1/2-year term (the "Tranche B Term
      Loan"), a $40.0 million tranche with an 8-year term (the "Tranche C Term
      Loan"), and a $25.0 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 $90.0 million
      revolving credit 



                                       8

<PAGE>   9

                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997

      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. The interest rates at the highest level of the credit grid
      and maturity dates are as follows: 
<TABLE>
<CAPTION>
                                         Initial               Maturity 
                                          Rate                   Date 
<S>                                  <C>                  <C>   
      Tranche B Term Loan            LIBOR + 2.75%         January 31, 2005 
      Tranche C Term Loan            LIBOR + 3.00%            July 31, 2005 
      Delayed Draw Term Facility     LIBOR + 2.75%         January 31, 2005
      Revolving Credit Facility      LIBOR + 2.25%            July 31, 2003
</TABLE>

      The Revolving Credit Facility also allows for German Deutschemark
      borrowings at the Eurodeutschemark rate plus 2.25% (or 6.0% at December
      31, 1997.

      As part of the Refinancing, the Company used the proceeds of the Senior
      Subordinated Note offering, together with borrowings under the Revolving
      Credit Facility, the Term Loan Facilities and cash on hand to fund (a) the
      repurchase at a premium of substantially all of the Company's 12 7/8%
      Senior Secured Notes, plus accrued interest to August 8, 1997 totaling
      $181.6 million, (b) the redemption at liquidation value of all of the
      Company's Series B Special Stock on September 8, 1997 totaling $77.6
      million, (c) the purchase from HFS Gaming Corporation of the right to
      receive royalty payments based on revenues of the Rainbow Casino for $19.0
      million (the "Rainbow Royalty Buyout"), (d) the repayment of related debt
      owed to an HFS affiliate, National Gaming Mississippi, Inc. on August 12,
      1997 totaling $7.3 million, (e) repayment of amounts outstanding under the
      domestic and foreign revolving lines of credit and (f) the payment of
      transaction fees and expenses totaling $16.6 million. At December 31,
      1997, based on the terms of the new $90.0 million Revolving Credit
      Facility, the Company would have been able to borrow, net of credit line
      restrictions of $1.5 million, $71.6 million. At December 31, 1997,
      borrowings under the revolving credit line totaled $24.2 million, of which
      $15.7 million were German Deutschemark borrowings. The borrowing base for
      the revolving credit facility includes eligible receivables and inventory
      (as defined). Additionally, in July 1997 the Company redeemed the
      remaining balance of the 7 1/2% Convertible Debentures at a price of 104%,
      or a total of $1.7 million.

      The bank facility 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 is subject to both a U.S. and
      German Pledge Agreement (both as defined). The bank facility contains a
      number of maintenance covenants and together with the indenture, both 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 otherwise restrict corporate activities.

      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 new credit 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 


                                       9

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

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997


      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.

3.    REFINANCING CHARGES

      As a result of the Refinancing described above, 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 $16.5 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.

4.    INCOME TAXES

      The Company's effective tax rate for the three and six months ended
      December 31, 1996 and 1997 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, earnings at the Company's domestic subsidiaries cannot
      be fully offset by the utilization of net operating loss carryforwards.

5.     SUPPLEMENTAL CASH FLOW INFORMATION

      The following supplemental information is related to the condensed
      consolidated statements of cash flows. For the six months ended December
      31, 1996 and 1997, the Company recorded the following significant non-cash
      items:
<TABLE>
<CAPTION>

                                                                        Six months ended December 31,
                                                                             1996          1997
                                                                             ----          ----
                                                                                 (In 000's)
<S>                                                                        <C>            <C>   
      Reclassify other assets to property, plant and equipment             $1,461         $  154
      Reclassify excess costs over net assets of acquired business
        to property, plant and equipment                                    1,436           --
      Dividends for Series E and Series B Special Stock                     5,411          2,773
      Reclassify inventory to property, plant and equipment                 6,496          3,101
      Translation rate adjustments                                            859          2,352
</TABLE>


                                       10

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

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997



6.    LEGAL PROCEEDINGS

      LITIGATION

      In the action filed on December 2, 1996, the Company was named as a
      defendant in an action brought by Canpartners Investments IV and Cerberus
      Partners, pending in federal district court for the Southern District of
      New York. The Company entered into certain loan commitment letters with
      the plaintiffs in August 1995, contemplating that the plaintiffs would
      lend approximately $30.0 million to partially fund the Company's then
      pending hostile tender offer for Bally Gaming International, Inc. (BGII).
      The Company entered into a merger agreement with BGII in October 1995 and
      did not use funds provided by the plaintiffs to fund the acquisition of
      BGII in June 1996. On October 27, 1997, the court granted in part the
      Company's motion to dismiss the Canyon/Cerebus complaint. The claims for
      breach of the duty of good faith and fair dealing, seeking damages in
      excess of $12.0 million, and fraudulent concealment have been dismissed in
      their entirety, without prejudice to plaintiffs' right to replead. The
      claim for indemnification has been dismissed to the extent plaintiffs seek
      reimbursement of costs and fees relating to the litigation, but remains to
      the extent they seek reimbursement of expenses in connection with
      negotiation of the commitment letter and loan documents. The court left
      intact the plaintiffs' claim for breach of contract; however, the Company
      believes it has strong defenses to the plaintiffs' claim and intends to
      vigorously defend the action.

      On September 25, 1995, BGII was named as a defendant in a class action
      lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on
      behalf of himself and all others similarly situated. The plaintiffs filed
      suit against BGII and approximately 45 other defendants. Each defendant is
      involved in the gaming business as either a gaming machine manufacturer,
      distributor, or casino operator. The class action lawsuit arises out of
      alleged fraudulent marketing and operation of casino video poker machines
      and electronic slot machines. The plaintiffs allege that the defendants'
      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. In December 1997, the judge dismissed the
      defendants' motion to dismiss all claims in the litigation. Management
      believes the plaintiffs' lawsuit to be without merit. The Company intends
      to vigorously pursue all legal defenses available to it.

