**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                                                                                                                     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                           |
| **For the quarterly period ended March 31, 2004**                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                           |                                                                                           |   |
| **OR**                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                           |
| **o**                                                                                                                                                                                                                                                          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |   |
|                                                                                                                                                                                                                                                           |
| **For the transition period from                    to                  ** |
|                                                                                                                                                                                                                                                                |                                                                                                |        |  |  |

 

**CommissionFile Number 0-4281**

 

**ALLIANCEGAMING CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **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**                                  |
| **Registrant’s  internet:**  www.alliancegaming.com                            |

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12B-2 of the Exchange Act).  Yes    ý    Noo  

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

ý   Yes    o  No

 

The number of shares of Common Stock, $0.10 par value, outstanding asof May 3, 2004, according to the records of the registrant’s registrar andtransfer agent was 51,422,947.

 

 

----

 

ALLIANCE GAMING CORPORATION

FORM 10-Q

 

For the Quarter Ended March 31, 2004

 

**IN D E X**

 
| **PART I.**    | **FINANCIAL  INFORMATION**                                                                                         |   |
|----------------|--------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                               |   |
| Item 1.        | Unaudited Financial Statements                                                                                     |   |
|           |                                                                                                               |   |
|           | Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003  and March 31, 2004                            |   |
|           |                                                                                                               |   |
|           | Unaudited Condensed Consolidated Statements  of Operations  for the three months ended March 31, 2003 and 2004     |   |
|           |                                                                                                               |   |
|           | Unaudited Condensed Consolidated Statements  of Operations  for the nine months ended March 31, 2003 and 2004      |   |
|           |                                                                                                               |   |
|           | Unaudited Condensed Consolidated Statement  of Stockholders’ Equity  for the nine months ended March 31, 2004 |   |
|           |                                                                                                               |   |
|           | Unaudited Condensed Consolidated Statements  of Cash Flows  for the nine months ended March 31, 2003 and 2004      |   |
|           |                                                                                                               |   |
|           | Notes to Unaudited Condensed Consolidated  Financial Statements                                                    |   |
|           |                                                                                                               |   |
| Item 2.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |   |
|           |                                                                                                               |   |
| Item 3.        | Quantitative  and Qualitative Disclosures About Market Risk                                                        |   |
|           |                                                                                                               |   |
| Item 4.        | Disclosure  Controls and Procedures                                                                                |   |
|           |                                                                                                               |   |
| **PART II.**   | **OTHER  INFORMATION**                                                                                             |   |
|           |                                                                                                               |   |
| Item 1.        | Legal Proceedings                                                                                                  |   |
|           |                                                                                                               |   |
| Item 6.        | Exhibits and Reports on Form 8-K                                                                                   |   |
|           |                                                                                                               |   |
| **SIGNATURES** |                                                                                                               |
|                |                                                                                                                    |        |  |  |

 

2

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**PART 1**

**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

(In 000’s, except share data)

 
|                                                                                                               |   | **June 30,  2003** |    | **March 31,  2004** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|---------------------|--------|
| ASSETS                                                                                                             |   |               |    |                |   |
| Current assets:                                                                                                    |   |               |    |                |   |
| Cash and cash equivalents                                                                                          |   | $                  | 38,884  |                | $      | 32,506 |   |
| Accounts and notes receivable, net of  allowance for doubtful accounts of $6,962 and $8,191                        |   | 98,368             |    | 114,844             |   |
| Inventories, net of reserves of $6,503 and  $5,694                                                                 |   | 32,102             |    | 53,236              |   |
| Deferred tax assets, net                                                                                           |   | 44,821             |    | 56,331              |   |
| Other current assets                                                                                               |   | 8,010              |    | 12,004              |   |
| Total current assets                                                                                               |   | 222,185            |    | 268,921             |   |
|                                                                                                               |   |               |    |                |   |
| Long-term investments (restricted)                                                                                 |   | 864                |    | 2,638               |   |
| Long-term receivables, net of allowance for  doubtful accounts of $15 and $18                                      |   | 14,865             |    | 12,020              |   |
| Net investment in sales type leases                                                                                |   | —             |    | 8,269               |   |
| Leased gaming equipment, net of accumulated  depreciation of $15,703 and $22,324                                   |   | 25,792             |    | 54,983              |   |
| Property, plant and equipment, net of  accumulated depreciation and amortization of $20,495 and $25,948            |   | 56,894             |    | 65,542              |   |
| Goodwill, net of accumulated amortization  of $5,941 and $5,941                                                    |   | 63,040             |    | 135,128             |   |
| Intangible assets, net of accumulated  amortization of $12,109 and $10,383                                         |   | 26,631             |    | 64,837              |   |
| Assets of discontinued operations held for  sale                                                                   |   | 114,314            |    | 109,340             |   |
| Other assets, net of reserves of $1,788 and  $1,788                                                                |   | 580                |    | 6,277               |   |
| Total assets                                                                                                       |   | $                  | 525,165 |                | $      | 727,955 |   |
|                                                                                                               |   |               |    |                |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                         |   |               |    |                |   |
| Current liabilities:                                                                                               |   |               |    |                |   |
| Accounts payable                                                                                                   |   | $                  | 22,726  |                | $      | 38,729 |   |
| Accrued liabilities                                                                                                |   | 30,183             |    | 53,849              |   |
| Jackpot liabilities                                                                                                |   | 10,588             |    | 14,239              |   |
| Current maturities of long-term debt                                                                               |   | 3,537              |    | 5,446               |   |
| Liabilities of discontinued operations held  for sale                                                              |   | 16,186             |    | 24,970              |   |
| Total current liabilities                                                                                          |   | 83,220             |    | 137,233             |   |
|                                                                                                               |   |               |    |                |   |
| Long-term debt, net                                                                                                |   | 341,678            |    | 424,015             |   |
| Deferred tax liabilities                                                                                           |   | 3,920              |    | 6,676               |   |
| Other liabilities                                                                                                  |   | 3,387              |    | 5,048               |   |
| Minority interest                                                                                                  |   | 1,330              |    | 1,447               |   |
| Total liabilities                                                                                                  |   | 433,535            |    | 574,419             |   |
|                                                                                                               |   |               |    |                |   |
| Commitments and contingencies                                                                                      |   |               |    |                |   |
| Stockholders’ equity:                                                                                         |   |               |    |                |   |
| Special Stock, 10,000,000 shares  authorized: Series E, $100 liquidation value; 115 shares issued and  outstanding |   | 12                 |    | 12                  |   |
| Common Stock, $.10 par value; 100,000,000  shares authorized; 49,933,000 and 51,266,000 shares issued              |   | 4,996              |    | 5,129               |   |
| Treasury stock at cost, 513,000 shares                                                                             |   | (501               | )       | (501                | )      |
| Additional paid-in capital                                                                                         |   | 163,267            |    | 185,638             |   |
| Accumulated other comprehensive income                                                                             |   | 1,287              |    | 2,084               |   |
| Accumulated deficit                                                                                                |   | (77,431            | )       | (38,826             | )      |
| Total stockholders’ equity                                                                                    |   | 91,630             |    | 153,536             |   |
| Total liabilities and stockholders’ equity                                                                    |   | $                  | 525,165 |                | $      | 727,955 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

3

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

#### **UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

(In 000’s, except per share data)

 
|                                                                                         |   | **Three  Months Ended March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                         |   | **2003**                          |   | **2004** |   |
| Revenues:                                                                                    |   |                              |   |   |   |
| Gaming equipment and systems                                                                 |   | $                                 | 82,341 |   | $ | 101,977 |   |
| Casino operations                                                                            |   | 13,891                            |   | 14,262 |   |
|                                                                                         |   | 96,232                            |   | 116,239 |   |
| Costs and expenses:                                                                          |   |                              |   |   |   |
| Cost of gaming equipment and systems                                                         |   | 34,249                            |   | 41,378 |   |
| Cost of casino operations                                                                    |   | 5,531                             |   | 5,324 |   |
| Selling, general and administrative                                                          |   | 24,930                            |   | 30,198 |   |
| Research and development costs                                                               |   | 5,592                             |   | 9,059 |   |
| Depreciation and amortization                                                                |   | 5,527                             |   | 8,128 |   |
|                                                                                         |   | 75,829                            |   | 94,087 |   |
|                                                                                         |   |                              |   |   |   |
| Operating income                                                                             |   | 20,403                            |   | 22,152 |   |
|                                                                                         |   |                              |   |   |   |
| Other income (expense):                                                                      |   |                              |   |   |   |
| Interest income                                                                              |   | 54                                |   | 1,817 |   |
| Interest expense                                                                             |   | (6,269                            | )      | (4,590 | ) |
| Minority interest                                                                            |   | (729                              | )      | (722 | ) |
| Other, net                                                                                   |   | 121                               |   | (182 | ) |
|                                                                                         |   |                              |   |   |   |
| Income from continuing operations before  income taxes                                       |   | 13,580                            |   | 18,475 |   |
| Income tax expense                                                                           |   | 4,653                             |   | 6,234 |   |
| Net income from continuing operations                                                        |   | 8,927                             |   | 12,241 |   |
|                                                                                         |   |                              |   |   |   |
| Discontinued operations:                                                                     |   |                              |   |   |   |
| Income from discontinued operations of wall  machines and amusement games business unit, net |   | 2,178                             |   | — |   |
| Income (loss) from discontinued operations  of Nevada Route, net                             |   | 425                               |   | (274 | ) |
| Income from discontinued operations of  Louisiana Route, net                                 |   | 381                               |   | 586 |   |
| Income from discontinued operations of Rail  City Casino, net                                |   | 869                               |   | 1,281 |   |
| Income from discontinued operations                                                          |   | 3,853                             |   | 1,593 |   |
| Net income                                                                                   |   | $                                 | 12,780 |   | $ | 13,834 |   |
|                                                                                         |   |                              |   |   |   |
| Basic earnings per share:                                                                    |   |                              |   |   |   |
| Continuing operations                                                                        |   | $                                 | 0.18   |   | $ | 0.25 |   |
| Discontinued operations                                                                      |   | 0.08                              |   | 0.03 |   |
|                                                                                         |   | $                                 | 0.26   |   | $ | 0.28 |   |
| Diluted earnings per share:                                                                  |   |                              |   |   |   |
| Continuing operations                                                                        |   | $                                 | 0.18   |   | $ | 0.24 |   |
| Discontinued operations                                                                      |   | 0.07                              |   | 0.03 |   |
|                                                                                         |   | $                                 | 0.25   |   | $ | 0.27 |   |
|                                                                                         |   |                              |   |   |   |
| Weighted average common shares outstanding                                                   |   | 49,294                            |   | 50,221 |   |
|                                                                                         |   |                              |   |   |   |
| Weighted average common and common share  equivalents outstanding                            |   | 50,162                            |   | 51,449 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

4

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

#### **UNAUDITED CONDENSEDCONSOLIDATED**STATEMENTS OFOPERATIONS

(In 000’s, except per share data)

 
|                                                                                         |   | **Nine  Months Ended March 31,** |    |
|----------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                                         |   | **2003**                         |    | **2004** |   |
| Revenues:                                                                                    |   |                             |    |   |   |
| Gaming equipment and systems                                                                 |   | $                                | 232,507 |   | $ | 286,764 |   |
| Casino operations                                                                            |   | 38,158                           |    | 39,329 |   |
|                                                                                         |   | 270,665                          |    | 326,093 |   |
| Costs and expenses:                                                                          |   |                             |    |   |   |
| Cost of gaming equipment and systems                                                         |   | 100,170                          |    | 113,395 |   |
| Cost of casino operations                                                                    |   | 16,051                           |    | 15,211 |   |
| Selling, general and administrative                                                          |   | 67,125                           |    | 80,812 |   |
| Research and development costs                                                               |   | 14,725                           |    | 24,462 |   |
| Depreciation and amortization                                                                |   | 14,680                           |    | 20,595 |   |
|                                                                                         |   | 212,751                          |    | 254,475 |   |
|                                                                                         |   |                             |    |   |   |
| Operating income                                                                             |   | 57,914                           |    | 71,618 |   |
|                                                                                         |   |                             |    |   |   |
| Other income (expense):                                                                      |   |                             |    |   |   |
| Interest income                                                                              |   | 181                              |    | 1,943 |   |
| Interest expense                                                                             |   | (19,464                          | )       | (14,188 | ) |
| Minority interest                                                                            |   | (1,483                           | )       | (1,749 | ) |
| Refinancing charge                                                                           |   | —                           |    | (12,293 | ) |
| Other, net                                                                                   |   | 487                              |    | (1,081 | ) |
|                                                                                         |   |                             |    |   |   |
| Income from continuing operations before  income taxes                                       |   | 37,635                           |    | 44,250 |   |
| Income tax expense                                                                           |   | 14,609                           |    | 15,944 |   |
| Net income from continuing operations                                                        |   | 23,026                           |    | 28,306 |   |
|                                                                                         |   |                             |    |   |   |
| Discontinued operations:                                                                     |   |                             |    |   |   |
| Income from discontinued operations of wall  machines and amusement games business unit, net |   | 1,453                            |    | — |   |
| Income from discontinued operations of  Nevada Route, net                                    |   | 3,115                            |    | 5,936 |   |
| Income from discontinued operations of Louisiana  Route, net                                 |   | 940                              |    | 1,316 |   |
| Income from discontinued operations of Rail  City Casino, net                                |   | 2,357                            |    | 3,047 |   |
| Income from discontinued operations                                                          |   | 7,865                            |    | 10,299 |   |
| Net income                                                                                   |   | $                                | 30,891  |   | $ | 38,605 |   |
|                                                                                         |   |                             |    |   |   |
| Basic earnings per share:                                                                    |   |                             |    |   |   |
| Continuing operations                                                                        |   | $                                | 0.47    |   | $ | 0.57 |   |
| Discontinued operations                                                                      |   | 0.17                             |    | 0.21 |   |
|                                                                                         |   | $                                | 0.64    |   | $ | 0.78 |   |
| Diluted earnings per share:                                                                  |   |                             |    |   |   |
| Continuing operations                                                                        |   | $                                | 0.46    |   | $ | 0.56 |   |
| Discontinued operations                                                                      |   | 0.16                             |    | 0.20 |   |
|                                                                                         |   | $                                | 0.62    |   | $ | 0.76 |   |
|                                                                                         |   |                             |    |   |   |
| Weighted average common shares outstanding                                                   |   | 48,567                           |    | 49,334 |   |
|                                                                                         |   |                             |    |   |   |
| Weighted average common and common share  equivalents outstanding                            |   | 49,581                           |    | 50,522 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

