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 September 30, 1998

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the
                         SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to

                          Commission File Number 0-4281
                           ALLIANCE GAMING CORPORATION
             (Exact name of registrant as specified in its charter)

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

                               6601 S. Bermuda Rd.
                             Las Vegas, Nevada 89119
               (Address of principal executive offices) (Zip Code)

                  Registrant's telephone number: (702) 270-7600



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

The  number of  shares of Common  Stock,  $0.10  par  value,  outstanding  as of
November 4, 1998  according  to the records of the  registrant's  registrar  and
transfer agent was 34,261,167.












<PAGE>


                          ALLIANCE GAMING CORPORATION
                                   FORM 10-Q

                   For the Quarter Ended September 30, 1998










                                   I N D E X



PART I.  FINANCIAL INFORMATION                                        Page


Item 1. Unaudited Financial Statements

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

        Unaudited Condensed Consolidated Statements of Operations
           for the three months ended September 30, 1997 and 1998      4

        Unaudited Condensed Consolidated Statements of Stockholders' 
           Deficiency for the three months ended September 30, 1998    5

        Unaudited Condensed Consolidated Statements of Cash Flows
           for the three months ended September 30, 1997 and 1998      6

        Notes to Unaudited Condensed Consolidated Financial 
           Statements                                                  7

Item 2. Management's  Discussion and Analysis of Financial  
           Condition and Results of Operations                        18



PART II. OTHER INFORMATION


Item 1. Legal Proceedings                                             26

Item 6. Exhibits and Reports on Form 8-K                              26


SIGNATURES                                                            27










<PAGE>


                                     PART 1

                           ALLIANCE GAMING CORPORATION
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                          (In 000's, except share data)
                                                          June 30,    Sept. 30,
                                                             1998       1998
ASSETS
Current assets:
  Cash and cash equivalents                              $ 23,487     $26,916
  Accounts and notes receivable, net of allowance 
   for doubtful accounts of $11,932 and $11,909            93,459      87,510
  Inventories, net of reserves of $6,797 and $6,085        42,418      47,395
   Other current assets                                    11,711       9,179
                                                         --------    --------
   Total current assets                                   171,075     171,000
                                                          -------     -------
Long-term notes receivable, net of allowance for doubtful
  accounts of $1,109 and $988                               7,931       7,441
Leased equipment, net of accumulated depreciation of 
  $4,020 and $3,564                                         7,325        7,229
Property, plant and equipment, net of accumulated 
  depreciation of $46,090 and $50,211                       77,905      79,139
Excess of costs over net assets of acquired businesses, 
  net of accumulated amortization of $3,199 and $3,864      59,952      60,940

Intangible assets, net of accumulated amortization of 
  $13,358 and $14,001                                      26,732       27,868
Other assets, net                                          15,917       15,476
                                                          -------      -------
      Total assets                                       $366,837     $369,093
                                                         ========     ========

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
  Accounts payable                                       $ 10,477    $ 12,926
  Accrued liabilities                                      39,122      29,542
  Current maturities of long-term debt                      1,996       2,116
                                                        ---------      ------
    Total current liabilities                              51,595      44,584
                                                         --------     -------
Term loan facilities                                      137,800     137,450
Senior Subordinated Notes due 2007, net                   149,245     149,258
Other long-term debt, less current maturities              36,912      38,609
Other liabilities                                          12,718      12,658
                                                          -------     -------
    Total liabilities                                     388,270     382,559
                                                         --------    --------

Minority interest                                           2,315       1,956
Commitments and contingencies
Stockholders' deficiency:
  Special Stock, 10,000,000 shares authorized:
     Series E, $100 liquidation value; 137,317 shares 
      and 141,265 shares issued and outstanding            13,732      14,127
  Common Stock, $.10 par value; 175,000,000 shares 
     authorized; 32,122,000 shares and 34,261,000 issued 
     and outstanding                                        3,212       3,426
  Additional paid-in capital                              122,980     127,609
  Accumulated other comprehensive income                  (13,946)     (8,176)
  Accumulated deficit                                    (149,726)   (152,408)
                                                          -------     -------
    Total stockholders' deficiency                        (23,748)    (15,422)
                                                           ------      ------  
    Total liabilities and stockholders' deficiency       $366,837    $369,093
                                                         =======     ========



    See notes to unaudited condensed consolidated financial statements.


<PAGE>


                                ALLIANCE GAMING CORPORATION
                 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                       (In 000's, except per share data)
                                                Three Months Ended September 30,
                                                            1997       1998  
Revenues:
    Gaming equipment and systems                         $ 27,167   $ 21,942
    Wall machines and amusement games                      21,061     20,611
    Route operations                                       35,655     40,004
    Casino operations                                      14,088     16,214
                                                          -------    -------
                                                           97,971     98,771
Costs and expenses:
    Cost of gaming equipment and systems                   16,236     11,840
      Cost of wall machines and amusement games            11,568     12,068
      Cost of route operations                             27,188     31,129
      Cost of casino operations                             6,260      6,816
      Selling, general and administrative                  21,403     21,012
  Research and development                                  2,869      4,194
  Depreciation and amortization                             5,003      5,402
                                                           ------      -----
                                                           90,527     92,461

Operating income                                            7,444      6,310

Other income (expense):
    Interest income                                           231        232
    Interest expense                                       (6,069)    (7,903)
    Rainbow royalty                                          (587)         -
    Rainbow royalty buyout                                (19,000)         -
    Minority interest                                        (390)      (539)
    Other, net                                                (12)      (192)
                                                           -------    -------
Loss before income taxes                                  (18,383)    (2,092)

Income tax provision                                         (493)      (184)
                                                           ------    --------
Net loss before extraordinary item                        (18,876)    (2,276)

Extraordinary loss, without tax benefit (note 2)          (42,033)         -
                                                          -------    -------
Net loss                                                  (60,909)    (2,276)

Special Stock dividends and redemption premium on 
    Series B Special Stock                                (18,953)      (406)
                                                           ------       ---- 
Net loss applicable to common shares                     $(79,862)   $(2,682)
                                                         ========    =======
Basic and diluted loss per share:
Loss per share before extraordinary item                $  (1.19)    $ (0.08)
Extraordinary loss per share                               (1.32)        - 
                                                          -------      -----
Net loss per share                                      $  (2.51)   $  (0.08) 
                                                        ========     =======

Weighted average common shares outstanding                31,853      32,982
                                                         =======     =======

      See notes to unaudited condensed consolidated financial statements.