      As is further discussed below, during the quarter ended December 31, 1997
      the Company, Alpha Hospitality and General Electric Credit Corporation
      settled certain customer notes receivable obligations which had been sold
      by the Company on a recourse basis in prior years. As a result of this
      settlement, all litigation between these parties has been dismissed.

      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.

7.    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 


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

                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997


      the NASDAQ Small Cap market. The Company intends to sell 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. 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.

      During the quarter ended September 30, 1996, the Company incurred unusual
      charges of $0.7 million related primarily to separation costs of Alliance
      personnel subsequent to the acquisition of Bally Gaming International,
      Inc.

8.    UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS

      The following unaudited 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
      completed in August 1997 (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.


                                       12
<PAGE>   13



                           ALLIANCE GAMING CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                          CONSOLIDATING BALANCE SHEETS

                                  June 30, 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>   
ASSETS
Current assets:
Cash and cash equivalents                            $  16,462         $  12,462         $                 $  28,924
Accounts and notes receivable, net                      31,799            57,207            (1,305)           87,701
Inventories, net                                        19,231            18,778              (680)           37,329
Other current assets                                     6,695             2,932                               9,627
                                                     ---------         ---------         ---------         ---------
    Total current assets                                74,187            91,379            (1,985)          163,581
                                                     ---------         ---------         ---------         ---------
Long-term notes receivable, net                         96,271             1,501           (88,791)            8,981
Leased equipment, net                                                      7,902                               7,902
Property, plant and equipment, net                      41,836            32,811                              74,647
Excess of costs over net assets of acquired
    businesses, net                                     41,185            21,031              (118)           62,098
Intangible assets, net                                  17,979               252                              18,231
Investment in subsidiaries                             100,478                            (100,478)
Other assets, net                                       22,310            (5,758)               24            16,576
                                                     ---------         ---------         ---------         ---------
                                                     $ 394,246         $ 149,118         $(191,348)        $ 352,016
                                                     =========         =========         =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable                                     $   9,936         $   4,262         $      72         $  14,270
Accrued liabilities                                     21,129            16,727              (464)           37,392
Current maturities of long-term debt                       585             1,348              (809)            1,124
                                                     ---------         ---------         ---------         ---------
   Total current liabilities                            31,650            22,337            (1,201)           52,786
                                                     ---------         ---------         ---------         ---------
Senior Secured Notes due 2003, net                     151,224                                               151,224
Other long-term debt, less current maturities           87,924            22,676           (89,109)           21,491
Other liabilities                                        9,366             3,500              (433)           12,433
                                                     ---------         ---------         ---------         ---------
   Total liabilities                                   280,164            48,513           (90,743)          237,934
                                                     ---------         ---------         ---------         ---------

Minority interest                                        1,546                                                 1,546
Series B Special Stock                                  58,981                                                58,981

Stockholders' equity:
Common Stock                                             3,185            17,832           (17,832)            3,185
Series E Special Stock                                  12,368                                                12,368
Additional paid-in capital                             138,590            68,699           (68,699)          138,590
Cumulative translation adjustment                      (11,719)          (11,880)           11,880           (11,719)
Retained earnings (accumulated deficit)                (88,869)           25,954           (25,954)          (88,869)
                                                     ---------         ---------         ---------         ---------
     Total stockholders' equity                         53,555           100,605          (100,605)           53,555
                                                     ---------         ---------         ---------         ---------
                                                     $ 394,246         $ 149,118         $(191,348)        $ 352,016
                                                     =========         =========         =========         =========
</TABLE>

                        See accompanying unaudited note.

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

                          CONSOLIDATING BALANCE SHEETS

                                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>
ASSETS                                         
Current assets:
Cash and cash equivalents                                          $  10,905       $  16,142       $               $  27,047
Accounts and notes receivable, net                                    37,869          53,454          (3,873)         87,450
Inventories, net                                                      19,275          16,204            (497)         34,982
Other current assets                                                   5,084           3,399                           8,483
                                                                   ---------       ---------       ---------       ---------
    Total current assets                                              73,133          89,199          (4,370)        157,962
                                                                   ---------       ---------       ---------       ---------
Long-term notes receivable, net                                       99,366           1,496         (92,727)          8,135
Leased equipment, net                                                                  8,279                           8,279
Property, plant and equipment, net                                    41,920          32,942                          74,862
Excess of costs over net assets of acquired
    businesses, net                                                   40,829          20,275                          61,104
Intangible assets, net                                                20,523             479                          21,002
Investment in subsidiaries                                           100,090                        (100,090)           --
Other assets, net                                                     34,711          (5,804)        (12,906)         16,001
                                                                   ---------       ---------       ---------       ---------
                                                                   $ 410,572       $ 146,866       $(210,093)      $ 347,345
                                                                   =========       =========       =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable                                                   $   5,657       $   2,273       $    (654)      $   7,276
Accrued liabilities                                                   22,225          11,992          (1,370)         32,847
Current maturities of long-term debt                                   1,773           2,980          (2,474)          2,279
                                                                   ---------       ---------       ---------       ---------
   Total current liabilities                                          29,655          17,245          (4,498)         42,402
                                                                   ---------       ---------       ---------       ---------
Term loan facilities                                                 138,500                                         138,500
Senior Secured Notes due 2003, net                                        19                                              19
Senior Subordinated Notes due 2007, net                              149,221                                         149,221
Other long-term debt, less current maturities                        105,916          25,731        (105,060)         26,587
Other liabilities                                                     10,311           3,742            (387)         13,666
                                                                   ---------       ---------       ---------       ---------
   Total liabilities                                                 433,622          46,718        (109,945)        370,395
                                                                   ---------       ---------       ---------       ---------

Minority interest                                                      1,590                                           1,590
Stockholders' equity (net capital deficiency):
Common Stock                                                           3,201          17,832         (17,832)          3,201
Series E Special Stock                                                12,975                                          12,975
Additional paid-in capital                                           122,609          68,700         (68,700)        122,609
Cumulative translation adjustment                                    (14,220)        (14,381)         14,381         (14,220)
Retained earnings (accumulated deficit)                             (149,205)         27,997         (27,997)       (149,205)
                                                                   ---------       ---------       ---------       ---------
   Total stockholders' equity (net capital deficiency)               (24,640)        100,148        (100,148)        (24,640)
                                                                   ---------       ---------       ---------       ---------
                                                                   $ 410,572       $ 146,866       $(210,093)      $ 347,345
                                                                   =========       =========       =========       =========
</TABLE>

                        See accompanying unaudited note.
  