5

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

Nine Months Ended March 31, 2004

(In 000’s)

 
|                                                            |   | **Common  Stock** |   | **Series E** |   | **Treasury**       |   | **Additional  Paid-in** |   | **Accumulated  Other  Comprehensive** |   | **Accum.** |   | **Total  Stock-  holders’** |   |
|-----------------------------------------------------------------|--------|-------------------|--------|--------------|--------|--------------------|--------|-------------------------|--------|---------------------------------------|--------|------------|--------|----------------------------------|--------|
|                                                            |   | **Shares**        |   | **Dollars**  |   | **Special  Stock** |   | **Stock**               |   | **Capital**                           |   | **Income** |   | **Deficit**                      |   | **Equity** |   |
|                                                            |   |              |   |         |   |               |   |                    |   |                                  |   |       |   |                             |   |   |   |
| Balances at June 30, 2003                                       |   | 49,933            |   | $            | 4,996  |               | $      | 12                      |   | $                                     | (501   | )          | $      | 163,267                          |   | $ | 1,287 |   | $ | (77,431 | ) | $ | 91,630 |   |
|                                                            |   |              |   |         |   |               |   |                    |   |                                  |   |       |   |                             |   |   |   |
| Net income                                                      |   | —            |   | —       |   | —             |   | —                  |   | —                                |   | —     |   | 38,605                           |   | 38,605 |   |
| Foreign currency translation adjustment                         |   | —            |   | —       |   | —             |   | —                  |   | —                                |   | 797        |   | —                           |   | 797 |   |
| Total comprehensive income                                      |   |              |   |         |   |               |   |                    |   |                                  |   |       |   |                             |   | 39,402 |   |
| Common shares issued upon acquisition of SDG                    |   | 662               |   | 66           |   | —             |   | —                  |   | 11,883                                |   |       |   |                             |   | 11,949 |   |
| Additional Paid in Capital upon issuance of warrants (MindPlay) |   | —            |   | —       |   | —             |   | —                  |   | 886                                   |   | —     |   | —                           |   | 886 |   |
| Shares issued upon exercise of options                          |   | 671               |   | 67           |   | —             |   | —                  |   | 6,556                                 |   | —     |   | —                           |   | 6,623 |   |
| Tax benefit of employee stock option exercises                  |   | —            |   | —       |   | —             |   | —                  |   | 3,046                                 |   | —     |   | —                           |   | 3,046 |   |
|                                                            |   |              |   |         |   |               |   |                    |   |                                  |   |       |   |                             |   |   |   |
| Balances at March 31, 2004                                      |   | 51,266            |   | $            | 5,129  |               | $      | 12                      |   | $                                     | (501   | )          | $      | 185,638                          |   | $ | 2,084 |   | $ | (38,826 | ) | $ | 153,536 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

6

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#### **ALLIANCE GAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In 000’s)

 
|                                                                                                        |   | **Nine  Months Ended March 31,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                        |   | **2003**                         |   | **2004** |   |
| Cash flows from operating activities of  continuing operations:                                             |   |                             |   |   |   |
| Net income                                                                                                  |   | $                                | 30,891 |   | $ | 38,605 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities of continuing operations: |   |                             |   |   |   |
| Income from discontinued operations                                                                         |   | (7,865                           | )      | (10,299 | ) |
| Depreciation and amortization                                                                               |   | 14,680                           |   | 20,595 |   |
| Refinancing charge                                                                                          |   | —                           |   | 12,293 |   |
| Deferred income taxes                                                                                       |   | 14,886                           |   | (6,257 | ) |
| Provision for losses on receivables                                                                         |   | 1,224                            |   | 755 |   |
| Other                                                                                                       |   | 1,565                            |   | (1,354 | ) |
| Change in operating assets and liabilities:                                                                 |   |                             |   |   |   |
| Accounts and notes receivable                                                                               |   | (35,712                          | )      | (8,725 | ) |
| Inventories                                                                                                 |   | (823                             | )      | (3,080 | ) |
| Other current assets                                                                                        |   | (2,791                           | )      | (627 | ) |
| Accounts payable                                                                                            |   | 9,634                            |   | 9,893 |   |
| Accrued liabilities and jackpot liabilities                                                                 |   | (674                             | )      | 16,255 |   |
| Net cash provided by operating activities  of continuing operations                                         |   | 25,015                           |   | 68,054 |   |
|                                                                                                        |   |                             |   |   |   |
| Cash flows from investing activities of  continuing operations:                                             |   |                             |   |   |   |
| Additions to property, plant and equipment                                                                  |   | (7,462                           | )      | (9,556 | ) |
| Additions to leased gaming equipment                                                                        |   | (14,794                          | )      | (26,372 | ) |
| Additions to other long-term assets                                                                         |   | (2,628                           | )      | (12,825 | ) |
| Advances of notes receivable due from  Sierra Design Group                                                  |   | —                           |   | (72,820 | ) |
| Acquisitions, net of cash acquired                                                                          |   | (3,038                           | )      | (50,675 | ) |
| Proceeds from sale of assets of  discontinued operations                                                    |   | —                           |   | 16,500 |   |
| Net cash used in investing activities of  continuing operations                                             |   | (27,922                          | )      | (155,748 | ) |
|                                                                                                        |   |                             |   |   |   |
| Cash flows from financing activities of  continuing operations:                                             |   |                             |   |   |   |
| Debt issuance costs                                                                                         |   | —                           |   | (6,954 | ) |
| Premium and consent fees paid on redemption  of subordinated notes                                          |   | —                           |   | (5,399 | ) |
| Proceeds from issuance of long-term debt                                                                    |   | —                           |   | 350,000 |   |
| Net change in revolving credit facility                                                                     |   | —                           |   | 70,000 |   |
| Payoff of debt from refinancing                                                                             |   | —                           |   | (337,625 | ) |
| Reduction of long-term debt                                                                                 |   | (3,364                           | )      | (2,986 | ) |
| Proceeds from exercise of stock options                                                                     |   | 1,961                            |   | 6,623 |   |
| Net cash (used in) provided by financing  activities of continuing operations                               |   | (1,403                           | )      | 73,659 |   |
|                                                                                                        |   |                             |   |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                                               |   | 905                              |   | 100 |   |
|                                                                                                        |   |                             |   |   |   |
| Cash and cash equivalents provided by  discontinued operations                                              |   | 8,740                            |   | 7,557 |   |
|                                                                                                        |   |                             |   |   |   |
| Cash and cash equivalents:                                                                                  |   |                             |   |   |   |
| Increase (decrease) for the period                                                                          |   | 5,335                            |   | (6,378 | ) |
| Balance, beginning of period                                                                                |   | 31,800                           |   | 38,884 |   |
| Balance, end of period                                                                                      |   | $                                | 37,135 |   | $ | 32,506 |   |

 

See notes to unaudited condensed consolidatedfinancial statements.

 

7

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**ALLIANCE GAMINGCORPORATION AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                      BASISOF PRESENTATION**

 

## ***Principles ofconsolidation***

 

The accompanying unaudited condensed consolidated financial statementsreflect all adjustments, consisting of normal recurring adjustments, whichmanagement 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 ofoperations for an interim period are not necessarily indicative of the resultsthat may be expected for any other interim period or for the year as a whole.The accompanying unaudited condensed consolidated financial statements shouldbe read in conjunction with the consolidated financial statements and notes inthe Company’s annual report on Form 10-K for the year ended June 30, 2003.

 

The accompanying unaudited condensed consolidated financial statementsinclude the accounts of Alliance, and its wholly owned and partially owned,controlled subsidiaries. In the case of Video Services, Inc. (“VSI”), theCompany owns 100% of the voting stock. The Company is entitled to receive 71%of dividends declared by VSI, if any, at such time that dividends are declared.

 

The Company, through a wholly-owned subsidiary, is the general partnerof Rainbow Casino Vicksburg Partnership, L.P. (“RCVP”), the limited partnershipthat operates the Rainbow Casino. The limited partner, Rainbow Corporation, anindependent third party, is entitled to receive 10% of the net available cashflows after debt service and other items, as defined (which amount increases to20% of such amount for the proportional revenues above $35.0 million) eachyear through December 31, 2010. The Company holds the remaining economicinterest in the partnership and consolidates the partnership.

 

The Company records minority interest expense to reflect the portion ofearnings of VSI and RCVP attributable to the minority shareholders.

 

During the fiscal year ended June 30, 2003, the Company acquired 100percent of the stock of three companies: Casino Management Systems SoftwareCompany (“CMS”) on November 13, 2002, Micro Clever Consulting Systems Company(“MCC”) on April 9, 2003 and Honeyframe Systems Company (“HSC”) on May 28,2003.

 

On December 31, 2003, the Company acquired100% of the assets of U.K. based Crown Gaming from Crown Leisure Limited(“Crown”).   The purchase price in cashwas $3.9 million of which approximately $1.0 million was allocated togoodwill.  The acquisition, whichincludes Crown’s distributorship agreements for a wide variety of automatedtable games and video bingo machines, strategically builds on the Company’sfocus towards future growth projected in England.

 

During the quarter ended March 31, 2004, the Company completed theacquisition of substantially all of the assets and liabilities of MindPlay LLC(“MindPlay”), a leading developer of advanced table game technologies andcompleted the acquisition of Sierra Design Group (“SDG”), a leading supplier ofClass II and Class III gaming devices, systems and technology, details of whichare included in Note 9.

 

All significant intercompany accounts and transactions have beeneliminated. Certain reclassifications have been made to prior year financialstatements to conform to the current year presentation.

 

8

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### *Revenue recognition*

 

Revenue from sales of gaming machines isgenerally recognized at the time products are shipped and title has passed tothe customer. Games placed with customers on a trial basis are not recognizedas revenue until the trial period ends and the customer accepts the games. TheCompany sells gaming equipment on normal credit terms (generally 2%, net 30)and offers financing to qualified customers for periods generally between 6 and48 months.

 

Revenue from sales of computerized monitoringsystems is recognized in accordance with the AICPA’s Statement of Position 97-2(“SOP 97-2”) “Software Revenue Recognition.” In accordance with the provisions of SOP 97-2, the contracts for thesales of computerized monitoring units are considered to have “multiple elements”because they include hardware, software, installation, supervision, training,and post-contract customer support. Accordingly, revenues from the sale ofsystems are deferred and begin to be recognized at the point when the system isdeemed to be functionally operational, and the residual method is used torecognize revenue for the remaining elements as they are delivered, each havingvendor-specific objective evidence of relative fair values. Post-contractcustomer support revenues are recognized over the period of the supportagreement (generally one year).

 

Our Bally Gaming and Systems business unitearns revenues from recurring revenue sources that consist of the operations ofthe wide-area progressive jackpot systems and revenues from gaming machines placedin a casino on a daily lease or rental basis. Revenue from these sources isrecognized based on the contractual terms of the participation or rentalagreements and is generally based on a share of money wagered, a share of thenet winnings, or on a fixed daily rental rate basis.

 

In accordance with industry practice, theCompany recognizes gaming revenues in its route and casino operations as thenet win from gaming machine operations, which is the difference between coinsand currency deposited into the machines and payments to customers and, forother games, the difference between gaming wins and losses.  The Company recognizes total net win fromgaming machines as revenues for route operations, which the Company operatespursuant to revenue-sharing arrangements and revenue-sharing payments (eitherfixed or variable) as a cost of route operations.

 

The Company continuously monitors itsexposure for credit losses and maintains allowances for anticipated losses.

 

*Capitalized Costs*

 

During fiscal year 2004, Bally Gaming andSystems has experienced an almost four fold increase in the volume of productsubmissions to the various domestic regulatory bodies, each of which chargesfees for the testing and approval of each product. Product testing costs are capitalizedonce technological feasibility has been established and are amortized,generally over a three year period once the product is placed in service.Product testing costs related to projects that are discontinued are expensedwhen such determination is made. The year to date fees incurred for suchregulatory approvals totaled approximately $4.0 million. Of these amountsincurred, for the quarter ended March 31, 2004, the Company capitalized a totalof $1.6 million that was directly attributable to products that have beenapproved and amortization expenses totaled $0.3 million.