<PAGE>


                                ALLIANCE GAMING CORPORATION
         UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
                     Three Months Ended September 30, 1998
                                  (In 000's)
<TABLE>
<CAPTION>


                                                                                  Accumulated             Total
                                       Series E                        Additional    Other                Stock-
                                     Special Stock       Common Stock   Paid-in  Comprehensive  Accum.   holders'
                                    Shares  Dollars   Shares   Dollars  Capital      Income    Deficit  Deficiency     
<S>                                  <C>   <C>        <C>       <C>     <C>        <C>       <C>         <C>      
Balances at June 30, 1998            137   $13,732    32,122    $3,212  $122,980   $(13,946) $(149,726)  $(23,748)

Net loss                              --      --        --        --        --         --       (2,276)    (2,276)
Shares issued upon exercise of
  Options and warrants                --      --       2,139       214     4,629       --         --        4,843
Special Stock dividends                4       395      --        --        --         --         (406)       (11)
Foreign currency translation
  Adjustment                          --      --        --        --        --        5,770       --        5,770
                                     ---   -------    ------    ------  --------   --------  ---------   --------
Balances at September 30, 1998       141   $14,127    34,261    $3,426  $127,609   $ (8,176) $(152,408)  $(15,422)

</TABLE>














            See notes to unaudited condensed consolidated financial statements.






<PAGE>


                                ALLIANCE GAMING CORPORATION
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (In 000's)



                                                Three Months Ended September 30,
                                                            1997       1998
Cash flows from operating activities:
   Net loss                                              $(60,909) $  (2,276)
   Adjustments to reconcile net loss to net
     cash provided by (used in) operating activities:
       Depreciation and amortization                        5,003      5,402
       Amortization of debt discounts                           7         13
     Extraordinary item                                    42,033          -
     Write down of other assets                               476        185
     Loss (gain) on sale of assets                            (14)       (21)
     Provision for doubtful receivables                       771       (353)
     Other                                                    259       (198)
   Net change in operating assets and liabilities:
     Accounts and notes receivable                          8,700     10,281
     Inventories                                           (2,622)    (4,420)
     Other current assets                                     (70)     2,692
     Accounts payable                                      (2,865)     2,449
     Accrued liabilities                                    1,124     (9,723)
      Net cash provided by (used in) operating activities  (8,107)     4,031

Cash flows from investing activities:
   Additions to property, plant and equipment              (3,049)    (3,483)
   Proceeds from disposal of property and equipment           131         36
   Additions to other long term assets                       (862)    (2,008)
      Net cash used in investing activities                (3,780)    (5,455)

Cash flows from financing activities:
   Refinancing fees and expenses                          (32,752)         -
   Capitalized debt issuance costs                        (11,456)         -
   Proceeds from issuance of long-term debt               303,734          -
   Reduction of long-term debt                           (177,894)      (467)
   Net change in lines of credit                            3,072        300
   Repurchase of Series B Special Stock                   (77,568)         -
   Proceeds from exercise of stock options and warrants         -      4,843
                                                          -------      -----
    Net cash provided by financing activities               7,136      4,676

Effect of exchange rate changes on cash                      (120)       177

Cash and cash equivalents:
    Increase (decrease) for period                         (4,871)     3,429
    Balance, beginning of period                           28,924     23,487
                                                           ------    -------
    Balance, end of period                               $ 24,053   $ 26,916
                                                         ========   ========



            See notes to unaudited condensed consolidated financial statements.


<PAGE>


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

                       Three Months Ended September 30, 1997 and 1998



1.  BASIS OF PRESENTATION

    The  accompanying   unaudited  interim  condensed   consolidated   financial
    statements   reflect  all   adjustments,   consisting  of  normal  recurring
    adjustments,  which management  believes are necessary to present fairly the
    financial position,  results of operations and cash flows of Alliance Gaming
    Corporation  ("Alliance"  or  the  "Company")  for  the  respective  periods
    presented.  The  results  of  operations  for  an  interim  period  are  not
    necessarily  indicative  of the results  which may be expected for any other
    interim  period  or for the  year as a  whole.  The  accompanying  unaudited
    interim  condensed  consolidated  financial  statements  should  be  read in
    conjunction  with the  consolidated  financial  statements  and notes in the
    Company's  annual report on Form 10-K as amended for the year ended June 30,
    1998. All  intercompany  accounts and  transactions  have been eliminated in
    consolidation.

    The accompanying  condensed  consolidated  financial  statements at June 30,
    1998 were derived from audited consolidated financial statements, but do not
    include  all  disclosures   required  under  generally  accepted  accounting
    principles.  Certain  reclassifications  have  been  made  to  prior  period
    financial statements to conform with current period presentation.

2.  DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION

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

                                                          June 30,  Sept. 30,
                                                            1998      1998
                                                               (in 000's)
      10% Senior Subordinated Notes due 2007, net of 
         unamortized discount of $755,000 and $742,000   $149,245  $149,258
      Term loan facilities:
         Tranche B Term Loan                               74,438    74,250
         Tranche C Term Loan                               39,700    39,600
         Delayed Draw Term Facility                        25,000    25,000
      Revolving Credit Facility                            34,971    36,253
      Other, secured by related equipment                   2,599     3,072
                                                          -------   -------
                                                          325,953   327,433
      Less current maturities                               1,996     2,116
                                                           ------   -------
      Long-term debt, less current maturities            $323,957  $325,317
                                                         ========  ========

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


<PAGE>


                                              Interest           Maturity
                                                Rates               Date
            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

    The Revolving Credit Facility also allows for German Deutschemark borrowings
    at the euro deutschmark rate plus 2.25% (or 5.4% at September 30, 1998).