                                       14

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

                     CONSOLIDATING STATEMENTS OF OPERATIONS

                      Three Months Ended December 31, 1996
                                   (In 000's)
<TABLE>
<CAPTION>

                                                                                                Alliance
                                                                                                 Gaming
                                                 Parent and          Non-                      Corporation
                                                Guaranteeing     Guaranteeing      Adjust-         and
                                                Subsidiaries     Subsidiaries       ments     Subsidiaries
                                                ------------     ------------       -----     ------------

<S>                                               <C>             <C>             <C>             <C>
Revenues:
   Gaming equipment and systems                   $  41,319       $   2,575       $  (1,621)      $  42,273
   Wall machines and amusement games                                 42,293                          42,293
   Route operations                                  27,180           4,512                          31,692
   Casino operations                                  2,932           9,513                          12,445
                                                  ---------       ---------       ---------       ---------
                                                     71,431          58,893          (1,621)        128,703
                                                  ---------       ---------       ---------       ---------
Costs and expenses:
   Cost of gaming equipment and systems              25,177           2,122            (816)         26,483
   Cost of wall machines and amusement games                         20,317                          20,317
   Cost of route operations                          20,736           2,908                          23,644
   Cost of casino operations                          1,918           3,665                           5,583
   Selling, general and administrative               18,099          14,731              17          32,847
   Depreciation and amortization                      3,340           2,580                           5,920
                                                  ---------       ---------       ---------       ---------
                                                     69,270          46,323            (799)        114,794
                                                  ---------       ---------       ---------       ---------

Operating income                                      2,161          12,570            (822)         13,909

Earnings in consolidated subsidiaries                 6,880                          (6,880)

Other income (expense):
   Interest income                                      498              81            (108)            471
   Interest expense                                  (5,282)           (454)            108          (5,628)
   Rainbow royalty                                                   (1,125)                         (1,125)
   Minority interest                                   (285)                                           (285)
   Other, net                                            59             (23)             17              53
                                                  ---------       ---------       ---------       ---------

Income before income taxes                            4,031          11,049          (7,685)          7,395
Income tax (benefit) provision                         (114)          3,364                           3,250
                                                  ---------       ---------       ---------       ---------

Net income                                            4,145           7,685          (7,685)          4,145

Special Stock dividends                               3,094                                           3,094
                                                  ---------       ---------       ---------       ---------

 Net income applicable to common shares           $   1,051       $   7,685       $  (7,685)      $   1,051
                                                  =========       =========       =========       =========
</TABLE>


                        See accompanying unaudited note.
  

                                       15

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

                     CONSOLIDATING STATEMENTS OF OPERATIONS

                      Three Months Ended December 31, 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               15,273          11,331                          26,604
   Depreciation and amortization                      3,458           2,351                           5,809
   Unusual items                                     (2,545)                                         (2,545)
                                                  ---------       ---------       ---------       ---------
                                                     58,847          37,948          (1,523)         95,272
                                                  ---------       ---------       ---------       ---------

Operating income                                      3,153           8,215              74          11,442

Earnings in consolidated subsidiaries                 6,004                          (6,004)

Other income (expense):
   Interest income                                      340              96            (226)            210
   Interest expense                                  (7,266)           (457)            226          (7,497)
   Rainbow royalty                                    1,296          (1,296)
   Minority interest                                   (446)                                           (446)
   Other, net                                           (33)             97                              64
                                                  ---------       ---------       ---------       ---------

Income before income taxes                            3,048           6,655          (5,930)          3,773
Income tax (benefit) provision                         (298)            725                             427
                                                  ---------       ---------       ---------       ---------

Net income                                            3,346           5,930          (5,930)          3,346

Special Stock dividends                                 373                                             373
                                                  ---------       ---------       ---------       ---------

Net income applicable to common shares            $   2,973       $   5,930       $  (5,930)      $   2,973
                                                  =========       =========       =========       =========
</TABLE>

                        See accompanying unaudited note.

                                       16

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

                     CONSOLIDATING STATEMENTS OF OPERATIONS

                       Six Months Ended December 31, 1996
                                   (In 000's)
<TABLE>
<CAPTION>

                                                                                                    Alliance
                                                                                                     Gaming
                                                     Parent and          Non-                      Corporation
                                                    Guaranteeing     Guaranteeing      Adjust-         and
                                                    Subsidiaries     Subsidiaries       ments     Subsidiaries
                                                    ------------     ------------       -----     ------------

<S>                                                 <C>              <C>              <C>           <C> 
Revenues:
   Gaming equipment and systems                      $  74,921       $   5,583       $  (3,329)      $  77,175
   Wall machines and amusement games                                    68,700                          68,700
   Route operations                                     51,749           8,833                          60,582
   Casino operations                                     6,047          19,111                          25,158
                                                     ---------       ---------       ---------       ---------
                                                       132,717         102,227          (3,329)        231,615
                                                     ---------       ---------       ---------       ---------
Costs and expenses:
   Cost of gaming equipment and systems                 46,264           4,550          (2,524)         48,290
   Cost of wall machines and amusement games                            35,421                          35,421
   Cost of route operations                             39,853           5,686                          45,539
   Cost of casino operations                             3,783           7,175                          10,958
   Selling, general and administrative                  31,243          25,459                          56,702
   Depreciation and amortization                         6,588           4,553                          11,141
   Unusual items                                           700                                             700
                                                     ---------       ---------       ---------       ---------
                                                       128,431          82,844          (2,524)        208,751
                                                     ---------       ---------       ---------       ---------

Operating income                                         4,286          19,383            (805)         22,864