 

*Recently Issued Accounting Pronouncements*

 

In December 2003, the Financial AccountingStandards Board published FASB Interpretation No. 46, Consolidation of VariableInterest Entities (revised December 2003) (“FIN46-R”), clarifying FIN 46 andexempting certain entities from the provisions of FIN 46. Generally,application of FIN 46-R is required in financial statements of public entitiesthat have interests in structures commonly referred to as special-purposeentities forperiods ending after December 15, 2003, and, for other types of VIEs, forperiods ending after December 15, 2004. The Company has reviewed this pronouncement and determined it is notapplicable.

 

9

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In December 2003, the FASB issued Statement of Financial AccountingStandard (“SFAS”) No. 132-R “Employers’ Disclosures about Pensions and OtherPostretirement Benefits — an amendment of FASB Statements No. 87, 88, and106.”  This statement revises employers’disclosures about pension plans and other postretirement benefit plans.  The Company has reviewed this pronouncement and determined it is notapplicable.

 

**2.****                                      EARNINGSPER SHARE**

 

The following computation of basic and diluted earnings per share andweighted average common and common share equivalents outstanding is as follows(in 000’s except per share amounts):

 
|                                                              |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-------------------------------------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                                              |   | **2003**                           |   | **2004**                          |   | **2003** |   | **2004** |   |
|                                                              |   |                               |   |                              |   |   |   |   |   |
| Net income from continuing operations                             |   | $                                  | 8,927  |                              | $      | 12,241 |   | $ | 23,026 |   | $ | 28,306 |   |
| Net income from discontinued operations                           |   | 3,853                              |   | 1,593                             |   | 7,865 |   | 10,299 |   |
| Net income                                                        |   | $                                  | 12,780 |                              | $      | 13,834 |   | $ | 30,891 |   | $ | 38,605 |   |
|                                                              |   |                               |   |                              |   |   |   |   |   |
| Weighted average common shares outstanding                        |   | 49,294                             |   | 50,221                            |   | 48,567 |   | 49,334 |   |
| Effect of dilutive securities                                     |   | 868                                |   | 1,228                             |   | 1,014 |   | 1,188 |   |
| Weighted average common and common share  equivalents outstanding |   | 50,162                             |   | 51,449                            |   | 49,581 |   | 50,522 |   |
|                                                              |   |                               |   |                              |   |   |   |   |   |
| Earnings per basic share:                                         |   |                               |   |                              |   |   |   |   |   |
| Income from continuing operations                                 |   | $                                  | 0.18   |                              | $      | 0.25 |   | $ | 0.47 |   | $ | 0.57 |   |
| Income from discontinued operations                               |   | 0.08                               |   | 0.03                              |   | 0.17 |   | 0.21 |   |
|                                                              |   | $                                  | 0.26   |                              | $      | 0.28 |   | $ | 0.64 |   | $ | 0.78 |   |
|                                                              |   |                               |   |                              |   |   |   |   |   |
| Earnings per diluted share:                                       |   |                               |   |                              |   |   |   |   |   |
| Income from continuing operations                                 |   | $                                  | 0.18   |                              | $      | 0.24 |   | $ | 0.46 |   | $ | 0.56 |   |
| Income from discontinued operations                               |   | 0.07                               |   | 0.03                              |   | 0.16 |   | 0.20 |   |
|                                                              |   | $                                  | 0.25   |                              | $      | 0.27 |   | $ | 0.62 |   | $ | 0.76 |   |

 

Diluted earnings per share represent the potential dilution that couldoccur if all dilutive securities outstanding were exercised. Certain securitiesdo not have a dilutive effect because their exercise price exceeds the averagefair market value of the underlying stock during the respective period. Suchsecurities are excluded from the diluted earnings per share calculation andconsist of the following (in 000’s):

 
|          |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|---------------|--------|------------------------------------|--------|-----------------------------------|--------|
|          |   | **2003**                           |   | **2004**                          |   | **2003** |   | **2004** |   |
| Stock options |   | 716                                |   | 2                                 |   | 716 |   | 1,435 |   |

 

The Company accounts for its stock-based employee compensationawards in accordance with Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, becausethe exercise price of the Company’s employee stock options equals or exceedsthe market price of the underlying stock on the date of grant, no compensationexpense is recognized.

 

In 1998, the Company adopted SFAS No. 123 “Accounting for Stock-BasedCompensation” (“SFAS No. 123”). Under SFAS No. 123 companies may continue toaccount for employee stock-based compensation under APB 25, but are required todisclose historical pro-forma net income and earnings per share that would haveresulted from the use of the fair value method described in SFAS No. 123.

 

10

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In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure”. This Statement amends SFASNo. 123 to provide alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation. In addition, this Statement amends the disclosure requirements ofSFAS No. 123 and APB Opinion No. 28 “Interim Financial Reporting” to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. Under the fair value method, compensation costs are measured using anoptions pricing model and amortized over the estimated life of the option,which is generally three to ten years, with option forfeitures accounted for atthe time of the forfeiture, and all amounts are reflected net of tax.  The historical and pro forma net income(assuming an after-tax charge for stock-based compensation) and related pershare data are as follows (in 000’s, except per share data):

 
|                                        |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|---------------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                        |   | **2003**                           |   | **2004**                          |   | **2003** |   | **2004** |   |
| Net income                                  |   |                               |   |                              |   |   |   |   |   |
| As reported                                 |   | $                                  | 12,780 |                              | $      | 13,834 |   | $ | 30,891 |   | $ | 38,605 |   |
| Stock-based compensation under FASB No. 123 |   | (617                               | )      | (1,483                            | )      | (2,266 | ) | (3,377 | ) |
| Pro forma net income                        |   | $                                  | 12,163 |                              | $      | 12,351 |   | $ | 28,625 |   | $ | 35,228 |   |
|                                        |   |                               |   |                              |   |   |   |   |   |
| Earnings per share:                         |   |                               |   |                              |   |   |   |   |   |
| Basic – As reported                    |   | $                                  | 0.26   |                              | $      | 0.28 |   | $ | 0.64 |   | $ | 0.78 |   |
| Basic - Pro forma                           |   | $                                  | 0.25   |                              | $      | 0.25 |   | $ | 0.59 |   | $ | 0.71 |   |
| Diluted – As reported                  |   | $                                  | 0.25   |                              | $      | 0.27 |   | $ | 0.62 |   | $ | 0.76 |   |
| Diluted – Pro forma                    |   | $                                  | 0.24   |                              | $      | 0.24 |   | $ | 0.58 |   | $ | 0.70 |   |

 

On the date of grant using the Black-Scholes option-pricing model, thefollowing assumptions were used to value the options in the periods indicated:

 
|                    |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                    |   | **2003**                           |   | **2004**                          |   | **2003** |   | **2004** |   |
|                    |   |                               |   |                              |   |   |   |   |   |
| Risk-fee interest rate  |   | 3.5                                | %      | 3.5                               | %      | 3.5 | % | 3.5 | % |
| Expected volatility     |   | 0.28                               |   | 0.26                              |   | 0.28 |   | 0.26 |   |
| Expected dividend yield |   | 0                                  |   | 0                                 |   | 0 |   | 0 |   |
| Expected life           |   | 3-10 years                         |   | 3-10 years                        |   | 3-10 years |   | 3-10 years |   |

 

The resulting fair values applied to theoptions granted were $5.51 and $9.18 per share for the quarter ended March 31,2003 and 2004 and were $6.21 and $9.24 per share for the nine month periodsended March 31, 2003 and 2004, respectively.

 

**3.****                                      DISCONTINUEDOPERATIONS**

 

In July 2003 the Company announced it hadentered into definitive sale agreements for each component of its routeoperations segment consisting of United Coin Machine Co. (“UCMC”) and VideoServices, Inc. (“VSI”) and its German wall machine and amusement games segment(Alliance Automaten GmbH & Co. KG dba Bally Wulff).

 

The sale of Bally Wulff was consummated onJuly 18, 2003, at which time the Company received $16.5 million in cashconsideration.  Pursuant to the saleagreement, the Company used $5.6 million of the sale proceeds to purchase a 5million Euro certificate of deposit as collateral for a tax claim currentlybeing negotiated with the German tax authorities, for which the Company hasindemnified the buyer.  The certificateof deposit is included in Other Assets in the accompanying unaudited financial statements.

 

The Company has entered into a definitiveagreement for the sale of UCMC to the privately held Century Gaming, Inc. basedin Montana.  The sales price is based ona multiple of EBITDA (as defined in the sale agreement).  The

 

11

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closing of this transaction is subject tocustomary closing conditions, including that the buyer obtain the necessarygaming licenses. This transaction is expected to close in June 2004.

 

Through a wholly owned subsidiary, Allianceowns 100 percent of the class B voting shares of VSI.  Alliance and the owners of the class A shares have entered into adefinitive agreement to sell 100 percent of VSI’s stock to Gentilly Gaming,LLC. The all-cash transaction is subject to customary closing conditions and isexpected to close on June 30, 2004. Concurrent with the sale agreement, VSI has entered into a 12-monthoperating agreement extension under terms and conditions that are the same asthe existing agreement with the Fair Grounds Corporation.

 

On December 8, 2003 the Company announced that it had entered into anagreement for the sale of its Rail City Casino.  The sale was completed on May 3, 2004 and Alliance received cashof $37.9 million.

 

As a result of the transactions describedabove, each of the four businesses is treated as discontinued operations, andtheir results are presented net of applicable income taxes below income fromcontinuing operations in the accompanying unaudited condensed consolidatedstatements of operations. In accordance with accounting principlesgenerally accepted in the United States of America, depreciation andamortization for these discontinued operations ceased as of July 1, 2003 forUCMC and VSI and as of December 8, 2003 for Rail City Casino as a result oftheir designation as assets held for sale. The assets and liabilities of the businesses are now classified as heldfor sale in the accompanying unaudited condensed consolidated balance sheets.The prior year results have been reclassified to conform to the current yearpresentation.

 

Summary operating results for thediscontinued operations for UCMC, VSI, Bally Wulff and Rail City Casino are asfollows (in 000’s):

 
|                                 |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|--------------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                                 |   | **2003**                           |   | **2004**                          |   | **2003** |   | **2004** |   |
|                                 |   |                               |   |                              |   |   |   |   |   |
| Net revenues                         |   | $                                  | 79,223 |                              | $      | 68,797 |   | $ | 225,148 |   | $ | 192,330 |   |
| Operating income                     |   | 4,875                              |   | 8,716                             |   | 11,038 |   | 23,462 |   |
| Income tax expense                   |   | 920                                |   | 7,023                             |   | 3,501 |   | 11,747 |   |
| Income from discontinued  operations |   | $                                  | 3,853  |                              | $      | 1,593 |   | $ | 7,865 |   | $ | 10,299 |   |

 

The following net assets held for sale areincluded in the accompanying unaudited condensed consolidated balance sheets(in 000’s):

 
|                                  |   | **June 30,  2003** |   | **March 31,  2004** |   |
|---------------------------------------|--------|--------------------|--------|---------------------|--------|
|                                  |   |               |   |                |   |
| Cash and cash equivalents             |   | $                  | 28,918 |                | $      | 31,054 |   |
| Accounts and contracts receivable     |   | 21,627             |   | 6,203               |   |
| Other current assets                  |   | 5,200              |   | 3,756               |   |
| Property, plant and equipment         |   | 33,316             |   | 44,485              |   |
| Intangible assets                     |   | 21,695             |   | 20,180              |   |
| Other                                 |   | 3,558              |   | 3,662               |   |
| Total assets                          |   | 114,314            |   | 109,340             |   |
|                                  |   |               |   |                |   |
| Current liabilities                   |   | 11,913             |   | 20,639              |   |
| Long-term liabilities                 |   | 4,273              |   | 4,331               |   |
| Total liabilities                     |   | 16,186             |   | 24,970              |   |
| Net assets of discontinued operations |   | $                  | 98,128 |                | $      | 84,370 |   |

 

12

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**4.****                                      INVENTORIES**

 

Inventories are stated at the lower of cost, determined on a first-in,first-out basis, or market. Cost elements included for work-in-process andfinished goods include raw materials, freight, direct labor and manufacturingoverhead.

 

Inventories, net of reserves, consisted of the following (in 000’s):

 
|            |   | **June 30,  2003** |   | **March 31,  2004** |   |
|-----------------|--------|--------------------|--------|---------------------|--------|
|            |   |               |   |                |   |
| Raw materials   |   | $                  | 13,720 |                | $      | 19,479 |   |
| Work-in-process |   | 789                |   | 2,871               |   |
| Finished goods  |   | 17,593             |   | 30,886              |   |
| Total           |   | $                  | 32,102 |                | $      | 53,236 |   |

 

**5.****                                      DEBT**

 

Long-term debt and lines of credit consisted of the following (in000’s):

 
|                                                     |   | **June 30,  2003** |    | **March 31,  2004** |   |
|----------------------------------------------------------|--------|--------------------|---------|---------------------|--------|
|                                                     |   |               |    |                |   |
| Term loan facility                                       |   | $                  | 187,625 |                | $      | 350,000 |   |
| Revolving credit facility                                |   | —             |    | 70,000              |   |
| 10% Sr. Subordinated Notes, net of  unamortized discount |   | 149,663            |    | —              |   |
| Other subordinated debt                                  |   | 495                |    | —              |   |
| Other, generally secured by related  equipment           |   | 7,432              |    | 9,461               |   |
|                                                     |   | 345,215            |    | 429,461             |   |
| Less current maturities                                  |   | 3,537              |    | 5,446               |   |
| Long-term debt, net of current maturities                |   | $                  | 341,678 |                | $      | 424,015 |   |

 

The Company’s debt structure at June 30, 2003 consisted primarily of a$190 million term loan facility and a $23.7 million undrawn revolving creditfacility and $150 million 10% Senior Subordinated Notes (“Subordinated Notes”).The term loan had an interest rate of LIBOR plus 3.25% (or 4.45% as of June 30,2003).