    The bank facility is  collateralized  by substantially all domestic property
    and is  guaranteed  by each  domestic  subsidiary  of the U.S.  Borrower and
    German Subsidiaries (both as defined), other than the entity which holds the
    Company's  interest  in its  Louisiana  operations  and  other  non-material
    subsidiaries  (as  defined),  and secured by both a U.S.  and German  Pledge
    Agreement  (both  as  defined).  The bank  facility  contains  a  number  of
    maintenance  covenants  and it and  the  Indenture  have  other  significant
    covenants that, among other things,  restrict the ability of the Company and
    certain  of  its  subsidiaries  to  dispose  of  assets,   incur  additional
    indebtedness  and  issue  preferred  stock,  pay  dividends  or  make  other
    distributions, enter into certain acquisitions,  repurchase equity interests
    (as defined) or subordinated indebtedness, issue or sell equity interests of
    the Company's subsidiaries (as defined),  engage in mergers or acquisitions,
    or engage in certain transactions with subsidiaries and affiliates, and that
    otherwise restrict corporate activities.

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

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

3.  INCOME TAXES

    The Company's  effective  tax rate for the three months ended  September 30,
    1997 and 1998  differs  from the  statutory  rate of 35% due to state income
    taxes and the impact of taxes  applicable  to  earnings of Bally  Wulff.  In
    addition,  earnings at the Company's domestic  subsidiaries  cannot be fully
    offset by the utilization of net operating loss carryforwards.

4.     SUPPLEMENTAL CASH FLOW INFORMATION

    The following supplemental information is related to the unaudited condensed
    consolidated  statements of cash flows. For the three months ended September
    30, 1997 and 1998, the Company recorded the following  significant  non-cash
    items:
                                                Three months ended September 30,
                                                          1997        1998
                                                             (In 000's)
    Reclassify other assets to property, plant and
    equipment                                            $  105     $  108
    Dividends for Series E and Series B Special Stock     2,400        406
    Reclassify inventory to equipment                     1,599        459
    Series B Special Stock redemption premium            16,553         -
    Translation rate adjustment                             895      5,593
    Capitalized obligation incurred in acquisition 
      of route asset                                         -         652

5.  LEGAL PROCEEDINGS

    Litigation

    On  September  25,  1995,  BGII was named as a defendant  in a class  action
    lawsuit filed in Federal  District  Court in Nevada,  by Larry  Schreirer on
    behalf of himself and all others  similarly  situated.  The plaintiffs filed
    suit against Bally Gaming International,  Inc. ("BGII") and approximately 45
    other  defendants.  Each  defendant is involved in the gaming  business as a
    gaming machine  manufacturer,  distributor,  or casino  operator.  The class
    action lawsuit arises out of alleged  fraudulent  marketing and operation of
    casino video poker  machines and electronic  slot  machines.  The plaintiffs
    allege  that the  defendants  have  engaged  in a course of  fraudulent  and
    misleading  conduct  intended to induce  people into  playing  their  gaming
    machines  based on a false belief  concerning  how those  machines  actually
    operate as well as the extent to which there is actually an  opportunity  to
    win on any given play. The plaintiffs  allege that the  defendants'  actions
    constitute  violations of the Racketeer Influenced and Corrupt Organizations
    Act  (RICO)  and  give  rise to  claims  of  common  law  fraud  and  unjust
    enrichment.  The plaintiffs are seeking  monetary  damages in excess of $1.0
    billion,  and are asking that any damage awards be trebled under  applicable
    Federal  law.  Management  believes  the  plaintiffs'  lawsuit to be without
    merit. The Company intends to vigorously pursue all legal defenses available
    to it.

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




6.    COMPREHENSIVE INCOME

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

    During  the  three  months  ended   September  30,  1998  and  1997,   total
    comprehensive   income  (loss)  amounted  to  $3,088,000  and  $(80,877,000)
    respectively.

7.  UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS

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


<PAGE>


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

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

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable                         $  7,373      $ 3,104    $           $ 10,477
Accrued liabilities                        26,415       13,705       (998)      39,122
Current maturities of long-term debt        6,912        3,176     (8,092)       1,996
                                            -----        -----     ------        -----
  Total current liabilities                40,700       19,985     (9,090)      51,595
                                           ------       ------    -------       ------
Term loan facilities                      137,800                              137,800
Senior Subordinated Notes due 2007, net   149,245                              149,245
Other long-term debt, less current 
  maturities                              105,279       20,878    (89,245)      36,912
Other liabilities                          10,729        2,330       (341)      12,718
                                          -------      -------    -------      -------
  Total liabilities                       443,753       43,193    (98,676)     388,270
                                          -------      -------    -------      -------
Minority interest                           2,315                                2,315
Commitments and contingencies
Stockholders' equity (deficiency):
Series E Special Stock                     13,732                               13,732
Common Stock                                3,212       17,832    (17,832)       3,212
Additional paid-in capital                122,980       68,700    (68,700)     122,980
Cumulative translation adjustment         (13,946)     (14,140)    14,140      (13,946)
Retained earnings (accumulated deficit)  (149,752)      31,827    (31,801)    (149,726)
                                         --------       ------    -------     --------
 Total stockholders' equity (deficiency)  (23,774)     104,219   (104,193)     (23,748)
                                         --------      -------    -------      -------
                                         $422,294     $147,412  $(202,869)    $366,837
                                         ========     ========  =========     ========
</TABLE>

                              See accompanying unaudited note.