Earnings in consolidated subsidiaries                   10,068                         (10,068)

Other income (expense):
   Interest income                                       1,084             171            (221)          1,034
   Interest expense                                    (10,576)         (1,524)            221         (11,879)
   Rainbow royalty                                                      (2,276)                         (2,276)
   Minority interest                                      (426)                                           (426)
   Other, net                                              (77)            129                              52
                                                     ---------       ---------       ---------       ---------

Income before income taxes                               4,359          15,883         (10,873)          9,369
Income tax (benefit) provision                            (422)          5,010                           4,588
                                                     ---------       ---------       ---------       ---------

Net income                                               4,781          10,873         (10,873)          4,781

Special Stock dividends                                  5,411                                           5,411
Premium on repurchase of Series B Special Stock            580                                             580
                                                     ---------       ---------       ---------       ---------

Net income applicable to common shares               $  (1,210)      $  10,873       $ (10,873)      $  (1,210)
                                                     =========       =========       =========       =========
</TABLE>


                        See accompanying unaudited note.

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

                     CONSOLIDATING STATEMENTS OF OPERATIONS

                       Six Months Ended December 31, 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                  28,627          22,249                          50,876
   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                    9,185                          (9,185)

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                      (16,061)         10,578          (9,127)        (14,610)
Income tax (benefit) provision                            (531)          1,451                             920
                                                     ---------       ---------       ---------       ---------

Net income (loss) before extraordinary item            (15,530)          9,127          (9,127)        (15,530)
Extraordinary loss, without tax benefit                (42,033)                                        (42,033)
                                                     ---------       ---------       ---------       ---------

Net income (loss)                                      (57,563)          9,127          (9,127)        (57,563)

Special Stock dividends                                  2,773                                           2,773
Premium on redemption of Series B Special Stock         16,553                                          16,553
                                                     ---------       ---------       ---------       ---------

Net loss applicable to common shares                 $ (76,889)      $   9,127       $  (9,127)      $ (76,889)
                                                     =========       =========       =========       =========
</TABLE>

                        See accompanying unaudited note.

                                       18


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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                       Six Months Ended December 31, 1996
                                   (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:                                   (9,323)        12,699            381          3,757
                                                         --------       --------       --------       --------
Cash flows from investing activities:
   Additions to property and equipment                     (3,493)        (2,562)                       (6,055)
   Proceeds from disposal of property and equipment            39          2,752                         2,791
   Other                                                   (1,534)                                      (1,534)
                                                         --------       --------       --------       --------
       Net cash provided by (used in) investing
       activities                                          (4,988)           190                        (4,798)
                                                         --------       --------       --------       --------
Cash flows from financing activities:
   Proceeds from long-term debt                                41                                           41
     Reduction of long-term debt                             (428)        (4,044)          (381)        (4,853)
     Net change in lines of credit                         (6,929)        (2,365)                       (9,564)
     Repurchase of Series B Special Stock                  (3,307)                                      (3,307)
     Proceeds from issuance of common stock                   123                                          123
     Dividends received (paid)                                524           (524)                          --
                                                         --------       --------       --------       --------
       Net cash used in financing
       activities                                          (9,976)        (7,203)          (381)       (17,560)
                                                         --------       --------       --------       --------

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

Cash and cash equivalents:
   Increase (decrease) for period                         (24,287)         5,631                      (18,656)
   Balance, beginning of period                            36,954         11,103                       48,057
                                                         --------       --------       --------       --------
     Balance, end of period                              $ 12,667       $ 16,734       $   --         $ 29,401
                                                         ========       ========       ========       ========
</TABLE>


                        See accompanying unaudited note.
  


                                       19

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

                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                       Six Months Ended December 31, 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              6             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
   Reduction 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.

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


DEBT AND LINES OF CREDIT

Long-term debt and lines of credit at December 31, 1997 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        $ 149,221                                            $ 149,221
Tranche B Term Loan                             74,813                                               74,813
Tranche C Term Loan                             39,900                                               39,900
Delayed Draw Term Facility                      25,000                                               25,000
Revolving Credit Facility                        8,589           15,654                              24,243
Intercompany notes payable                      97,079           10,455          (107,534)             --
Other                                              827            2,602                               3,429
                                             ---------        ---------         ---------         ---------
                                               395,429           28,711          (107,534)          316,606
Less current maturities                          1,773            2,980            (2,474)            2,279
                                             ---------        ---------         ---------         ---------
Long-term debt, less current
   maturities                                $ 393,656        $  25,731         $(105,060)        $ 314,327
                                             =========        =========         =========         =========
</TABLE>



                                       21
<PAGE>   22



                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1997



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

In August 1997 the Company completed a series of related transactions as
described below ("the Refinancing") which consisted of the private placement of
$150.0 million of Senior Subordinated Notes and the closing of $230.0 million of
bank financing. The bank financing provides for (i) term loans in the aggregate
amount of up to $140.0 million, comprised of a $75.0 million tranche with a 
7 1/2-year term (the "Tranche B Term Loan"), a $40.0 million tranche with an
8-year term (the "Tranche C Term Loan"), and a $25.0 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 $90.0 million revolving credit facility with a 6-year term (the 
"Revolving Credit Facility").

As part of the Refinancing, the Company used the proceeds of the Senior
Subordinated Note offering, together with borrowings under the Revolving Credit
Facility, the Term Loan Facilities and cash on hand, to fund (a) the repurchase
at a premium of substantially all of the Company's 12 7/8% Senior Secured Notes,
plus accrued interest to August 8, 1997 totaling $181.6 million, (b) the
redemption at liquidation value of all of the Company's Series B Special Stock
on September 8, 1997 totaling $77.6 million, (c) the purchase from HFS Gaming
Corporation of the right to receive royalty payments based on revenues of the
Rainbow Casino and the purchase of related debt owed to an HFS affiliate,
National Gaming Mississippi, Inc. on August 12, 1997 totaling $26.3 million and
(d) the payment of transaction fees and expenses totaling $16.6 million.
Additionally, in July 1997 the Company redeemed the remaining balance of its
7-1/2% Convertible Debentures at a price of 104%, or a total of $1.7 million.