 

On September 5, 2003, the Company completed a senior bank debtrefinancing transaction (the “Refinancing”) whereby the Company entered into anew $275 million term loan facility and a $125 million revolving creditfacility. Proceeds from the new loans were used to repay the existing bank termloans totaling approximately $188 million, repay the Subordinated Notes, and topay transaction fees and expenses.  Thenew term loan had an interest rate of LIBOR plus 2.75%, which was later reducedto LIBOR + 2.50% (or 3.79% as of March 31, 2004), has a 1% per year mandatoryprincipal amortization after the first year, and a 6-year maturity.  The revolving credit facility has aninterest rate of LIBOR plus 2.50% (or 3.79% as March 31, 2004), and thecommitment decreases ratably over its 5-year term to a 60% balloon.  During the December 2003 quarter the Companyincreased the term loan by $75 million, to a total of $350 millionoutstanding.  The proceeds were usedprimarily to fund the acquisition SDG. As a result the Company incurred an additional $1.3 million in debtissuance costs, which have been capitalized and will be amortized over theremaining term of the loan.

 

On August 13, 2003, the Company initiated a tender offer and consentsolicitation for all of the outstanding Subordinated Notes at a price of103.33% plus a .25% tender premium which was contingent on the closing of thenew bank facility.  On September 10,2003, the tender offer period expired, with $78.6 million of the SubordinatedNotes having been tendered.  OnSeptember 11, 2003, the Company initiated redemption of the remainingSubordinated Notes at a price of 103.33%, which was completed on September 16,2003, at which time the Subordinated Notes were fully redeemed.

 

13

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As a result of the Refinancing described above, the Company recorded apre-tax charge in the quarter ended September 30, 2003 of $12.3 million, whichincludes a $5.0 million charge for the early extinguishment of the SubordinatedNotes, $7.0 million for the non-cash write off of deferred financing costs, and$0.3 million in fees and expenses.

 

The new bank facility is collateralized by substantially all domesticproperty and is guaranteed by each domestic subsidiary of the Company, otherthan the entity that holds the Company’s interest in its Louisiana andMississippi operations, and is secured by a Pledge Agreement. The bank facilitycontains a number of maintenance covenants and other significant covenantsthat, among other things, restrict the ability of the Company and the abilityof certain of its subsidiaries to dispose of assets, incur additionalindebtedness and issue preferred stock, pay dividends or make otherdistributions, enter into certain acquisitions, repurchase equity interests orsubordinated indebtedness, issue or sell equity interests of the Company’ssubsidiaries, engage in mergers or acquisitions, or engage in certaintransactions with subsidiaries and affiliates, and that otherwise restrictcorporate activities.  As of March 31,2004, the Company is in compliance with these covenants.

 

**6.****                                      SEGMENTSAND GEOGRAPHICAL INFORMATION**

 

The Company currently operates in two business segments (exclusive ofthe two business segments included in discontinued operations): (i) GamingEquipment and Systems which designs, manufactures and distributes gamingmachines and computerized monitoring systems for gaming machines, and (ii)Casino Operations which owns and operates one regional casino. The accountingpolicies of these segments are consistent with the Company’s policies for theunaudited condensed consolidated financial statements.

 

The table below presents information as to the Company’s revenues,intersegment revenues and operating income (loss) by segment (in 000’s):

 
|                         |   | **Three  Months Ended  March 31,** |   | **Nine Months  Ended  March 31,** |   |
|------------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                         |   | **2003**                           |   | **2004**                          |   | **2003** |   | **2004** |   |
| Revenues:                    |   |                               |   |                              |   |   |   |   |   |
| Gaming Equipment and Systems |   | $                                  | 82,341 |                              | $      | 101,977 |   | $ | 232,507 |   | $ | 286,764 |   |
| Casino Operations            |   | 13,891                             |   | 14,262                            |   | 38,158 |   | 39,329 |   |
| Total revenues               |   | $                                  | 96,232 |                              | $      | 116,239 |   | $ | 270,665 |   | $ | 326,093 |   |
|                         |   |                               |   |                              |   |   |   |   |   |
| Intersegment revenues:       |   |                               |   |                              |   |   |   |   |   |
| Gaming Equipment and Systems |   | $                                  | 60     |                              | $      | 106 |   | $ | 1,378 |   | $ | 447 |   |
|                         |   |                               |   |                              |   |   |   |   |   |
| Operating income (loss):     |   |                               |   |                              |   |   |   |   |   |
| Gaming Equipment and Systems |   | $                                  | 19,056 |                              | $      | 20,096 |   | $ | 55,966 |   | $ | 68,670 |   |
| Casino Operations            |   | 4,843                              |   | 5,157                             |   | 11,388 |   | 12,985 |   |
| Corporate/other              |   | (3,496                             | )      | (3,101                            | )      | (9,440 | ) | (10,037 | ) |
| Total operating income       |   | $                                  | 20,403 |                              | $      | 22,152 |   | $ | 57,914 |   | $ | 71,618 |   |

 

The Company has operations based primarily in the United States with asignificant sales and distribution office based in Germany.

 

14

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The table below presents information as to the Company’s revenues andoperating income (loss) by geographic region (in 000’s):

 
|                    |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-------------------------|--------|------------------------------------|--------|-----------------------------------|--------|
|                    |   | **2003**                           |   | **2004**                          |   | **2003** |   | **2004** |   |
| Revenues:               |   |                               |   |                              |   |   |   |   |   |
| United States           |   | $                                  | 85,206 |                              | $      | 109,809 |   | $ | 241,673 |   | $ | 300,149 |   |
| Germany                 |   | 7,309                              |   | 2,901                             |   | 21,726 |   | 14,695 |   |
| Other foreign           |   | 3,717                              |   | 3,529                             |   | 7,266 |   | 11,249 |   |
| Total revenues          |   | $                                  | 96,232 |                              | $      | 116,239 |   | $ | 270,665 |   | $ | 326,093 |   |
|                    |   |                               |   |                              |   |   |   |   |   |
| Operating income:       |   |                               |   |                              |   |   |   |   |   |
| United States           |   | $                                  | 19,589 |                              | $      | 22,516 |   | $ | 55,515 |   | $ | 69,488 |   |
| Germany                 |   | 535                                |   | 695                               |   | 2,102 |   | 2,645 |   |
| Other  foreign          |   | 279                                |   | (1,059                            | )      | 297 |   | (515 | ) |
| Total  operating income |   | $                                  | 20,403 |                              | $      | 22,152 |   | $ | 57,914 |   | $ | 71,618 |   |

 

**7.****                                      SUPPLEMENTALCASH FLOW INFORMATION**

 

The following supplemental information is related to the unauditedcondensed consolidated statements of cash flows (in 000’s).

 
|                                                   |   | **Nine  Months Ended  March 31,** |   |
|--------------------------------------------------------|--------|-----------------------------------|--------|
|                                                   |   | **2003**                          |   | **2004** |   |
|                                                   |   |                              |   |   |   |
| Cash paid for interest                                 |   | $                                 | 23,126 |   | $ | 19,779 |   |
| Cash paid for income taxes                             |   | 1,609                             |   | 3,425 |   |
|                                                   |   |                              |   |   |   |
| Non-cash transactions:                                 |   |                              |   |   |   |
| Reclassify property, plant and equipment to  inventory |   | $                                 | 2,777  |   | $ | 3,793 |   |
| Favorable translation rate adjustment                  |   | 3,873                             |   | 697 |   |
| Notes payable issued in acquisition                    |   | 3,000                             |   | 4,000 |   |

 

See Note 9 for assets and liabilities assumed in acquisitions.

 

**8.****                                      COMMITMENTSAND CONTINGENCIES**

 

The Company is a party to various lawsuits relating to routine mattersincidental to its business.  Managementdoes not believe that the outcome of such litigations, in the aggregate, willhave a material adverse effect on the Company.

 

On February 19, 2004, the Company completed the acquisition ofMindPlay. The Company purchased substantially all of the assets and liabilitiesof MindPlay for consideration of $11.0 million in cash, a promissory note inthe amount of $4.0 million and a warrant to purchase 100,000 shares of AllianceCommon Stock, plus transaction fees and expense resulting in totalconsideration of $15.9 million. Additional consideration may become payable in cash over the next 13years upon the MindPlay business unit achieving certain significant revenue andgross margin targets.

 

Additionally, on March 2, 2004, the Company completed the acquisitionof SDG. The Company purchased 100 percent of the outstanding shares of SDG forconsideration of approximately $29.8 million in cash and 662,000 shares ofAlliance Common Stock. In addition, the Company assumed approximately $80million of debt (including approximately $72 million of loans payable toAlliance which now has been forgiven), plus transaction fees and expenses,resulting in total initial consideration of $126.4 million. Additionalcontingent consideration of up to $95.6 million may become payable, in equalportions of cash and stock, over the next three fiscal years upon the SDGbusiness unit achieving certain significant revenue and EBITDA targets.

 

15

----

 

**9.****                                      ACQUISITIONS**

 

Under the purchase method of accounting, the total purchase price isallocated to the net tangible and intangible assets based upon their estimatedfair market values as of the date of the acquisitions. The allocation of thepurchase price to goodwill and intangibles is subject to change based on finalvaluation of net assets (including inventory and property, plant and equipment)and is based upon independent third-party valuations and management’sestimates.

 

**SIERRADESIGN GROUP**

 

On March 2, 2004, Alliance completed the acquisition of 100% of theshares of privately held SDG. Consideration totaled $126.4 million, and additional contingentconsideration of up to $95.6 million may become payable over the next threeyears upon the SDG business unit achieving certain revenues and EBITDA targets.

 

 

The fair values preliminarily assigned to the SDG assets andliabilities were as follows (in 000’s):

 
| Tangible Assets:                |   |   |    |
|---------------------------------|--------|--------|---------|
| Cash                            |   | $      | 1,189   |   |
| Accounts receivable             |   | 6,949  |    |
| Inventories                     |   | 12,088 |    |
| Deposits                        |   | 1,576  |    |
| Other current assets            |   | 2,233  |    |
| Investment in Sales-type leases |   | 8,241  |    |
| Property, Plant and Equipment   |   | 22,205 |    |
| Other Assets                    |   | 103    |    |
| Deferred Tax Assets             |   | 9,921  |    |
| Notes Receivable                |   | 678    |    |
|                            |   | 65,183 |    |
| Liabilities:                    |   |   |    |
| Customer deposits               |   | 4,973  |    |
| Accounts payable                |   | 6,110  |    |
| Accrued liabilities             |   | 10,687 |    |
| Notes Payable                   |   | 3,704  |    |
|                            |   | 25,474 |    |
| Net tangible assets acquired    |   | 39,709 |    |
| Intangible assets acquired:     |   |   |    |
| Contracts                       |   | 12,320 |    |
| Patents/core technology         |   | 5,445  |    |
| Trade name/ Trademark           |   | 5,708  |    |
|                            |   | 23,473 |    |
| Goodwill                        |   | 63,211 |    |
| Total Purchase Price            |   | $      | 126,393 |   |

 

The purchase price paid for SDG consists of the following (inthousands):

 
| Cash paid to SDG stockholders                                 |   | $      | 29,846  |   |
|---------------------------------------------------------------|--------|--------|---------|--------|
| Fair value of restricted Alliance Gaming  common stock issued |   | 11,950 |    |
| Deferred consideration                                        |   | 1,350  |    |
| Transaction fees and expenses                                 |   | 4,739  |    |
| Subtotal                                                      |   | $      | 47,885  |   |
| SDG loans to third parties                                    |   | 5,688  |    |
| Pre-acquisition loans from Alliance to SDG  forgiven          |   | 72,820 |    |
| Acquisition cost                                              |   | $      | 126,393 |   |

 

16

----

 

The following intangible assets of SDG are being amortized with thefollowing lives:

 
|                    |   | **Lives** |   |
|-------------------------|--------|-----------|--------|
| Contracts               |   | 10        |   |
| Patents/core technology |   | 8         |   |
| Trade name/trademark    |   | 5         |   |

 

The value assigned to the restricted stock totaled $11.9 million, andwas determined by an independent third-party, and resulted in a 30% discount tothe stock price two days before and after the announcement of theacquisition.  Pursuant to a loanagreement between Alliance and SDG, Alliance committed to loan SDG up to $74million during the pre-acquisition period. As of December 31, 2003, Alliance had advanced $61.0 million, and as ofthe acquisition date the loan balance totaled $72.8 million, which was forgivenas of the acquisition date.  Includingthe loan advances of $72.8 million, the cash paid for SDG totaled $108.6million.