                                CONSOLIDATING BALANCE SHEETS

                                     September 30, 1998
                                         (In 000's)

<TABLE>
<CAPTION>
                                                                              Alliance
                                                                               Gaming
                                       Parent and       Non-                Corporation
                                      Guaranteeing  Guaranteeing  Adjust-       and
                                      Subsidiaries  Subsidiaries   ments   Subsidiaries
<S>                                     <C>           <C>         <C>         <C>        
ASSETS
Current assets:
Cash and cash equivalents               $  14,643     $ 12,273    $           $ 26,916
Accounts and notes receivable, net         38,881       53,028     (4,399)      88,510
Inventories, net                           31,630       16,294       (529)      47,395
Other current assets                        7,157        2,022                   9,179
                                           ------       ------     ------      -------
   Total current assets                    92,311       83,617     (4,928)     171,000
                                          -------       ------     ------      -------
Long-term notes receivable, net            95,943        2,447    (90,949)       7,441
Leased equipment, net                       7,229                   7,229
Property, plant and equipment, net         46,032       33,107                  79,139
Excess of costs over net assets of 
   acquired businesses, net                39,699       21,241                  60,940
Intangible assets, net                     27,399          469                  27,868
Investment in subsidiaries                 96,414                 (96,414)          -
Other assets, net                          23,088       (8,639)     1,027       15,476
                                          -------      -------    -------      -------
                                         $420,886     $139,471  $(191,264)    $369,093
                                         ========     ========  =========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable                        $  10,603     $  2,323    $           $ 12,926
Accrued liabilities                        16,475       13,810       (743)      29,542
Current maturities of long-term debt        1,528        3,216     (2,628)       2,116
                                           ------       ------    -------       ------
  Total current liabilities                28,606       19,349     (3,371)      44,584
                                          -------      -------    -------      -------
Term loan facilities                      137,450                              137,450
Senior Subordinated Notes due 2007, net   149,258                              149,258
Other long-term debt, less current 
  maturities                              108,418       21,085    (90,894)      38,609
Other liabilities                          10,646        2,330       (318)      12,658
                                          -------      -------    -------      -------
  Total liabilities                       434,378       42,764    (94,583)     382,559
                                          -------       ------    -------      -------
Minority interest                           1,956                                1,956
Commitments and contingencies
Stockholders' equity (deficiency):
Series E Special Stock                     14,127                               14,127
Common Stock                                3,426       17,832    (17,832)       3,426
Additional paid-in capital                127,609       68,700    (68,700)     127,609
Cumulative translation adjustment          (8,176)      (8,375)     8,375       (8,176)
Retained earnings (accumulated deficit)  (152,434)      18,550    (18,524)    (152,408)
                                         --------      -------    -------     --------
  Total stockholders' equity (deficiency) (15,448)      96,707    (96,681)     (15,422)
                                         --------      -------    -------      ------- 
                                         $420,886     $139,471  $(190,264)    $369,093
                                         ========     ========  =========     ========
</TABLE>

                            See accompanying unaudited note.


<PAGE>


                     CONSOLIDATING STATEMENTS OF OPERATIONS

                      Three Months Ended September 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>   
Revenues:
  Gaming equipment and systems               $26,523      $ 2,747    $(2,103)     $27,167
  Wall machines and amusement games                        21,061                  21,061
  Route operations                            30,765        4,890                  35,655
  Casino operations                            3,289       10,799                  14,088
                                             -------     --------     ------      -------
                                              60,577       39,497     (2,103)      97,971
                                             -------      -------     ------      -------
Costs and expenses:
  Cost of gaming equipment and systems        16,280        2,043     (2,087)      16,236
  Cost of wall machines and amusement games                11,568                  11,568
  Cost of route operations                    24,052        3,136                  27,188
  Cost of casino operations                    2,098        4,162                   6,260
  Selling, general and administrative         11,202       10,201                  21,403
  Research and development                     2,152          717                   2,869
  Depreciation and amortization                2,927        2,076                   5,003
                                             -------      -------     ------      -------
                                              58,711       33,903     (2,087)      90,527
                                             -------      -------     ------      -------

Operating income                               1,866        5,594        (16)       7,444

Earnings in consolidated subsidiaries          3,197                  (3,197)

Other income (expense):
  Interest income                                292          111       (172)         231
  Interest expense                            (5,802)        (439)       172       (6,069)
  Rainbow royalty                                680       (1,267)                   (587)
  Rainbow royalty buyout                     (19,000)                             (19,000)
  Minority interest                             (390)                                (390)
  Other, net                                      64          (76)                    (12)
                                              ------        -----     ------       ------

Income (loss) before income taxes            (19,093)       3,923     (3,213)     (18,383)
Income tax benefit (provision)                   233         (726)                   (493)
                                              ------      -------     ------       ------

Net income (loss) before extraordinary item  (18,860)       3,197     (3,213)     (18,876)
Extraordinary loss, without tax benefit      (42,033)                             (42,033)
                                             -------      -------     ------      -------
Net income (loss)                            (60,893)       3,197     (3,213)     (60,909)

Special Stock dividends and redemption 
  premium                                    (18,953)                             (18,953)
                                             -------     -------     ------      --------

Net loss applicable to common shares       $(79,846)      $ 3,197    $(3,213)    $(79,862)
                                           ========       =======    =======     ========

</TABLE>

                                 See accompanying unaudited note.

<PAGE>


                     CONSOLIDATING STATEMENTS OF OPERATIONS

                      Three Months Ended September 30, 1998
                                   (In 000's)
<TABLE>
<CAPTION>
                                                                              Alliance
                                                                               Gaming
                                        Parent and       Non-               Corporation
                                      Guaranteeing  Guaranteeing   Adjust-      and
                                      Subsidiaries  Subsidiaries   ments    Subsidiaries
<S>                                       <C>          <C>        <C>          <C>    
Revenues:
  Gaming equipment and systems            $20,171      $ 3,072    $(1,301)     $21,942
  Wall machines and amusement games                     20,622        (11)      20,611
  Route operations                         34,889        5,115                  40,004
  Casino operations                         3,307       12,907                  16,214
                                            -----      -------    -------      -------
                                           58,367       41,716     (1,312)      98,771
Costs and expenses:
  Cost of gaming equipment and systems     10,791        2,350     (1,301)      11,840
  Cost of wall machines and amusement 
    games                                               12,079        (11)      12,068
  Cost of route operations                 27,816        3,313                  31,129
  Cost of casino operations                 2,039        4,777                   6,816
  Selling, general and administrative      11,837        9,175                  21,012
  Research and development                  3,436          758                   4,194
  Depreciation and amortization             3,672        1,730                   5,402
                                            -----       -------    ------       ------
                                           59,591       34,182     (1,312)      92,461