At December 31, 1997, based on the terms of the new $90.0 million Revolving
Credit Facility, the Company would have been able to borrow, net of credit line
restrictions, $71.6 million, of which the Company had borrowings of
approximately $24.2 million on December 31, 1997. The borrowing base for the
revolving credit facility consists of eligible receivables and inventory, as
defined in the credit agreement.

At December 31, 1997, the Company actually had $27.0 million in cash and cash
equivalents and $47.4 million in additional availability on its revolving line
of credit. In addition, the Company had working capital of approximately $115.6
million, an increase of approximately $4.8 million from June 30, 1997 which is
explained below. Consolidated cash and cash equivalents at December 31, 1997
includes approximately $13.0 million of cash which is utilized in Casino and
Route Operations which is held in vaults, cages or change banks, which amount
has increased due to the growth in locations serviced by the Route Operations
business unit.

Management believes that cash flow from operating activities, cash and cash
equivalents held and the new $90.0 million Revolving Credit Facility will
provide the Company with sufficient capital resources and liquidity. At December
31, 1997, the Company did not have any significant commitments for capital
expenditures.

Working Capital

During the six months ended December 31, 1997, working capital increased $4.8
million to $115.6 million. The primary fluctuations contributing to the increase
in working capital were: (i) reductions in accounts payable and accrued
liabilities of $11.5 million, (ii) the impact of foreign exchange fluctuations
between the dollar and the deutschemark, and (iii) an increase in accounts
receivable resulting from the reversal of the provision for doubtful 

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

                     FOR THE QUARTER ENDED DECEMBER 31, 1997


receivables related to the Alpha Hospitality obligation discussed below,
partially offset by decreases in cash and cash equivalents of $1.9 million and
decreases in accounts receivable due to cash collections.

Cash Flow

During the six months ended December 31, 1997, the Company used cash from
operating activities of $12.2 million primarily related to cash payments for
accounts payable and accrued liabilities, partially offset by cash collected
from accounts receivable..

During the six months ended December 31, 1997 $8.3 million was used by investing
activities primarily related to capital expenditures.

During the six months ended December 31, 1997, $18.8 million was provided in
financing activities from the issuance of the Senior Subordinated Notes and the
new credit facility, and was used to repurchase the Senior Secured Notes, redeem
the Series B Special Stock, fund the Rainbow Royalty Buyout and pay related fees
and expenses.

--------------

The following is a summary of EBITDA by business unit:
<TABLE>
<CAPTION>

                                    Three Months Ending December 31,     Six Months Ending December 31,
                                           1996            1997              1996             1997
                                         --------         --------         --------         --------
                                                                (In $000's)
<S>                                     <C>              <C>              <C>             <C>  
EBITDA by Business Unit:
Gaming Equipment and Systems             $  6,328         $  2,781         $ 11,771         $  5,927
Wall Machines and Amusement Games          10,841            5,210           14,911            7,811
Route Operations                            5,067            6,048            9,788           12,382
Casino Operations                           4,176            4,956            8,791            9,213
Corporate Administrative Expenses          (6,583)          (4,289)         (10,556)          (8,180)
Unusual Items                                --              2,545             (700)           2,545
                                         --------         --------         --------         --------
    EBITDA                               $ 19,829         $ 17,251         $ 34,005         $ 29,698
                                         ========         ========         ========         ========
</TABLE>

The Company believes that the above 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 new credit facility 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 is subject to both a U.S. and German Pledge
Agreement (both as defined). The new credit facility contains a number of
maintenance covenants and both 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 

                                       23

<PAGE>   24
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1997



acquisitions, or engage in certain transactions with subsidiaries and affiliates
and otherwise restrict corporate activities.

Customer Financing

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 intends to sell this stock within the limitations provided for in
the settlement agreement.

Bally Wulff provides customer financing for approximately 17% of its sales and
also provides lease financing to its customers. Lease terms are generally for
six months, but leases are also available for 12 and 43 month terms.




                                       24



<PAGE>   25

                                        


RESULTS OF OPERATIONS:

THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997

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 three months ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>

                                                 1996             1997
                                                ------           -----
                                                       (In 000's)
<S>                                              <C>           <C>  
REVENUES:
  Gaming Equipment and Systems                 $ 42,273        $ 27,455
  Wall Machines and Amusement Games              42,293          27,731
  Route Operations                               31,692          37,040
  Casino Operations                              12,445          14,488
                                               --------         -------
TOTAL REVENUES                                 $128,703        $106,714
                                               ========        ========

OPERATING INCOME (LOSS):
  Gaming Equipment and Systems                  $ 4,955        $  1,655
  Wall Machines and Amusement Games               8,858           3,423
  Route Operations                                3,296           4,053
  Casino Operations                               3,685           4,447
  Corporate Administrative Expenses              (6,885)         (4,681)
                                               --------        --------
  Subtotal                                       13,909           8,897
  Unusual items                                     -             2,545
                                               --------        --------
TOTAL OPERATING INCOME:                        $ 13,909        $11,442
                                               ========        ========
</TABLE>

GAMING EQUIPMENT AND SYSTEMS

For the quarter ended December 31, 1997, the Gaming Equipment and Systems
business unit reported revenues of $27.5 million, a decrease of 35%, compared to
revenues of $42.3 million in the prior year quarter. Bally Gaming reported unit
sales of approximately 3,400 new gaming machines, a decrease of 38% compared to
unit sales of approximately 5,500 in the prior year quarter. By market segment,
Bally Gaming's unit sales for the quarter consisted of approximately 1,300 units
to the Nevada and Atlantic City markets, 1,000 units to international markets
and 1,100 units to riverboats, Native American and other domestic markets.
Management believes the industry-wide decrease in number of units shipped
resulted primarily from lower replacement demand from existing casinos as casino
operators await regulatory approval of new products that gaming manufacturers
displayed at the World Gaming Congress in October 1997. Bally Gaming reported
revenues from the sale of new gaming machines of $17.5 million, a decrease of
42% compared to $30.4 million in the prior year quarter due to lower unit volume
and a 7% decrease in the average selling price of new gaming machines. In
addition, Systems sales decreased from $7.6 million in the prior year quarter to
$5.5 million in the current year quarter.