 

The following unaudited proforma financial information is presented asif the SDG acquisition had been completed at the beginning of the relativeperiod (in 000’s, except per share information).

 
|                                            |   | **Nine  months ended** |    |
|-------------------------------------------------|--------|------------------------|---------|
|                                            |   | **March 31,  2003**    |    | **March 31,  2004** |   |
|                                            |   |                   |    |   |   |
| Total revenue                                   |   | $                      | 346,560 |   | $ | 392,811 |   |
| Income from continuing operations before  taxes |   | 40,523                 |    | 28,177 |   |
| Income from continuing operations               |   | 24,817                 |    | 18,341 |   |
|                                            |   |                   |    |   |   |
| Earnings per share from continuing  operations  |   |                   |    |   |   |
| Basic                                           |   | $                      | 0.50    |   | $ | 0.37 |   |
| Diluted                                         |   | $                      | 0.49    |   | $ | 0.36 |   |

 

**MINDPLAY**

 

On February 19, 2004, Alliance completed the acquisition ofsubstantially all of the assets and liabilities of MindPlay LLC.  The consideration consisted of $9 million incash, a note payable totaling $4.0 million, assumption of $2.0 million oflong-term debt, and warrants to purchase 100,000 Alliance common stock valuedat $1.0 million. Additional contingent consideration is payable over the next13 years based on certain MindPlay product revenues and gross margin targets.

 

The fair values preliminarily assigned to the MindPlay assets andliabilities are as follows (in 000’s):

 
| Tangible Assets:              |   |   |   |
|-------------------------------|--------|--------|--------|
| Cash                          |   | $      | 22     |   |
| Accounts receivable           |   | 41     |   |
| Inventories                   |   | 110    |   |
| Property, plant and equipment |   | 143    |   |
| Other Assets                  |   | 43     |   |
|                          |   | 359    |   |
| Liabilities:                  |   |   |   |
| Customer deposits             |   | 467    |   |
| Net tangible  assets acquired |   | (108   | )      |
|                          |   |   |   |
| Intangible assets acquired:   |   |   |   |
| Patents                       |   | 11,255 |   |
|                          |   |   |   |
| Goodwill                      |   | 5,644  |   |
| Total Purchase Price          |   | $      | 16,791 |   |

 

The acquired patents, which are classified as intangible assets, arebeing amortized over the remaining life of the patents, which is approximately15 years.

 

17

----

 

**10.****                               UNAUDITEDCONDENSED CONSOLIDATING FINANCIAL STATEMENTS**

 

The following unaudited condensed consolidating financial statementsare presented to provide certain financial information regarding guaranteeingand non-guaranteeing subsidiaries in relation to the Company’s new bank creditagreement. The financial information presented includes Alliance (the“Parent”), its wholly-owned guaranteeing subsidiaries (“GuaranteeingSubsidiaries”), and the non-guaranteeing subsidiaries Video Services, Inc., theRainbow Casino Vicksburg Partnership, L.P. (dba Rainbow Casino) and theParent’s non-domestic subsidiaries (together the “Non-GuaranteeingSubsidiaries”). The notes to the unaudited condensed consolidating financialstatements should be read in conjunction with these unaudited condensedconsolidating financial statements.

 

18

----

 

**UNAUDITED CONDENSED CONSOLIDATING BALANCESHEETS**

June 30, 2003

(In 000’s)

 

ASSETS

 
|                                             |   | **Parent** |    | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|--------------------------------------------------|--------|------------|---------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Current assets:                                  |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Cash and cash equivalents                        |   | $          | 12,730  |                           | $      | 18,036                               |   | $                                              | 8,118  |                                                 | $      | — |   | $ | 38,884 |   |
| Accounts and notes receivable, net               |   | 738        |    | 70,880                         |   | 27,496                               |   | (746                                           | )      | 98,368                                               |   |
| Inventories, net                                 |   | —     |    | 29,801                         |   | 2,518                                |   | (217                                           | )      | 32,102                                               |   |
| Deferred tax assets, net                         |   | 33,182     |    | 11,639                         |   | —                               |   | —                                         |   | 44,821                                               |   |
| Other current assets                             |   | 404        |    | 7,110                          |   | 496                                  |   | —                                         |   | 8,010                                                |   |
| Total current assets                             |   | 47,054     |    | 137,466                        |   | 38,628                               |   | (963                                           | )      | 222,185                                              |   |
| Long-term investments (restricted)               |   | —     |    | 864                            |   | —                               |   | —                                         |   | 864                                                  |   |
| Long-term receivables, net                       |   | 159,723    |    | 15,113                         |   | 12                                   |   | (159,983                                       | )      | 14,865                                               |   |
| Leased gaming equipment, net                     |   | —     |    | 25,792                         |   | —                               |   | —                                         |   | 25,792                                               |   |
| Property, plant and equipment, net               |   | 74         |    | 20,394                         |   | 36,426                               |   | —                                         |   | 56,894                                               |   |
| Goodwill, net                                    |   | (900       | )       | 48,293                         |   | 15,647                               |   | —                                         |   | 63,040                                               |   |
| Intangible assets, net                           |   | 7,049      |    | 14,550                         |   | 5,032                                |   | —                                         |   | 26,631                                               |   |
| Investments in subsidiaries                      |   | 294,513    |    | 74,990                         |   | —                               |   | (369,503                                       | )      | —                                               |   |
| Deferred tax assets, net                         |   | 3,394      |    | —                         |   | —                               |   | (3,394                                         | )      | —                                               |   |
| Assets of discontinued operations held for  sale |   | 16,539     |    | 93,672                         |   | 4,103                                |   | —                                         |   | 114,314                                              |   |
| Other assets, net                                |   | (84,406    | )       | 99,918                         |   | (14,933                              | )      | 1                                              |   | 580                                                  |   |
|                                             |   | $          | 443,040 |                           | $      | 531,052                              |   | $                                              | 84,915 |                                                 | $      | (533,842 | ) | $ | 525,165 |   |

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
| Current liabilities:                           |   |    |    |    |   |    |   |     |   |    |   |
|------------------------------------------------|--------|---------|---------|---------|--------|---------|--------|----------|--------|---------|--------|
| Accounts payable                               |   | $       | 1,295   |    | $      | 19,507  |   | $        | 1,924  |    | $      | — |   | $ | 22,726 |   |
| Accrued liabilities                            |   | 7,378   |    | 18,188  |   | 5,368   |   | (751     | )      | 30,183  |   |
| Jackpot liabilities                            |   | —  |    | 10,446  |   | 142     |   | —   |   | 10,588  |   |
| Current maturities of long-term debt           |   | 2,395   |    | 1,124   |   | 18      |   | —   |   | 3,537   |   |
| Liabilities of disc. operations held for  sale |   | 1,000   |    | 14,358  |   | 828     |   | —   |   | 16,186  |   |
| Total current liabilities                      |   | 12,068  |    | 63,623  |   | 8,280   |   | (751     | )      | 83,220  |   |
|                                           |   |    |    |    |   |    |   |     |   |    |   |
| Long term debt, net                            |   | 335,388 |    | 166,013 |   | —  |   | (159,723 | )      | 341,678 |   |
| Deferred tax liabilites                        |   | —  |    | 5,679   |   | 1,635   |   | (3,394   | )      | 3,920   |   |
| Other liabilities                              |   | 2,624   |    | 753     |   | 10      |   | —   |   | 3,387   |   |
| Minority interest                              |   | 1,330   |    | —  |   | —  |   | —   |   | 1,330   |   |
| Total liabilities                              |   | 351,410 |    | 236,068 |   | 9,925   |   | (163,868 | )      | 433,535 |   |
| Commitments and contingencies                  |   |    |    |    |   |    |   |     |   |    |   |
| Stockholders’ equity:                     |   |    |    |    |   |    |   |     |   |    |   |
| Special Stock Series E                         |   | 12      |    | —  |   | —  |   | —   |   | 12      |   |
| Common Stock                                   |   | 4,996   |    | 478     |   | 1,027   |   | (1,505   | )      | 4,996   |   |
| Treasury stock                                 |   | (501    | )       | —  |   | —  |   | —   |   | (501    | )      |
| Additional paid-in capital                     |   | 163,267 |    | 190,449 |   | 33,415  |   | (223,864 | )      | 163,267 |   |
| Accumulated other comprehensive income  (loss) |   | 1,287   |    | 1,290   |   | 1,267   |   | (2,557   | )      | 1,287   |   |
| Retained earnings (accumulated deficit)        |   | (77,431 | )       | 102,767 |   | 39,281  |   | (142,048 | )      | (77,431 | )      |
| Total stockholders’ equity                |   | 91,630  |    | 294,984 |   | 74,990  |   | (369,974 | )      | 91,630  |   |
|                                           |   | $       | 443,040 |    | $      | 531,052 |   | $        | 84,915 |    | $      | (533,842 | ) | $ | 525,165 |   |

 

See accompanying unaudited notes.

 

19

----

 

#### **UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS**

March 31, 2004

(In 000’s)

 

ASSETS

 
|                                             |   | **Parent** |    | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|--------------------------------------------------|--------|------------|---------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Current assets:                                  |   |       |    |                           |   |                                 |   |                                           |   |                                                 |   |
| Cash and cash equivalents                        |   | $          | 11,511  |                           | $      | 13,124                               |   | $                                              | 7,871  |                                                 | $      | — |   | $ | 32,506 |   |
| Accounts and notes receivable, net               |   | 1,257      |    | 95,229                         |   | 19,284                               |   | (926                                           | )      | 114,844                                              |   |
| Inventories, net                                 |   | —     |    | 49,424                         |   | 4,017                                |   | (205                                           | )      | 53,236                                               |   |
| Deferred tax assets, net                         |   | 31,465     |    | 24,866                         |   | —                               |   | —                                         |   | 56,331                                               |   |
| Other current assets                             |   | 1,050      |    | 10,844                         |   | 110                                  |   | —                                         |   | 12,004                                               |   |
| Total current assets                             |   | 45,283     |    | 193,487                        |   | 31,282                               |   | (1,131                                         | )      | 268,921                                              |   |
| Long-term investments (restricted)               |   | —     |    | 2,638                          |   | —                               |   | —                                         |   | 2,638                                                |   |
| Long-term receivables, net                       |   | 245,400    |    | 10,665                         |   | 22                                   |   | (244,067                                       | )      | 12,020                                               |   |
| Lease Receivable                                 |   | —     |    | 8,269                          |   | —                               |   | —                                         |   | 8,269                                                |   |
| Leased gaming equipment, net                     |   | —     |    | 54,983                         |   | —                               |   | —                                         |   | 54,983                                               |   |
| Property, plant and equipment, net               |   | 74         |    | 28,858                         |   | 36,610                               |   | —                                         |   | 65,542                                               |   |
| Goodwill, net                                    |   | (900       | )       | 117,167                        |   | 18,861                               |   | —                                         |   | 135,128                                              |   |
| Intangible assets, net                           |   | 6,215      |    | 54,465                         |   | 4,157                                |   | —                                         |   | 64,837                                               |   |
| Investments in subsidiaries                      |   | 427,895    |    | 74,900                         |   | —                               |   | (502,795                                       | )      | —                                               |   |
| Deferred tax assets, net                         |   | 1,999      |    | —                         |   | —                               |   | (1,999                                         | )      | —                                               |   |
| Assets of discontinued operations held for  sale |   | 39         |    | 104,794                        |   | 4,507                                |   | —                                         |   | 109,340                                              |   |
| Other assets, net                                |   | (132,181   | )       | 150,082                        |   | (11,627                              | )      | 3                                              |   | 6,277                                                |   |
|                                             |   | $          | 593,824 |                           | $      | 800,308                              |   | $                                              | 83,812 |                                                 | $      | (749,989 | ) | $ | 727,955 |   |

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
| Current liabilities:                           |   |    |    |    |   |    |   |     |   |    |   |
|------------------------------------------------|--------|---------|---------|---------|--------|---------|--------|----------|--------|---------|--------|
| Accounts payable                               |   | $       | 2,052   |    | $      | 35,532  |   | $        | 1,145  |    | $      | — |   | $ | 38,729 |   |
| Accrued liabilities                            |   | 8,436   |    | 41,671  |   | 4,677   |   | (935     | )      | 53,849  |   |
| Jackpot liabilities                            |   | —  |    | 14,050  |   | 189     |   | —   |   | 14,239  |   |
| Current maturities of long-term debt           |   | 2,438   |    | 3,005   |   | 3       |   | —   |   | 5,446   |   |
| Liabilities of disc. operations held for  sale |   | 1,729   |    | 21,973  |   | 1,268   |   | —   |   | 24,970  |   |
| Total current liabilities                      |   | 14,655  |    | 116,231 |   | 7,282   |   | (935     | )      | 137,233 |   |
|                                           |   |    |    |    |   |    |   |     |   |    |   |
| Long term debt, net                            |   | 421,562 |    | 246,353 |   | —  |   | (243,900 | )      | 424,015 |   |
| Deferred tax liabilites                        |   | —  |    | 7,040   |   | 1,635   |   | (1,999   | )      | 6,676   |   |
| Other liabilities                              |   | 2,624   |    | 2,424   |   | —  |   | —   |   | 5,048   |   |
| Minority interest                              |   | 1,447   |    | —  |   | —  |   | —   |   | 1,447   |   |
| Total liabilities                              |   | 440,288 |    | 372,048 |   | 8,917   |   | (246,834 | )      | 574,419 |   |
| Commitments and contingencies                  |   |    |    |    |   |    |   |     |   |    |   |
| Stockholders’ equity:                     |   |    |    |    |   |    |   |     |   |    |   |
| Special Stock Series E                         |   | 12      |    | —  |   | —  |   | —   |   | 12      |   |
| Common Stock                                   |   | 5,129   |    | 478     |   | 1,027   |   | (1,505   | )      | 5,129   |   |
| Treasury stock                                 |   | (501    | )       | —  |   | —  |   | —   |   | (501    | )      |
| Additional paid-in capital                     |   | 185,638 |    | 260,813 |   | 33,415  |   | (294,228 | )      | 185,638 |   |
| Accumulated other comprehensive income  (loss) |   | 2,084   |    | 2,084   |   | 3,014   |   | (5,098   | )      | 2,084   |   |
| Retained earnings (accumulated deficit)        |   | (38,826 | )       | 164,885 |   | 37,439  |   | (202,324 | )      | (38,826 | )      |
| Total stockholders’ equity                |   | 153,536 |    | 428,260 |   | 74,895  |   | (503,155 | )      | 153,536 |   |
|                                           |   | $       | 593,824 |    | $      | 800,308 |   | $        | 83,812 |    | $      | (749,989 | ) | $ | 727,955 |   |

 

See accompanying unaudited notes.