Operating income                           (1,224)       7,534                   6,310

Earnings in consolidated subsidiaries       5,102                  (5,102)

Other income (expense):
  Interest income                             315          104       (187)         232
  Interest expense                         (7,701)        (389)       187       (7,903)
  Rainbow royalty                           1,507       (1,507)
  Minority interest                          (539)                                (539)
  Other, net                                  (13)        (179)                   (192)
                                           ------       ------     ------       ------

Income (loss) before income taxes          (2,553)       5,563     (5,102)      (2,092)
Income tax benefit (provision)                277         (461)                   (184)
                                            -----       ------    -------       ------

Net income (loss)                          (2,276)       5,102     (5,102)      (2,276)
                                            -----        -----     ------       ------
Special Stock dividends                      (406)                                (406)
                                           ------       ------    -------        -----

Net loss applicable to common shares      $(2,682)      $5,102    $(5,102)     $(2,682)
                                         ========      =======    =======      =======
</TABLE>

                            See accompanying unaudited note.


<PAGE>


                           CONSOLIDATING STATEMENTS OF CASH FLOWS
                           Three Months Ended September 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>   
Net cash provided by (used in)
 operating activities                     (23,015)       7,968      6,940       (8,107)
                                          -------       ------     ------       ------
Cash flows from investing activities:
   Additions to property and equipment     (2,288)        (761)                 (3,049)
   Proceeds from disposal of property and 
    equipment                                  62           69                     131
   Additions to other long term asets        (710)        (152)                   (862)
                                           ------        -----     ------       ------
     Net cash used in investing activities (2,936)        (844)                 (3,780)
                                           ------        -----     ------       ------
Cash flows from financing activities:
   Refinancing fees and expenses          (32,752)                             (32,752)
  Capitalized new debt fees               (11,456)                             (11,456)
  Proceeds from issuance of long-term 
    debt, net of expenses                 303,734        7,279     (7,279)     303,734
   Reduction of long-term debt           (170,294)      (7,939)       339     (177,894)
  Net change in lines of credit             1,840        1,232                   3,072
  Repurchase of Series B Special Stock    (77,568)                             (77,568)
  Dividends received (paid)                 5,374       (5,374)                      - 
                                          -------       ------     ------      -------
     Net cash provided by (used in)
       financing activities                18,878       (4,802)    (6,940)       7,136
                                          -------       ------     ------      -------

Effect of exchange rate changes on cash                   (120)                   (120)

Cash and cash equivalents:
   Increase (decrease) for period          (7,073)       2,202                  (4,871)
   Balance, beginning of period            16,462       12,462                  28,924
                                          -------      -------                 -------
  Balance, end of period                  $ 9,389      $14,664   $     --      $24,053
                                          =======      =======   ========      =======

</TABLE>


                                 See accompanying unaudited note.



<PAGE>


                           CONSOLIDATING STATEMENTS OF CASH FLOWS
                           Three Months Ended September 30, 1998
                                         (In 000's)

<TABLE>
<CAPTION>
                                                                               Alliance
                                                                                Gaming
                                       Parent and        Non-                Corporation
                                       Guaranteeing  Guaranteeing    Adjust-      and
                                       Subsidiaries  Subsidiaries    ments   Subsidiaries
<S>                                        <C>          <C>          <C>         <C> 
Net cash provided by (used in)
 operating activities                      (6,904)      11,558       (623)       4,031
                                           ------      -------      -----       ------
Cash flows from investing activities:
   Additions to property and equipment     (2,732)        (751)                 (3,483)
   Proceeds from disposal of property and 
     equipment                                 28            8                      36
   Additions to other long term assets     (2,008)                              (2,008)
                                           ------      -------     ------       ------
     Net cash used in investing activities (4,712)        (743)                 (5,455)
                                           ------      -------     ------       ------
Cash flows from financing activities:
   Reduction of long-term debt               (355)        (735)       623         (467)
   Net change in lines of credit              300                                  300
   Proceeds from exercise of stock options 
    and warrants                            4,843                                4,843
   Dividends received (paid)               12,862      (12,862)                      - 
                                          -------      -------     ------       ------
     Net cash provided by (used in) 
       financing activities                17,650      (13,597)       623        4,676
                                          -------      -------     ------       ------

Effect of exchange rate changes on cash                    177                     177

Cash and cash equivalents:
   Increase (decrease) for period           6,034       (2,605)                  3,429
   Balance, beginning of period             8,609       14,878                  23,487
                                           ------      -------                  ------
  Balance, end of period                 $ 14,643      $12,273     $   --      $26,916
                                         ========      =======     ======      =======

</TABLE>
                              See accompanying unaudited note.



<PAGE>



Debt and Lines of Credit

Long-term  debt and  lines of  credit  at  September  30,  1998  consist  of the
following:
<TABLE>
<CAPTION>

                                                                              Alliance
                                                                              Gaming
                                       Parent and       Non-               Corporation
                                      Guaranteeing   Guaranteeing  Adjust-       and
                                      Subsidiaries   Subsidiaries   ments   Subsidiaries
                                                          (in 000's)
<S>                                      <C>          <C>         <C>         <C>     
10% Senior Subordinated Notes due

  2007, net of unamortized discount      $149,258                             $149,258
Term loan facilities:
  Tranche B Term Loan                      74,250                               74,250
  Tranche C Term Loan                      39,600                               39,600
  Delayed Draw Term Facility               25,000                               25,000
Revolving Credit Facility                  23,000      13,253                   36,253
Intercompany notes payable                 84,904       8,618     (93,522)       -
Other                                         642       2,430                    3,072
                                          -------       -----     -------      -------
                                          396,654      24,301     (93,522)     327,433
Less current maturities                     1,528       3,216      (2,628)       2,116
                                          -------     -------     -------      -------
Long-term debt, less current
  maturities                             $395,126     $21,085    $(90,894)    $325,317
                                         ========     =======    ========     ========

</TABLE>

<PAGE>


                                ALLIANCE GAMING CORPORATION
                                   FORM 10-Q

                   For the Quarter Ended September 30, 1998




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").