                                       25
<PAGE>   26

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1997



Gross margin for the quarter ended December 31, 1997 was 44 percent compared to
37 percent in the prior year quarter. The increase was due principally to a
higher proportion of higher margin System revenues and lower provisions for
inventory obsolescence in the current year quarter. Operating income was $1.7
million in the current year quarter, representing a 66 percent decrease over the
prior year quarter results. Operating income was lower due to decreased revenues
and higher research and development costs, partially offset by improved gross
margins and a lower provision for doubtful receivables.

WALL MACHINES AND AMUSEMENT GAMES

For the quarter ended December 31, 1997, the Wall Machines and Amusement Games
business unit reported revenues of $27.7 million, a decrease of 34% compared to
revenues of $42.3 million in the prior year quarter, which was a record quarter
for this business unit. The currency translation impact of the fluctuation of
the German mark versus the U.S. dollar reduced revenues by $4.1 million during
the 1997 quarter. The revenue decrease resulted primarily from a 33% decrease in
unit shipments of new wall machines and a 30% decrease in amusement game
distribution revenues partially offset by a 48% increase in leased wall machine
revenues. Management believes the general slowdown in the German economy during
the current period has resulted in customers acquiring only enough units to
replace those units whose licenses are expiring, and deferring purchases of
other equipment.

Wall Machines and Amusement Games continued to expand its leasing program
whereby new wall machines 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. At December 31, 1997, a total of 5,600 machines were out on
lease versus 4,000 at December 31, 1996.

Gross margin for the quarter was 45 percent compared to 52 percent in the prior
year quarter. The decrease in gross margin was due to higher fixed overhead
costs per unit due to lower sales volumes, and a slightly lower average selling
price for new wall machines. Operating income of $3.4 million decreased by 61
percent, due primarily to decreased revenues and lower gross margins, partially
offset by lower selling, general and administrative expenses and a lower
provision for doubtful receivables.

ROUTE OPERATIONS

For the quarter ended December 31, 1997, the Route Operations business unit
reported revenues of $37.0 million, an increase of 17% compared to revenues of
$31.7 million in the prior year quarter. Revenues for the Nevada operations
increased 18% as net win per gaming machine per day increased to $53.60 from
$52.00 in the prior year quarter, while the average number of gaming machines
increased to 6,390 from 5,660 in the prior year quarter primarily resulting from
the additional machines added as a result of taking over operations of the
Westronics route and the Scolaris' locations. 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. Gamblers Bonus is currently installed in approximately 1,800
gaming machines at over 160 locations or 25% of the installed base of gaming
machines. Revenues for the Louisiana operations increased 13% as net win per
gaming machine per day increased to $74.20 from $70.70 in the prior year quarter
and the average number of gaming machines increased to 740 from 690 in the prior
year quarter

For the quarter ended December 31, 1997, Nevada operations cost of revenues
increased 22% to $25.3 million, and as a percentage of revenues increased to 79%
from 76% in the prior year quarter. The increase is due to higher space lease
cost and higher direct costs, primarily increased health insurance costs.
Louisiana operations cost 


                                       26
<PAGE>   27



of revenues increased 14% to $3.3 million, and as a percentage of revenues
increased to 65% from 64% in the prior year quarter. The increase is due to
higher direct costs, primarily increased health insurance costs. The Route
Operations business unit reported operating income of $4.1 million, an increase
of 24% compared to operating income of $3.3 million in the prior year quarter.
The operating income improvement resulted primarily from the aforementioned
increase in revenues, lower selling, general and administrative expenses as a
percentage of revenues, and a lower provision for doubtful receivables,
partially offset by the increase in operating costs as a percentage of revenues.

CASINO OPERATIONS

For the quarter ended December 31, 1997, the Casino Operations business unit
reported revenues of $14.5 million, an increase of 16%, compared to revenues of
$12.4 million in the prior year quarter. This increase reflects a 16% increase
at the Rainbow Casino and a 17% increase at the Rail City Casino. The
improvement at the Rainbow Casino was attributable to the continuing success of
its direct marketing campaigns resulting in a 12% higher average market share
than in the prior year quarter. Revenues from the Rail City Casino improved as a
result of enhanced marketing efforts including the introduction of the Rail City
Players Club and an increase in the net win per gaming machine per day resulting
from a 20% replacement of gaming machines with new gaming machines.

For the quarter ended December 31, 1997, the cost of revenues for Casino
Operations increased 12% to $6.3 million compared to $5.6 million in the prior
year quarter but, as a percentage of revenues, improved to 43% from 45% in the
prior year quarter due to the fixed nature of certain direct costs. The Casino
Operations business unit reported operating income of $4.4 million, an increase
of 19% compared to operating income of $3.7 million in the prior year quarter.
The increase in operating income resulted from the aforementioned increase in
revenues and the improvement in operating costs as a percentage of revenues,
partially offset by a slight increase in selling, general and administrative
expenses as a percentage of revenues.

CONSOLIDATED

Total revenues for the quarter ended December 31, 1997, were $106.7 million, a
decrease of 17% compared to revenues of $128.7 million in the prior year
quarter. The decrease is primarily due to the aforementioned decreases in Gaming
Equipment and Systems and Wall Machines and Amusement Games and the impact of
foreign exchange rate fluctuations, partially offset by increases in revenues at
the Route Operations and Casino Operations business units.

Cost of revenues for the quarter ended December 31, 1997, were $65.4 million, a
decrease of 14% compared to $76.0 million in the prior year quarter. Cost of
revenues as a percentage of total revenues increased to 61% from 59% in the
prior year quarter as the improvements at the Casino Operations and Gaming
Equipment and Systems business units were offset by increases at the Wall
Machines and Amusement Games and Route Operations business units.