 

20

----

 

**UNAUDITED****CONDENSED****CONSOLIDATINGSTATEMENTS OF OPERATIONS**

Three months ended March 31, 2003

(In 000’s)

 
|                                                                                                |   | **Parent** |   | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|-----------------------------------------------------------------------------------------------------|--------|------------|--------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Revenues:                                                                                           |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Gaming equipment and systems                                                                        |   | $          | — |                           | $      | 80,227                               |   | $                                              | 11,044 |                                                 | $      | (8,930 | ) | $ | 82,341 |   |
| Casino operations                                                                                   |   | —     |   | —                         |   | 15,545                               |   | (1,654                                         | )      | 13,891                                               |   |
|                                                                                                |   | —     |   | 80,227                         |   | 26,589                               |   | (10,584                                        | )      | 96,232                                               |   |
| Costs and expenses:                                                                                 |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Cost of gaming equipment and systems                                                                |   | —     |   | 35,554                         |   | 7,746                                |   | (9,051                                         | )      | 34,249                                               |   |
| Cost of casino operations                                                                           |   | —     |   | —                         |   | 5,531                                |   | —                                         |   | 5,531                                                |   |
| Selling, general and administrative                                                                 |   | 2,895      |   | 17,799                         |   | 5,907                                |   | (1,671                                         | )      | 24,930                                               |   |
| Research and development costs                                                                      |   | —     |   | 4,436                          |   | 1,156                                |   | —                                         |   | 5,592                                                |   |
| Depreciation and amortization                                                                       |   | 600        |   | 4,334                          |   | 593                                  |   | —                                         |   | 5,527                                                |   |
|                                                                                                |   | 3,495      |   | 62,123                         |   | 20,933                               |   | (10,722                                        | )      | 75,829                                               |   |
|                                                                                                |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Operating income (loss)                                                                             |   | (3,495     | )      | 18,104                         |   | 5,656                                |   | 138                                            |   | 20,403                                               |   |
|                                                                                                |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Earnings in consolidated subsidiaries                                                               |   | 18,941     |   | 3,507                          |   | —                               |   | (22,448                                        | )      | —                                               |   |
|                                                                                                |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Other income (expense):                                                                             |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Interest income                                                                                     |   | 3,061      |   | —                         |   | 26                                   |   | (3,033                                         | )      | 54                                                   |   |
| Interest expense                                                                                    |   | (6,220     | )      | (3,069                         | )      | (13                                  | )      | 3,033                                          |   | (6,269                                               | )      |
| Rainbow royalty                                                                                     |   | 1,742      |   | —                         |   | (1,742                               | )      | —                                         |   | —                                               |   |
| Minority interest                                                                                   |   | (729       | )      | —                         |   | —                               |   | —                                         |   | (729                                                 | )      |
| Other, net                                                                                          |   | 433        |   | (83                            | )      | (229                                 | )      | —                                         |   | 121                                                  |   |
| Income (loss) from continuing operations  before income taxes                                       |   | 13,733     |   | 18,459                         |   | 3,698                                |   | (22,310                                        | )      | 13,580                                               |   |
| Income tax expense (benefit)                                                                        |   | 4,806      |   | (343                           | )      | 190                                  |   | —                                         |   | 4,653                                                |   |
| Net income (loss) from continuing  operations                                                       |   | 8,927      |   | 18,802                         |   | 3,508                                |   | (22,310                                        | )      | 8,927                                                |   |
|                                                                                                |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Discontinued operations:                                                                            |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Income (loss) from discontinued operations  of wall machines and amusement games business unit, net |   | 172        |   | —                         |   | 2,006                                |   | —                                         |   | 2,178                                                |   |
| Income from disc. ops. of Nevada Route, net                                                         |   | —     |   | 425                            |   | —                               |   | —                                         |   | 425                                                  |   |
| Income from disc. ops. of Louisiana Route,  net                                                     |   | —     |   | —                         |   | 381                                  |   | —                                         |   | 381                                                  |   |
| Income from disc. ops. of Rail City Casino,  net                                                    |   | —     |   | 869                            |   | —                               |   | —                                         |   | 869                                                  |   |
| Earnings from consolidated discontinued  operations                                                 |   | 3,681      |   | 2,387                          |   | —                               |   | (6,068                                         | )      | —                                               |   |
| Income (loss) from discontinued operations                                                          |   | 3,853      |   | 3,681                          |   | 2,387                                |   | (6,068                                         | )      | 3,853                                                |   |
| Net income (loss)                                                                                   |   | $          | 12,780 |                           | $      | 22,483                               |   | $                                              | 5,895  |                                                 | $      | (28,378 | ) | $ | 12,780 |   |

 

See accompanying unaudited notes.

 

21

----

 

**UNAUDITED****CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS**

Three months ended March 31, 2004

(In 000’s)

 
|                                                          |   | **Parent** |   | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|---------------------------------------------------------------|--------|------------|--------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Revenues:                                                     |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Gaming equipment and systems                                  |   | $          | — |                           | $      | 97,822                               |   | $                                              | 6,430  |                                                 | $      | (2,275 | ) | $ | 101,977 |   |
| Casino operations                                             |   | —     |   | —                         |   | 15,876                               |   | (1,614                                         | )      | 14,262                                               |   |
|                                                          |   | —     |   | 97,822                         |   | 22,306                               |   | (3,889                                         | )      | 116,239                                              |   |
| Costs and expenses:                                           |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Cost of gaming equipment and systems                          |   | —     |   | 40,394                         |   | 3,447                                |   | (2,463                                         | )      | 41,378                                               |   |
| Cost of casino operations                                     |   | —     |   | —                         |   | 5,324                                |   | —                                         |   | 5,324                                                |   |
| Selling, general and administrative                           |   | 2,778      |   | 21,739                         |   | 7,294                                |   | (1,613                                         | )      | 30,198                                               |   |
| Research and development costs                                |   | —     |   | 8,865                          |   | 194                                  |   | —                                         |   | 9,059                                                |   |
| Depreciation and amortization                                 |   | 323        |   | 7,038                          |   | 767                                  |   | —                                         |   | 8,128                                                |   |
|                                                          |   | 3,101      |   | 78,036                         |   | 17,026                               |   | (4,076                                         | )      | 94,087                                               |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Operating income (loss)                                       |   | (3,101     | )      | 19,786                         |   | 5,280                                |   | 187                                            |   | 22,152                                               |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Earnings in consolidated subsidiaries                         |   | 17,002     |   | 2,712                          |   | —                               |   | (19,714                                        | )      | —                                               |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Other income (expense):                                       |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Interest income                                               |   | 5,203      |   | 98                             |   | 4                                    |   | (3,488                                         | )      | 1,817                                                |   |
| Interest expense                                              |   | (4,471     | )      | (3,600                         | )      | (7                                   | )      | 3,488                                          |   | (4,590                                               | )      |
| Rainbow royalty                                               |   | 1,777      |   | —                         |   | (1,777                               | )      | —                                         |   | —                                               |   |
| Minority interest                                             |   | (722       | )      | —                         |   | —                               |   | —                                         |   | (722                                                 | )      |
| Other, net                                                    |   | (422       | )      | 329                            |   | (183                                 | )      | 94                                             |   | (182                                                 | )      |
| Income (loss) from continuing operations  before income taxes |   | 15,266     |   | 19,325                         |   | 3,317                                |   | (19,433                                        | )      | 18,475                                               |   |
| Income tax expense                                            |   | 3,025      |   | 2,605                          |   | 604                                  |   | —                                         |   | 6,234                                                |   |
| Net income (loss) from continuing  operations                 |   | 12,241     |   | 16,720                         |   | 2,713                                |   | (19,433                                        | )      | 12,241                                               |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Discontinued operations:                                      |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Income from disc. ops. of Nevada Route, net                   |   | —     |   | (274                           | )      | —                               |   | —                                         |   | (274                                                 | )      |
| Income from disc. ops. of Louisiana Route,  net               |   | —     |   | —                         |   | 586                                  |   | —                                         |   | 586                                                  |   |
| Income from disc. ops. of Rail City Casino,  net              |   | —     |   | 1,281                          |   | —                               |   | —                                         |   | 1,281                                                |   |
| Earnings from consolidated discontinued  operations           |   | 1,593      |   | 586                            |   | —                               |   | (2,179                                         | )      | —                                               |   |
| Income (loss) from discontinued operations                    |   | 1,593      |   | 1,593                          |   | 586                                  |   | (2,179                                         | )      | 1,593                                                |   |
| Net income (loss)                                             |   | $          | 13,834 |                           | $      | 18,313                               |   | $                                              | 3,299  |                                                 | $      | (21,612 | ) | $ | 13,834 |   |

 

See accompanying unaudited notes.

 

22

----

 

**UNAUDITED****CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS**

Nine months ended March 31, 2003

(In 000’s)

 
|                                                                              |   | **Parent** |   | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|-----------------------------------------------------------------------------------|--------|------------|--------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Revenues:                                                                         |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Gaming equipment and systems                                                      |   | $          | — |                           | $      | 226,753                              |   | $                                              | 29,049 |                                                 | $      | (23,295 | ) | $ | 232,507 |   |
| Casino operations                                                                 |   | —     |   | —                         |   | 42,976                               |   | (4,818                                         | )      | 38,158                                               |   |
|                                                                              |   | —     |   | 226,753                        |   | 72,025                               |   | (28,113                                        | )      | 270,665                                              |   |
| Costs and expenses:                                                               |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Cost of gaming equipment and systems                                              |   | —     |   | 103,192                        |   | 20,333                               |   | (23,355                                        | )      | 100,170                                              |   |
| Cost of casino operations                                                         |   | —     |   | —                         |   | 16,051                               |   | —                                         |   | 16,051                                               |   |
| Selling, general and administrative                                               |   | 7,753      |   | 46,976                         |   | 17,270                               |   | (4,874                                         | )      | 67,125                                               |   |
| Research and development costs                                                    |   | —     |   | 11,778                         |   | 2,947                                |   | —                                         |   | 14,725                                               |   |
| Depreciation and amortization                                                     |   | 1,686      |   | 11,357                         |   | 1,637                                |   | —                                         |   | 14,680                                               |   |
|                                                                              |   | 9,439      |   | 173,303                        |   | 58,238                               |   | (28,229                                        | )      | 212,751                                              |   |
|                                                                              |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Operating income (loss)                                                           |   | (9,439     | )      | 53,450                         |   | 13,787                               |   | 116                                            |   | 57,914                                               |   |
|                                                                              |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Earnings in consolidated subsidiaries                                             |   | 50,494     |   | 6,906                          |   | —                               |   | (57,400                                        | )      | —                                               |   |
|                                                                              |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Other income (expense):                                                           |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Interest income                                                                   |   | 9,226      |   | —                         |   | 51                                   |   | (9,096                                         | )      | 181                                                  |   |
| Interest expense                                                                  |   | (19,339    | )      | (9,168                         | )      | (53                                  | )      | 9,096                                          |   | (19,464                                              | )      |
| Rainbow royalty                                                                   |   | 4,786      |   | —                         |   | (4,786                               | )      | —                                         |   | —                                               |   |
| Minority interest                                                                 |   | (1,483     | )      | —                         |   | —                               |   | —                                         |   | (1,483                                               | )      |
| Other, net                                                                        |   | 1,199      |   | (59                            | )      | (653                                 | )      | —                                         |   | 487                                                  |   |
| Income (loss) from continuing operations  before income taxes                     |   | 35,444     |   | 51,129                         |   | 8,346                                |   | (57,284                                        | )      | 37,635                                               |   |
| Income tax expense                                                                |   | 12,418     |   | 752                            |   | 1,439                                |   | —                                         |   | 14,609                                               |   |
| Net income (loss) from continuing  operations                                     |   | 23,026     |   | 50,377                         |   | 6,907                                |   | (57,284                                        | )      | 23,026                                               |   |
|                                                                              |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Discontinued operations:                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Income (loss) from disc. ops. of wall  machines and amusement games business unit |   | 580        |   | (1,210                         | )      | 2,083                                |   | —                                         |   | 1,453                                                |   |
| Income from disc. ops. of Nevada Route, net                                       |   | —     |   | 3,115                          |   | —                               |   | —                                         |   | 3,115                                                |   |
| Income from disc. ops. of Louisiana Route,  net                                   |   | —     |   | —                         |   | 940                                  |   | —                                         |   | 940                                                  |   |
| Income from disc. ops. of Rail City Casino,  net                                  |   | —     |   | 2,357                          |   | —                               |   | —                                         |   | 2,357                                                |   |
| Earnings from consolidated discontinued  operations                               |   | 7,285      |   | 3,023                          |   | —                               |   | (10,308                                        | )      | —                                               |   |
| Income (loss) from discontinued operations                                        |   | 7,865      |   | 7,285                          |   | 3,023                                |   | (10,308                                        | )      | 7,865                                                |   |
| Net income (loss)                                                                 |   | $          | 30,891 |                           | $      | 57,662                               |   | $                                              | 9,930  |                                                 | $      | (67,592 | ) | $ | 30,891 |   |

 

See accompanying unaudited notes.