At September  30, 1998,  based on the terms of the new $90.0  million  Revolving
Credit  Facility,  the Company would have been able to borrow $69.4 million,  of
which the Company had borrowings of approximately $36.3 million outstanding. The
borrowing  base  for  the  revolving   credit  facility   consists  of  eligible
receivables and inventory, as defined in the credit agreement.

At  September  30,  1998,  the  Company  had  $26.9  million  in cash  and  cash
equivalents and $33.1 million in unborrowed availability on its revolving credit
facility  pursuant to the  borrowing  base  limitations  contained in the credit
agreement.  In addition, the Company had working capital of approximately $126.4
million,  an increase of approximately $6.9 million from June 30, 1998, which is
explained  below.  Consolidated  cash and cash equivalents at September 30, 1998
includes  approximately  $12.1  million of cash which is  utilized in Casino and
Route Operations which is held in vaults, cages or change banks.

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

Management  believes  that cash flow from  operating  activities,  cash and cash
equivalents held and the  availability  under the revolving credit facility will
provide  the  Company  with  sufficient  capital  resources  and  liquidity.  At
September 30, 1998,  the Company did not have any  significant  commitments  for
capital expenditures.

Working Capital

During the three months ended September 30, 1998, working capital increased $6.9
million to $126.4 million. The primary fluctuations in working capital were: (i)
a decrease in accounts  receivable  resulting  from cash  collections  and lower
revenues,  (ii) an increase in inventory  due to new product  sales  expected in
fiscal  year 1999,  (iii) a decrease in accrued  liabilities  due to payments of
accrued interest payable and a final payment in settlement of litigation related
to the  acquisition of BGII,  (iv) the impact of foreign  exchange  fluctuations
between the dollar and the deutschemark on all working capital  categories,  (v)
increases  in  accounts  payable  based  on  timing  of  payments,  and (vi) the
corresponding impact of the above listed items on cash and cash equivalents.

Cash Flow

During the three months ended September 30, 1998, $4.0 million was provided from
operating  activities  resulting from a net decrease in accounts  receivable,  a
decrease in other current assets,  an increase in depreciation and amortization,
partially  offset by a net loss, an increase in  inventories  primarily at Bally
Gaming and Systems, and a decrease in accrued expenses.

During the three months ended  September  30, 1998 the Company used $5.5 million
of cash in investing activities primarily resulting from $3.5 million in capital
expenditures  and $2.0  million  of  payments  made in  acquiring  the rights to
manufacture and distribute several gaming products.

During the three months ended  September 30, 1998,  $4.7 million was provided by
financing  activities  primarily  resulting  from  the  cash  proceeds  from the
exercise of certain stock purchase warrants.

The following is a summary of the Company's  earnings  before  interest,  taxes,
depreciation and amortization (EBITDA) by business unit:
                        Three Months Ending September 30,
                                                   1997       1998
                                   (In $000's)

Bally Gaming and Systems                       $ 3,146     $   960
Wall Machines and Amusement Games                2,601       3,145
Route Operations                                 6,334       5,678
Casino Operations                                4,257       5,442
Corporate Administrative Expenses               (3,891)     (3,513)
                                               -------     -------
    EBITDA                                     $12,447     $11,712
                                               =======     =======

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

The bank facility is  collateralized  by substantially all domestic property and
is  guaranteed  by each  domestic  subsidiary  of the U.S.  Borrower  and German
Subsidiaries (both as defined),  other than the entity which holds the Company's
interest in its Louisiana  operations and other  non-material  subsidiaries  (as
defined),  and  secured by both a U.S.  and  German  Pledge  Agreement  (both as
defined).  The bank facility  contains a number of maintenance  covenants and it
and the indenture have other  significant  covenants  that,  among other things,
restrict the ability of the Company and certain of its  subsidiaries  to dispose
of assets, incur additional  indebtedness,  issue preferred stock, pay dividends
or make other distributions, enter into certain acquisitions,  repurchase equity
interests  (as  defined)  or  subordinated  indebtedness,  issue or sell  equity
interests  of the  Company's  subsidiaries  (as  defined),  engage in mergers or
acquisitions,   or  engage  in  certain   transactions   with  subsidiaries  and
affiliates, and that otherwise restrict corporate activities.


<PAGE>


Customer Financing

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

Year 2000

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

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

The Company has also initiated  efforts to ensure the Year 2000 readiness of its
products and services. The Company is actively evaluating its strategy and legal
obligations for any communication to its customers. As part of its assessment of
current  products and  services,  the Company is currently  upgrading  all Bally
Systems  SDS  customers  to version  7.0  software,  for which the  Company  has
developed a Year 2000 compliance  "patch" which is currently being  distributed.
The  Company  plans to have all  customers  upgraded  to version 7.0 by December
1998,  and have the patch  installed  by July 1999.  The  Company  is  currently
shipping  version  7.1 of the  software,  which  is also  Year  2000  compliant.
Customers are also being advised that the IBM or Unix operating systems they are
using must also be  upgraded  to versions  that are Year 2000  compliant.  Bally
Systems has  obtained the  operating  system  upgrades  from the vendors and has
offered to assist users in installing  the upgrade.  The Company has also tested
most of the  products  manufactured  in the United  States and Germany in recent
years to determine compliance with Year 2000 and plans to advise customers what,
if any, non-compliance issues exist before December 31, 1998.

Based upon the results of research and investigation,  management will formulate
further plans as necessary. The Year 2000 readiness of its customers varies, and
the Company is  encouraging  its  customers  to evaluate  and prepare  their own
systems.  These  efforts by customers to address Year 2000 issues may affect the
demand for certain products and services;  however, the impact to the revenue or
any change in revenue patterns is highly uncertain.