Selling, general and administrative expenses for the quarter ended December 31,
1997 were approximately $26.6 million, a decrease of 19% compared to costs of
$32.8 million for the prior year quarter. This decrease is due to a decrease in
the provision for doubtful receivables of $3.9 million as well as a decrease in
corporate administrative expenses and a decrease in expenses at the Wall
Machines and Amusement Games business unit, partially offset by increases in
expenses at the Gaming Equipment and Systems, the Casino Operations and the
Route Operations business units.


                                       27

<PAGE>   28

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1997


Depreciation and amortization for the quarter ended December 31, 1997 was $5.8
million, a 2% decrease compared to depreciation and amortization of $5.9 million
in the prior year quarter.

NET INTEREST EXPENSE AND INCOME TAXES

Net interest expense in the quarter ended December 31, 1997 increased to $7.3
million compared to net interest expense of $5.2 million in the prior year
quarter. The increase is primarily due to a higher level of debt resulting from
the Company's new 10% Senior Subordinated Notes due 2007 and the term loan
facilities which replaced substantially all of the Company's 12 7/8% Senior
Secured Notes and the 15% Series B Special Stock as part of the refinancing of
the Company's capital structure, completed in September 1997 resulting in
substantially lower fixed charges.

The Company recorded an income tax provision of $0.4 million in the quarter
ended December 31, 1997 compared to an income tax provision of $3.2 million in
the prior year quarter. The current quarter provision is primarily due to income
taxes for the Wall Machines and Amusement Games business unit and state income
taxes, and is lower than the effective tax rate in the prior year due to a
change in the organization structure in Germany, effective January 1, 1997,
which resulted in a lower tax rate on German earnings.

SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997

General

The following tables set forth the combined revenues and operating income for
the six months ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
                                                      1996             1997
                                                     ------           -----
                                                            (In 000's)
<S>                                                <C>               <C>    
REVENUES:
  Gaming Equipment and Systems                      $ 77,175        $ 54,622
  Wall Machines and Amusement Games                   68,700          48,792
  Route Operations                                    60,582          72,695
  Casino Operations                                   25,158          28,576
                                                    --------        --------
TOTAL REVENUES                                      $231,615        $204,685
                                                    ========        ========

OPERATING INCOME:
  Gaming Equipment and Systems                      $  9,050        $  3,527
  Wall Machines and Amusement Games                   11,522           4,867
  Route Operations                                     6,310           8,442
  Casino Operations                                    7,828           8,199
  Corporate Administrative Expenses                  (11,146)         (8,694)
                                                     -------         -------
  SUBTOTAL                                            23,564          16,341
  Unusual items                                         (700)         2,545
                                                     -------         ------
TOTAL OPERATING INCOME                               $22,864         $18,886
                                                     =======         =======
</TABLE>

GAMING EQUIPMENT AND SYSTEMS

For the six months ended December 31, 1997 the Gaming Equipment and Systems
business unit reported revenues of $54.6 million, a decrease of 29% compared to
revenues of $77.2 million in the prior year period. Bally Gaming 

                                       28
<PAGE>   29

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1997



reported unit sales of approximately 7,600 new gaming machines, a decrease of
27% compared to unit sales of approximately 10,400 in the prior year period. By
market segment, Bally Gaming's unit sales for the period consisted of
approximately 2,500 units to the Nevada and Atlantic City markets, 3,000 units
to international markets and 2,100 units to riverboats, Native American and
other domestic markets. The decrease in number of units shipped resulted
primarily from fewer new casino openings and lower replacement demand from
existing casinos. Bally Gaming reported revenues from the sale of new gaming
machines of $38.0 million, a decrease of 31% compared to $54.7 million in the
prior year quarter due to lower unit volume and a 5% decrease in average selling
price of new gaming machines. In addition, Systems sales decreased from $12.8
million in the prior year period to $8.8 million in the current year period.

For the six months ended December 31, 1997 gross profit margins improved to 42%
from 37% in the prior year period. The increase was due principally to a higher
proportion of higher margin System revenues and lower provisions for inventory
obsolescence in the current year period. Gaming Equipment and Systems reported
operating income of $3.5 million, a decrease of 61% over prior year period
results. The decrease in operating income resulted primarily from lower revenues
and higher research and development costs, partially offset by improved gross
margins and a lower provision for doubtful receivables.

WALL MACHINES AND AMUSEMENT GAMES

For the six months ended December 31, 1997, the Wall Machines and Amusement
Games business unit reported revenues of $48.8 million, a decrease of 29%
compared to revenues of $68.7 million in the prior year period. The currency
translation impact of the fluctuation of the German mark versus the U.S. dollar
reduced revenues by $8.5 million during the current year period. The revenue
decrease resulted primarily from a 26% decrease in unit shipments of new wall
machines and a 28% decrease in amusement game distribution revenues partially
offset by a 58% increase in leased wall machine revenues. Management believes
the general slowdown in the German economy during the current has resulted in
customers acquiring only enough units to replace those units whose licenses are
expiring, and deferring purchases of other equipment.

Wall Machines and Amusement Games continued to expand its leasing program
whereby new wall machines 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. As of December 31, 1997, a total of 5,600 machines were out on
lease versus 4,000 at December 31, 1996.

For the six months ended December 31, 1997, gross profit margin decreased to 45%
from 48% in the prior year period. The decrease in gross margin resulted
primarily due to higher fixed costs per unit due to lower sales volume and, in
dollars, a decrease in the average selling price of new wall machines, partially
offset by an increase in higher margin lease revenues. Wall Machines and
Amusement Games reported operating income of $4.9 million, a decrease of 58%
over prior year period results. The decrease in operating income resulted
primarily from the aforementioned decrease in revenues and lower gross margin,
partially offset by lower selling, general and administrative expenses and a
decrease in the provision for doubtful receivables.