 

23

----

 

**UNAUDITED****CONDENSEDCONSOLIDATING STATEMENTS OF OPERATIONS**

Nine months ended March 31, 2004

(In 000’s)

 
|                                                          |   | **Parent** |   | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|---------------------------------------------------------------|--------|------------|--------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Revenues:                                                     |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Gaming equipment and systems                                  |   | $          | — |                           | $      | 275,192                              |   | $                                              | 25,944 |                                                 | $      | (14,372 | ) | $ | 286,764 |   |
| Casino operations                                             |   | —     |   | —                         |   | 43,873                               |   | (4,544                                         | )      | 39,329                                               |   |
|                                                          |   | —     |   | 275,192                        |   | 69,817                               |   | (18,916                                        | )      | 326,093                                              |   |
| Costs and expenses:                                           |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Cost of gaming equipment and systems                          |   | —     |   | 112,375                        |   | 15,403                               |   | (14,383                                        | )      | 113,395                                              |   |
| Cost of casino operations                                     |   | —     |   | —                         |   | 15,211                               |   | —                                         |   | 15,211                                               |   |
| Selling, general and administrative                           |   | 8,836      |   | 55,975                         |   | 20,545                               |   | (4,544                                         | )      | 80,812                                               |   |
| Research and development costs                                |   | —     |   | 23,893                         |   | 569                                  |   | —                                         |   | 24,462                                               |   |
| Depreciation and amortization                                 |   | 1,202      |   | 16,903                         |   | 2,490                                |   | —                                         |   | 20,595                                               |   |
|                                                          |   | 10,038     |   | 209,146                        |   | 54,218                               |   | (18,927                                        | )      | 254,475                                              |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Operating income (loss)                                       |   | (10,038    | )      | 66,046                         |   | 15,599                               |   | 11                                             |   | 71,618                                               |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Earnings in consolidated subsidiaries                         |   | 61,759     |   | 8,437                          |   | —                               |   | (70,196                                        | )      | —                                               |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Other income (expense):                                       |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Interest income                                               |   | 11,380     |   | 103                            |   | 12                                   |   | (9,552                                         | )      | 1,943                                                |   |
| Interest expense                                              |   | (13,937    | )      | (9,765                         | )      | (38                                  | )      | 9,552                                          |   | (14,188                                              | )      |
| Rainbow royalty                                               |   | 4,911      |   | —                         |   | (4,911                               | )      | —                                         |   | —                                               |   |
| Minority interest                                             |   | (1,749     | )      | —                         |   | —                               |   | —                                         |   | (1,749                                               | )      |
| Refinancing charge                                            |   | (12,293    | )      | —                         |   | —                               |   | —                                         |   | (12,293                                              | )      |
| Other, net                                                    |   | (188       | )      | (58                            | )      | (929                                 | )      | 94                                             |   | (1,081                                               | )      |
| Income (loss) from continuing operations  before income taxes |   | 39,845     |   | 64,763                         |   | 9,733                                |   | (70,091                                        | )      | 44,250                                               |   |
| Income tax expense                                            |   | 11,539     |   | 3,110                          |   | 1,295                                |   | —                                         |   | 15,944                                               |   |
| Net income (loss) from continuing  operations                 |   | 28,306     |   | 61,653                         |   | 8,438                                |   | (70,091                                        | )      | 28,306                                               |   |
|                                                          |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Discontinued operations:                                      |   |       |   |                           |   |                                 |   |                                           |   |                                                 |   |
| Income from disc. ops. of Nevada Route, net                   |   | —     |   | 5,936                          |   | —                               |   | —                                         |   | 5,936                                                |   |
| Income from disc. ops. of Louisiana Route,  net               |   | —     |   | —                         |   | 1,316                                |   | —                                         |   | 1,316                                                |   |
| Income from disc. ops of Rail City Casino,  net               |   | —     |   | 3,047                          |   | —                               |   | —                                         |   | 3,047                                                |   |
| Earnings from consolidated discontinued  operations           |   | 10,299     |   | 1,316                          |   | —                               |   | (11,615                                        | )      | —                                               |   |
| Income (loss) from discontinued operations                    |   | 10,299     |   | 10,299                         |   | 1,316                                |   | (11,615                                        | )      | 10,299                                               |   |
| Net income (loss)                                             |   | $          | 38,605 |                           | $      | 71,952                               |   | $                                              | 9,754  |                                                 | $      | (81,706 | ) | $ | 38,605 |   |

 

See accompanying unaudited notes.

 

24

----

 

**UNAUDITED****CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOWS**

Nine Months Ended March 31, 2003

(000’s)

 
|                                                                                                |   | **Parent** |   | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|-----------------------------------------------------------------------------------------------------|--------|------------|--------|--------------------------------|--------|--------------------------------------|--------|-----------------------------------------------|--------|------------------------------------------------------|--------|
| Cash flows from operating activities of  continuing operations:                                     |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Net income (loss)                                                                                   |   | $          | 30,891 |                           | $      | 57,662                               |   | $                                             | 9,930  |                                                 | $      | (67,592 | ) | $ | 30,891 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| (Income) loss from discontinued operations                                                          |   | (7,866     | )      | (7,285                         | )      | (3,023                               | )      | 10,309                                        |   | (7,865                                               | )      |
| Depreciation and amortization                                                                       |   | 1,686      |   | 11,357                         |   | 1,637                                |   | —                                        |   | 14,680                                               |   |
| Deferred income taxes                                                                               |   | 14,903     |   | (3                             | )      | (14                                  | )      | —                                        |   | 14,886                                               |   |
| Provision for losses on receivables                                                                 |   | —     |   | 1,203                          |   | 21                                   |   | —                                        |   | 1,224                                                |   |
| Other                                                                                               |   | 811        |   | 773                            |   | (19                                  | )      | —                                        |   | 1,565                                                |   |
| Change in operating assets and liabilities:                                                         |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Accounts and notes receivable                                                                       |   | (400       | )      | (29,845                        | )      | (6,026                               | )      | 559                                           |   | (35,712                                              | )      |
| Intercompany accounts                                                                               |   | (27,128    | )      | (41,527                        | )      | 11,227                               |   | 57,428                                        |   | —                                               |   |
| Inventories                                                                                         |   | —     |   | 339                            |   | (1,048                               | )      | (114                                          | )      | (823                                                 | )      |
| Other current assets                                                                                |   | (246       | )      | (2,595                         | )      | 50                                   |   | —                                        |   | (2,791                                               | )      |
| Accounts payable                                                                                    |   | 2,570      |   | 7,799                          |   | (735                                 | )      | —                                        |   | 9,634                                                |   |
| Accrued liabilities and jackpot liabilities                                                         |   | (8,328     | )      | 7,915                          |   | 293                                  |   | (554                                          | )      | (674                                                 | )      |
| Net cash provided by operating activities  of continuing operations                                 |   | 6,893      |   | 5,793                          |   | 12,293                               |   | 36                                            |   | 25,015                                               |   |
|                                                                                                |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Cash flows from investing activities of  continuing operations:                                     |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Additions to property, plant and equipment                                                          |   | (2         | )      | (2,912                         | )      | (4,548                               | )      | —                                        |   | (7,462                                               | )      |
| Additions to leased gaming equipment                                                                |   | —     |   | (14,794                        | )      | —                               |   | —                                        |   | (14,794                                              | )      |
| Additions to other long-term assets                                                                 |   | (240       | )      | (2,339                         | )      | (49                                  | )      | —                                        |   | (2,628                                               | )      |
| Acquisitions, net of cash acquired                                                                  |   | —     |   | (3,038                         | )      | —                               |   | —                                        |   | (3,038                                               | )      |
| Net cash used in investing activities of  continuing operations                                     |   | (242       | )      | (23,083                        | )      | (4,597                               | )      | —                                        |   | (27,922                                              | )      |
|                                                                                                |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Cash flows from financing activities of  continuing operations:                                     |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Reduction of long-term debt                                                                         |   | (2,925     | )      | (430                           | )      | (9                                   | )      | —                                        |   | (3,364                                               | )      |
| Bally Austria APIC                                                                                  |   | —     |   | —                         |   | 36                                   |   | (36                                           | )      | —                                               |   |
| Proceeds from exercise of stock options                                                             |   | 1,961      |   | —                         |   | —                               |   | —                                        |   | 1,961                                                |   |
| Dividends received (paid)                                                                           |   | —     |   | 4,665                          |   | (4,665                               | )      | —                                        |   | —                                               |   |
| Net cash (used in) provided by financing  activities of continuing operations                       |   | (964       | )      | 4,235                          |   | (4,638                               | )      | (36                                           | )      | (1,403                                               | )      |
|                                                                                                |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Effect of exchange rate changes on cash                                                             |   | —     |   | —                         |   | 905                                  |   | —                                        |   | 905                                                  |   |
|                                                                                                |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Cash and cash equivalents provided by (used  in) discontinued operations                            |   | —     |   | 10,875                         |   | (2,135                               | )      | —                                        |   | 8,740                                                |   |
|                                                                                                |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Increase (decrease) for the period                                                                  |   | 5,687      |   | (2,180                         | )      | 1,828                                |   | —                                        |   | 5,335                                                |   |
| Balance, beginning of period                                                                        |   | 8,121      |   | 17,414                         |   | 6,265                                |   | —                                        |   | 31,800                                               |   |
| Balance, end of period                                                                              |   | $          | 13,808 |                           | $      | 15,234                               |   | $                                             | 8,093  |                                                 | $      | — |   | $ | 37,135 |   |

 

See accompanying unaudited notes.

 

25

----

 

**UNAUDITED****CONDENSED****CONSOLIDATING STATEMENTS OF CASH FLOWS**

Nine Months Ended March 31, 2004

(000’s)