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

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

Euro Currency Conversion

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

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


<PAGE>


Results of Operations:

Three Months Ended September 30, 1997 and 1998

General

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

The following tables set forth the combined revenues and operating income (loss)
for the four  business  units for the three months ended  September 30, 1997 and
1998:

                                            1997       1998  
                                               (In 000's)
Revenues:
  Bally Gaming and Systems              $ 27,167    $ 21,942
  Wall Machines and Amusement Games       21,061      20,611
  Route Operations                        35,655      40,004
  Casino Operations                       14,088      16,214
                                         -------     -------
Total Revenues                          $ 97,971    $ 98,771
                                        ========    ========

Operating income (loss):
  Bally Gaming and Systems               $ 1,871     $   147
  Wall Machines and Amusement Games        1,444       2,157
  Route Operations                         4,388       3,076
  Casino Operations                        3,754       4,862
  Corporate and Other                     (4,013)     (3,932)
                                          ------      ------
Total operating income:                  $ 7,444     $ 6,310 
                                         =======     ======= 
Bally Gaming and Systems

For the quarter ended September 30, 1998, Bally Gaming and Systems business unit
reported  revenues of $21.9  million,  a decrease of 19% compared to revenues of
$27.2  million in the prior year  quarter.  Bally Gaming  reported unit sales of
approximately  2,100 new gaming  machines,  a decrease  of 50%  compared to unit
sales of approximately 4,200 in the prior year quarter. By market segment, Bally
Gaming's unit sales for the quarter  consisted of approximately 900 units to the
Nevada and Atlantic City markets,  1,100 units to international  markets and 100
units to riverboats, Native American and other domestic markets. The decrease in
number of units  shipped  resulted  from  fewer new  casino  openings  and lower
replacement  demand from existing  casinos.  Bally Gaming reported revenues from
the sale of new gaming machines of $11.4 million,  a decrease of 44% compared to
$20.5  million in the prior year  quarter  due to lower unit  volume,  partially
offset by a 13% increase in average  selling prices over the prior year quarter.
Bally Systems reported revenues of $4.7 million,  an increase of 41% compared to
revenues of $3.3 million in the prior year quarter.

For the quarter ended September 30, 1998,  gross profit margins  improved to 46%
from 40% in the prior  year  quarter.  The  gross  margin  improvement  resulted
primarily from a change in the mix of product sales to higher margin products, a
greater  percentage of higher margin Systems  revenues and lower  provisions for
inventory  obsolescence  in the current year  quarter.  Bally Gaming and Systems
reported  operating  income of $0.1 million compared to operating income of $1.9
million in the prior year  quarter.  The decrease in operating  income  resulted
primarily  from lower  revenues,  higher  selling,  general  and  administrative
expenses and a $1.3 million increase in research and development costs resulting
from the  Company's  ongoing  efforts  to expand  its new and  existing  product
offerings,  partially offset by improved gross margins and a lower provision for
doubtful receivables.

Wall Machines and Amusement Games

For the quarter ended  September 30, 1998, the Wall Machines and Amusement Games
business unit reported  revenues of $20.6 million,  a decrease of 2% compared to
revenues  of $21.1  million  in the prior year  quarter.  The  revenue  decrease
resulted  primarily  from a 12% decrease in unit  shipments of new wall machines
and a 21% decrease in amusement game distribution revenues,  partially offset by
a 51%  increase in used wall  machine  revenues and a 4% increase in leased wall
machine revenues. The foreign currency fluctuation of the German mark versus the
U.S.  dollar  increased  revenues and EBITDA by $0.5  million and $0.1  million,
respectively,  during the 1998  quarter.  The Company  believes that the general
slowdown in the German  economy 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.
These leases provide Wall Machines and Amusement Games with a stream of revenues
and cash flow over the life of the leases,  which range from six months to three
and one half years. Wall Machines and Amusement Games experienced a 17% increase
in new units  leased  compared  to the prior year  quarter  and a total of 4,500
machines are currently out on lease.

For the quarter ended September 30, 1998,  gross profit margin  decreased to 41%
from 45% in the prior year  quarter  This  decrease  was due to the  unfavorable
impact of lower production at the  manufacturing  facility,  partially offset by
the  increase in higher  margin lease  revenues and a 1 percent  increase in the
average  selling price of new wall machines.  Wall Machines and Amusement  Games
reported  operating income of $2.2 million,  an increase of 49% compared to $1.4
million in the prior year quarter. The improvement resulted primarily from lower
selling,  general and administrative expenses as the prior year quarter included
additional expenses for a trade show, a lower provision for doubtful receivables
resulting   from  an  overall   reduction  in  receivable   balances  and  lower
depreciation  expense,  partially  offset by the  decrease in revenues and lower
gross margins.

Route Operations

For the quarter ended  September 30, 1998,  the Route  Operations  business unit
reported  revenues of $40.0 million,  an increase of 12% compared to revenues of
$35.7  million in the prior year  quarter.  Revenues  for the Nevada  operations
increased  13% as net win per gaming  machine per day  increased  to $52.60 from
$52.40 in the prior year quarter,  while the average  number of gaming  machines
increased to 7,140 from 6,340 in the prior year quarter primarily resulting from
the  additional  machines  added as a result of  taking  over the  contracts  to
operate  locations  previously  served  by  competitors.   Industry-wide  gaming
revenues in Northern  Nevada have declined from the prior year period and except
for  Gamblers  Bonus  locations,  this has caused the  Company to  experience  a
decrease in the net  operating  margins in this area of the state.  Revenues and
net operating margins continue to be strong in Southern Nevada,  particularly in
Gamblers Bonus  locations.  As of September 30, 1998, the Gamblers Bonus product
was  installed  in  approximately  2,160 gaming  machines at over 180  locations
statewide  or 30% of its  installed  base of gaming  machines.  Revenues for the
Louisiana  operations  increased  5% as net  win  per  gaming  machine  per  day
increased to $77.00 from $74.80 in the prior year quarter and an increase in the
average number of gaming machines to 720 from 710 in the prior year quarter