ROUTE OPERATIONS

For the six months ended December 31, 1997, the Route Operations business unit
reported revenues of $72.7 million, an increase of 20% compared to revenues of
$60.6 million in the prior year period. Nevada route operations revenues
increased 21% as net win per gaming machine per day increased 5% to $53.00 from
$50.70 in the prior year period, while the average number of gaming machines
increased to 6,390 from 5,580 in the prior 


                                       29
<PAGE>   30

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1997


year period. The increase in the average number of gaming machines in Nevada
reflects the additional machines added as a result of taking over operations of
the Westronics route and the Scolaris' locations. 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 13% as net win
per gaming machine per day increased 4% to $74.50 from $71.40 in the prior year
period and the average number of gaming machines increased to 730 from 670 in
the prior year period.

For the six months ended December 31, 1997, Nevada route operations cost of
revenues increased 24% and, as a percentage of revenues, increased to 79% from
77% in the prior year period primarily due to higher space lease costs and
higher direct costs, primarily increased health insurance costs. Louisiana route
operations cost of revenues increased 13% and as a percentage of revenues
remained relatively flat at 64% between periods. Route Operations reported
operating income of $8.4 million, an increase of 34% compared to operating
income of $6.3 million in the prior year quarter. The operating income
improvement resulted primarily from the aforementioned increase in revenues, an
improvement in selling, general and administrative expenses as a percentage of
revenues and a decrease in the provision for doubtful receivables, partially
offset by the increase in operating costs as a percentage of revenues.

CASINO OPERATIONS

For the six months ended December 31, 1997, the Casino Operations business unit
reported revenues of $28.6 million, an increase of 14% compared to revenues of
$25.2 million in the prior year period. This increase reflects a 14% increase at
the Rainbow Casino and an 11% increase at the Rail City Casino. The improvement
at the Rainbow Casino was attributable to the continuing impact of its marketing
campaigns and the addition of new gaming machines. Revenues from the Rail City
Casino improved as a result of enhanced marketing efforts and an increase in net
win per gaming machine per day resulting from the replacement of older gaming
machines with new gaming machines.

For the six months ended December 31, 1997, the cost of revenues for Casino
Operations increased 14% to $12.5 million compared to $11.0 million in the prior
year period but, as a percentage of revenues, remained relatively flat at 44%.
Casino Operations reported operating income of $8.2 million, an increase of 5%
compared to operating income of $7.8 million in the prior year period. The
operating income improvement resulted from the aforementioned increase in
revenues, partially offset by an increase in selling, general and administrative
expenses as a percentage of revenues.

CONSOLIDATED

Total revenues for the six months ended December 31, 1997, were $204.7 million,
a decrease of 12% compared to revenues of $231.6 million in the prior year
period. The decrease is primarily due to the aforementioned decreases in Gaming
Equipment and Systems and Wall Machines and Amusement Games and the impact of
foreign exchange rate fluctuations, partially offset by increases in revenues at
the Route Operations and Casino Operations business units.

Cost of revenues for the six months ended December 31, 1997, were $126.6
million, a decrease of 10% compared to $140.2 million in the prior year period.
Cost of revenues as a percentage of total revenues increased slightly to 62%
from 61% in the prior year period as the improvements at the Gaming Equipment
and Systems business unit were offset by increases at the Wall Machines and
Amusement Games and Route Operations business units.


                                       30

<PAGE>   31
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1997

Selling, general and administrative expenses for the six months ended December
31, 1997 were approximately $50.9 million, a decrease of 10% compared to costs
of $56.7 million for the prior year period. This decrease is due to a decrease
in the provision for doubtful receivables of $4.8 million, as well a decrease in
corporate administrative expenses and a decrease in expenses at the Wall
Machines and Amusement Games business unit, partially offset by increases in
expenses at the Gaming Equipment and Systems, the Casino Operations and the
Route Operations business units.

Depreciation and amortization for the six months ended December 31, 1997 was
$10.8 million, a 3% decrease compared to depreciation and amortization of $11.1
million in the prior year quarter.

NET INTEREST EXPENSE AND INCOME TAXES

Net interest expense in the six months ended December 31, 1997 increased to
$13.1 million compared to the net interest expense of $10.8 million in the prior
year period. The increase is due primarily to a higher level of debt resulting
from the Company's new 10% Senior Subordinated Notes due 2007 and the term loan
facilities which replaced substantially all of the Company's 12 7/8% Senior
Secured Notes and the 15% Series B Special Stock as part of the refinancing of
the Company's capital structure, completed in September 1997.

The Company recorded an income tax provision of $0.9 million in the six months
ended December 31, 1997 compared to a provision of $4.6 million in the prior
year period. The current period provision is due primarily to income taxes for
the Wall Machines and Amusement Games business unit and state income taxes, and
is lower than the effective tax rate in the prior year due to a change in the
organization structure in Germany, effective January 1, 1997, which resulted in
a lower tax rate on German earnings.


                                    * * * * *

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 ability to
service debt; 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, change in control, and other
risks detailed from time to time in the Company's filings with the Securities
and Exchange Commission.


                                       31
<PAGE>   32

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 1997




                                     PART II

ITEM 1.        LEGAL PROCEEDINGS

               See "Notes to Unaudited Condensed Consolidated Financial
               Statements- 6. Legal Proceedings" for a description of certain
               legal proceedings.

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

               On December 19, 1997, the Company held its annual shareholders
               meeting at which the shareholders were asked to vote on one
               matter: the election of three directors. Of the 32,012,776 shares
               of common stock outstanding, 29,230,252 shares were voted for,
               and 86,192 against, Mr. Morris Goldstein; 21,362,185 shares were
               voted for, and 7,954,259 against, Mr. David Robbins; and
               24,234,609 shares were voted for, and 5,081,835 against, Mr.
               Morton Topfer.

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K

               a.      Exhibits

               EXHIBIT
               NUMBER           DESCRIPTION
               ------           -----------
               3.(ii)           Amended by-laws of the Company.

               11               Computation of per share amounts

               27.1             Financial Data Schedule

               b.      Reports on Form 8-K

                       No reports on Form 8-K were filed during the quarter
                       ended December 31, 1997.



                                       32

<PAGE>   33
                          ALLIANCE GAMING CORPORATION
                                   FORM 10-Q
                    FOR THE QUARTER ENDED DECEMBER 31, 1997

                                   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)

                                       33