For the quarter  ended  September  30, 1998,  cost of revenues  increased 14% to
$31.1  million  compared  to $27.2  million  in the  prior  year  quarter.  As a
percentage of revenues,  cost of revenues increased to 78% from 76% in the prior
year  quarter.  Nevada  operations  cost of  revenues  increased  16%,  and as a
percentage  of  revenues  increased  to 80% from 78% in the prior  year  quarter
primarily  due to the lower  margins in the  Northern  Nevada  route.  Louisiana
operations  cost of  revenues  increased  6%, and as a  percentage  of  revenues
increased slightly to 65% from 64% in the prior year quarter, due to an increase
in direct costs. The Route Operations business unit reported operating income of
$3.1 million,  a decrease of 30% compared to operating income of $4.4 million in
the prior year quarter.  The decrease in operating income resulted primarily due
to higher direct costs, higher selling,  general and administrative expenses and
an increase in  depreciation  from an increase in the number of gaming  machines
deployed, partially offset by higher revenues.

Casino Operations

For the quarter ended  September 30, 1998, the Casino  Operations  business unit
reported  revenues of $16.2 million,  an increase of 15% compared to revenues of
$14.1  million  in the prior year  quarter.  This  increase  was driven by a 20%
increase at the Rainbow  Hotel  Casino.  The  improvement  at the Rainbow  Hotel
Casino was attributable to an increase in the average gaming machine net win per
day of 8% to $153  from  $142  in the  prior  year  quarter  coupled  with a 14%
increase in the average number of gaming machines.  Revenues remained relatively
flat at the Rail City  Casino  between  periods as an  increase  in the  average
gaming machine net win per day of 7% (to $59 from $55 in the prior year quarter)
and an 7% increase in the average  number of gaming  machines were mostly offset
by a lower  number of table games and a decrease in win per table game  position
combined with lower food and beverage revenues.

For the quarter  ended  September  30,  1998,  the cost of  revenues  for Casino
Operations  increased 9% to $6.8  million  compared to $6.3 million in the prior
year quarter but, as a percentage  of revenues,  improved to 42% from 44% in the
prior year quarter due primarily to the achievement of higher revenues without a
corresponding  increase in direct gaming costs. The Casino  Operations  business
unit reported  operating income of $4.9 million,  an increase of 30% compared to
operating  income of $3.8  million in the prior year  quarter.  The  increase in
operating  income  resulted from the increase in revenues,  the  improvement  in
operating  costs as a  percentage  of revenues  and an  improvement  in selling,
general and  administrative  expenses as a  percentage  of  revenues,  partially
offset by an increase in  depreciation  from an increase in the number of gaming
machines at both casinos.

Earlier this year,  the  independently  owned and operated hotel adjacent to the
Rainbow  Casino changed its name to the Rainbow  Hotel.  To further  enhance the
Company's  brand,  the casino and hotel are now  marketed as the  Rainbow  Hotel
Casino.

Consolidated

Total revenues for the quarter ended September 30, 1998, were $98.8 million,  an
increase of 1% compared to revenues of $98.0  million in the prior year quarter.
The  increase is  primarily  due to the  aforementioned  increases  at the Route
Operations and Casino Operations  business units,  partially offset by decreases
in Bally  Gaming and Systems and Wall  Machines  and  Amusement  Games  business
units.

Cost of revenues for the quarter ended  September 30, 1998,  were $61.9 million,
an increase of 1% compared to $61.3 million in the prior year  quarter.  Cost of
revenues as a percentage of total  revenues  remained flat at 63% from the prior
year  quarter as increases in Wall  Machines and  Amusement  Games and the Route
Operations  business units were offset by  improvements in costs as a percentage
of revenues at the Bally Gaming and Systems and the Casino  Operations  business
units.

Selling, general and administrative expenses for the quarter ended September 30,
1998 were approximately  $21.0 million, a decrease 2% compared to costs of $21.4
million  for the prior year  quarter.  This  decrease  is due to a  decrease  in
expenses at the Wall Machines and Amusement  Games business unit, a 10% decrease
in Corporate  expenses,  partially  offset by increases in expenses at the Bally
Gaming and Systems,  the Route  operations  and the Casino  Operations  business
units.

Research and  development  costs for the quarter  ended  September 30, 1998 were
approximately $4.2 million, an increase of 46% compared to costs of $2.9 million
in the prior  year.  This  increase  is due to  increases  in costs at the Bally
Gaming and Systems and the Wall Machines and Amusement Games business units.

Net Interest Expense and Income Taxes

Net interest  expense in the three months ended  September 30, 1998 increased to
$7.7 million from $5.8  million in the 1997  quarter.  The increase is primarily
due to higher interest costs which resulted from the additional debt taken on in
the refinancing  transaction  which was completed in September 1997 and a higher
average amount of working capital  borrowings in the current quarter,  partially
offset by the elimination of interest on the 12 7/8% Senior Secured Notes.

The Company  recorded  an income tax  provision  of $0.2  million in the quarter
ended  September 30, 1998 compared to an income tax provision of $0.5 million in
the prior fiscal year  quarter.  The  provision is primarily due to income taxes
related to the Bally Wulff entities and state income taxes.


                                         * * * * *

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



<PAGE>




                                          PART II

Item 1.   Legal Proceedings

          See "Notes to Unaudited Condensed Consolidated Financial Statements-5.
          Legal Proceedings" for a description of certain legal proceedings.

Item 6.   Exhibits and Reports on Form 8-K

          a.    Exhibits

          11    Computation of per share amounts

          27    Financial Data Schedule

          b.    Reports on Form 8-K

                No reports on Form 8-K were filed during the quarter ended  
                September  30, 1998.





<PAGE>


                                  SIGNATURES


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



    ALLIANCE GAMING CORPORATION
         (Registrant)





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




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