 
|                                                                                      |   | **Parent** |   | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|-------------------------------------------------------------------------------------------|--------|------------|--------|--------------------------------|--------|--------------------------------------|--------|-----------------------------------------------|--------|------------------------------------------------------|--------|
| Cash flows from operating activities of  continuing operations:                           |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Net income (loss)                                                                         |   | $          | 38,605 |                           | $      | 71,952                               |   | $                                             | 9,754  |                                                 | $      | (81,706 | ) | $ | 38,605 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| (Income) loss from discontinued operations                                                |   | (10,299    | )      | (10,299                        | )      | (1,316                               | )      | 11,615                                        |   | (10,299                                              | )      |
| Depreciation and amortization                                                             |   | 1,202      |   | 16,903                         |   | 2,490                                |   | —                                        |   | 20,595                                               |   |
| Refinancing charge                                                                        |   | 12,293     |   | —                         |   | —                               |   | —                                        |   | 12,293                                               |   |
| Deferred income taxes                                                                     |   | 4,398      |   | (10,655                        | )      | —                               |   | —                                        |   | (6,257                                               | )      |
| Provision for losses on receivables                                                       |   | —     |   | 721                            |   | 34                                   |   | —                                        |   | 755                                                  |   |
| Other                                                                                     |   | 131        |   | (1,475                         | )      | (10                                  | )      | —                                        |   | (1,354                                               | )      |
| Change in operating assets and liabilities:                                               |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Accounts and notes receivable                                                             |   | (187       | )      | (15,497                        | )      | 6,872                                |   | 87                                            |   | (8,725                                               | )      |
| Intercompany accounts                                                                     |   | (12,546    | )      | (54,018                        | )      | (3,636                               | )      | 70,200                                        |   | —                                               |   |
| Inventories                                                                               |   | —     |   | (3,632                         | )      | 564                                  |   | (12                                           | )      | (3,080                                               | )      |
| Other current assets                                                                      |   | (645       | )      | (1,029                         | )      | 1,047                                |   | —                                        |   | (627                                                 | )      |
| Accounts payable                                                                          |   | 757        |   | 9,915                          |   | (779                                 | )      | —                                        |   | 9,893                                                |   |
| Accrued liabilities and jackpot liabilities                                               |   | (2,355     | )      | 19,999                         |   | (1,205                               | )      | (184                                          | )      | 16,255                                               |   |
| Net cash provided by operating activities  of continuing operations                       |   | 31,354     |   | 22,885                         |   | 13,815                               |   | —                                        |   | 68,054                                               |   |
|                                                                                      |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Cash flows from investing activities of  continuing operations:                           |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Additions to property, plant and equipment                                                |   | (28        | )      | (6,999                         | )      | (2,529                               | )      | —                                        |   | (9,556                                               | )      |
| Additions to leased gaming equipment                                                      |   | —     |   | (24,496                        | )      | (1,876                               | )      | —                                        |   | (26,372                                              | )      |
| Additions to other long-term assets                                                       |   | (5,580     | )      | (7,746                         | )      | 501                                  |   | —                                        |   | (12,825                                              | )      |
| Advances of notes receivable due from SDG                                                 |   | (72,820    | )      | —                         |   | —                               |   | —                                        |   | (72,820                                              | )      |
| Acquisitions, net of cash acquired                                                        |   | (46,796    | )      | (3,879                         | )      | —                               |   | —                                        |   | (50,675                                              | )      |
| Proceeds from sale of assets of discontinued  operations                                  |   | 16,500     |   | —                         |   | —                               |   | —                                        |   | 16,500                                               |   |
| Net cash used in investing activities of  continuing operations                           |   | (108,724   | )      | (43,120                        | )      | (3,904                               | )      | —                                        |   | (155,748                                             | )      |
|                                                                                      |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Cash flows from financing activities of  continuing operations:                           |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Debt issuance costs                                                                       |   | (6,954     | )      | —                         |   | —                               |   | —                                        |   | (6,954                                               | )      |
| Premium and consents fees paid on  redemption of subordinated notes                       |   | (5,399     | )      | —                         |   | —                               |   | —                                        |   | (5,399                                               | )      |
| Proceeds from issuance of long-term debt                                                  |   | 350,000    |   | —                         |   | —                               |   | —                                        |   | 350,000                                              |   |
| Payoff of debt from refinancing                                                           |   | (337,625   | )      | —                         |   | —                               |   | —                                        |   | (337,625                                             | )      |
| Reduction of long-term debt                                                               |   | (495       | )      | (2,476                         | )      | (15                                  | )      | —                                        |   | (2,986                                               | )      |
| Net change in revolving credit facility                                                   |   | 70,000     |   | —                         |   | —                               |   | —                                        |   | 70,000                                               |   |
| Proceeds from exercise of stock options                                                   |   | 6,624      |   | (1                             | )      | —                               |   | —                                        |   | 6,623                                                |   |
| Dividends received (paid)                                                                 |   | —     |   | 11,595                         |   | (11,595                              | )      | —                                        |   | —                                               |   |
| Net cash provided by (used in) financing  activities of continuing operations             |   | 76,151     |   | 9,118                          |   | (11,610                              | )      | —                                        |   | 73,659                                               |   |
| Effect of exchange rate changes on cash                                                   |   | —     |   | —                         |   | 100                                  |   | —                                        |   | 100                                                  |   |
|                                                                                      |   |       |   |                           |   |                                 |   |                                          |   |                                                 |   |
| Cash and cash equivalents provided by (used  in) discontinued operations                  |   | —     |   | 6,205                          |   | 1,352                                |   | —                                        |   | 7,557                                                |   |
| Decrease for the period                                                                   |   | (1,219     | )      | (4,912                         | )      | (247                                 | )      | —                                        |   | (6,378                                               | )      |
| Balance, beginning of period                                                              |   | 12,730     |   | 18,036                         |   | 8,118                                |   | —                                        |   | 38,884                                               |   |
| Balance, end of period                                                                    |   | $          | 11,511 |                           | $      | 13,124                               |   | $                                             | 7,871  |                                                 | $      | — |   | $ | 32,506 |   |

 

See accompanying unaudited notes.

 

26

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## **Debt and Revolving CreditFacility**

 

Long-term debt and lines of credit at June 30, 2003 consisted ofthe following (in 000’s):

 
|                                                        |   | **Parent** |    | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|-------------------------------------------------------------|--------|------------|---------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| 10% Senior Subordinated Notes, net of  unamortized discount |   | $          | 149,663 |                           | $      | —                               |   | $                                              | — |                                                 | $      | — |   | $ | 149,663 |   |
| Term loan facility                                          |   | 187,625    |    | —                         |   | —                               |   | —                                         |   | 187,625                                              |   |
| Other subordinated debt                                     |   | 495        |    | —                         |   | —                               |   | —                                         |   | 495                                                  |   |
| Intercompany notes payable                                  |   | —     |    | 159,723                        |   | —                               |   | (159,723                                       | )      | —                                               |   |
| Other                                                       |   | —     |    | 7,414                          |   | 18                                   |   | —                                         |   | 7,432                                                |   |
|                                                        |   | 337,783    |    | 167,137                        |   | 18                                   |   | (159,723                                       | )      | 345,215                                              |   |
| Less current maturities                                     |   | 2,395      |    | 1,124                          |   | 18                                   |   | —                                         |   | 3,537                                                |   |
| Long-term debt, net of current maturities                   |   | $          | 335,388 |                           | $      | 166,013                              |   | $                                              | — |                                                 | $      | (159,723 | ) | $ | 341,678 |   |

 

Long-term debt and lines of credit at March 31, 2004, consisted ofthe following (in 000’s):

 
|                                     |   | **Parent** |    | **Guaranteeing  Subsidiaries** |   | **Non-  Guaranteeing  Subsidiaries** |   | **Reclas-  sifications  and  Elimina-  tions** |   | **Alliance  Gaming  Corporation  and  Subsidiaries** |   |
|------------------------------------------|--------|------------|---------|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------------|--------|
| Term loan facility                       |   | $          | 350,000 |                           | $      | —                               |   | $                                              | — |                                                 | $      | — |   | $ | 350,000 |   |
| Revolving credit facility                |   | 70,000     |    | —                         |   | —                               |   | —                                         |   | 70,000                                               |   |
| Intercompany notes payable               |   | —     |    | 243,900                        |   | —                               |   | (243,900                                       | )      | —                                               |   |
| Other                                    |   | 4,000      |    | 5,458                          |   | 3                                    |   | —                                         |   | 9,461                                                |   |
|                                     |   | 424,000    |    | 249,358                        |   | 3                                    |   | (243,900                                       | )      | 429,461                                              |   |
| Less current maturities                  |   | 2,438      |    | 3,005                          |   | 3                                    |   | —                                         |   | 5,446                                                |   |
| Long-term debt net of current maturities |   | $          | 421,562 |                           | $      | 246,353                              |   | $                                              | — |                                                 | $      | (243,900 | ) | $ | 424,015 |   |

 

27

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**ALLIANCE GAMING CORPORATION**

**FORM 10-Q**

 

**March 31,2004**

 

**ITEM 2****.****                             MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

***Overviewand Summary***

 

We are a diversified, worldwide gaming company that (i) designs,manufactures and distributes gaming machines and computerized monitoringsystems for gaming machines; and (ii) owns and operates a casino. Operatingunder the name Bally Gaming and Systems, we are a worldwide leader indesigning, manufacturing and distributing gaming machines, having marketed over90,000 gaming machines during the past five years. We also design, integrateand sell highly specialized computerized monitoring systems that providecasinos with networked accounting and security services for their gamingmachines with over 265,000 game monitoring units installed worldwide. Ourdockside casino in Vicksburg, Mississippi offers 12 table games andapproximately 930 gaming devices.

 

Several significant events should be highlighted. In July 2003, weannounced our intention to transform our Company from a diversified gamingconglomerate to a technology provider to the gaming industry. In July 2003,we entered into definitive agreements to sell our route operations in Nevadaand Louisiana, and our wall machine and amusement games business in Germany.The German business has been sold and the sales of the Nevada and Louisianaroute operations are expected to be completed during fiscal 2004. In addition,on December 8, 2003, we announced that we had entered into an agreementfor the sale of our Rail City Casino and the sale was comple4ted on May 3,2004. For purposes of financialreporting, each of these four businesses are now treated as discontinuedoperations and their results are presented net of applicable income taxes,below income from continuing operations.

 

In December 2003, we acquiredEngland-based Crown Gaming from Crown Leisure Limited one of the UnitedKingdom’s largest distributors of gaming and amusement machines.  In February 19, 2004 we acquiredsubstantially all of the assets and liabilities of MindPlay, a leadingdeveloper of advanced table technology and finally on March 2, 2004, wecompleted the acquisition 100 percent of the outstanding shares of SDG, aleading supplier of Class II and Class III gaming devices, systems andtechnology.

 

Over the next several years we believe thatthe next significant expansion in gaming will be derived from the Video LotteryTerminal (“VLT”) and the Racino markets both domestically and internationally.SDG’s presence in both arenas and more importantly its technology supportingcentrally determined gaming and Class II gaming will give us a meaningfulpresence in these markets and significant head start in capitalizing on theexpected growth in these markets.

 

 

***Liquidityand Capital Resources***

 

As of March 31, 2004, we had $32.5 million in cash and cashequivalents, and $55.0 million in unborrowed availability on our revolvingcredit facility. In addition, we had net working capital of approximately$156.7 million at March 31, 2004, compared to $155.2 million atJune 30, 2003, excluding liabilities of discontinued operations.  The changes within working capital are morefully described in the cash flow section below. Consolidated cash and cashequivalents at March 31, 2004 includes approximately $2.1 million of cashwhich is utilized in Casino Operations held in vaults, cages or change banks,as well as $16.8 million which is held in jackpot reserve accounts we maintainto ensure availability of funds to pay wide-area progressive jackpot awards. Inaddition, long-term investments of $2.6 million include investments in TreasuryStrips for the previous jackpot winners.

 

Management believes that cash flows from operating activities, cash andcash equivalents held and the $125 million revolving credit facility commitmentwill provide the Company with sufficient capital resources and liquidity foroperations.  At March 31, 2004, wehad no material commitments for capital expenditures.

 

28

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From time to time we become aware of potential acquisition ordevelopment opportunities and we may at any time be negotiating with respect totransactions or developments both domestically and internationally.Additionally, we regularly evaluate all of our assets within our portfolio andwill continue to consider disposition of assets that, in our opinion, do notrepresent the best use of our capital. If such transactions occur our capitalresources and liquidity may be affected.

 

***Cash Flow***

 

During the nine months ended March 31, 2004, we generated $68.1million of cash flows from operating activities of continuing operations,compared to $25.0 million in the prior year period primarily as the result of adecrease in receivables related to the gaming and systems short-term financingfor three significant property openings in the prior year.

 

# **During the nine months ended March 31, 2004, cash flowfrom investing activities of continuing operations included $10.9 million ofcash provided from the sale of Bally Wulff (net of $5.6 million used to purchase a 5 million Eurocertificate of deposit as collateral for a tax claim currently being negotiatedwith the German tax authorities, for which the Company has indemnified thebuyer), offset by net cash used in the acquisitions of Crown of $3.9million, SDG for $108.6 million includes the loan advances of $72.8 million**(See Note for assets and liabilities assumedin acquisitions) and MindPlay of $11.0 million, capital expenditures totaling$9.6 million, and costs incurred to produce participation games totaling $26.4million.

 

During the nine months ended March 31, 2004, $73.7 million cashwas provided by financing activities of continuing operations resulting from a$70 million increase in term loans and $350.0 million of proceeds from theissuance of long-term debt and $6.6 million of cash provided from the exerciseof stock options, offset by the $337.6 million payoff of debt from refinancing,$7.0 million of refinancing costs, $5.4 million of premium paid on the earlyredemption of the subordinated notes and principal payments on long term debttotaling $3.0 million.

 

***Results of Operationsfor each Business Unit:***

 

***Bally Gaming andSystems***

 

Summary financial results and operating statistics (dollars in 000’s):

 
|                                |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                |   | **2003**                                |   | **2004**                               |   | **2003** |   | **2004** |   |
| Revenues                            |   |                                    |   |                                   |   |   |   |   |   |
| Game sales                          |   | $                                       | 46,750 |                                   | $      | 49,138 |   | $ | 130,954 |   | $ | 141,456 |   |
| System sales                        |   | 21,602                                  |   | 31,102                                 |   | 59,918 |   | 91,835 |   |
| Gaming operations                   |   | 13,989                                  |   | 21,737                                 |   | 41,635 |   | 53,473 |   |
| Total revenues                      |   | 82,341                                  |   | 101,977                                |   | 232,507 |   | 286,764 |   |
|                                |   |                                    |   |                                   |   |   |   |   |   |
| Gross Margin                        |   |                                    |   |                                   |   |   |   |   |   |
| Game sales                          |   | 20,890                                  |   | 22,059                                 |   | 58,436 |   | 64,926 |   |
| System sales                        |   | 16,452                                  |   | 22,684                                 |   | 45,491 |   | 69,402 |   |
| Gaming operations                   |   | 10,750                                  |   | 15,856                                 |   | 28,410 |   | 39,041 |   |
| Total gross margin                  |   | 48,092                                  |   | 60,599                                 |   | 132,337 |   | 173,369 |   |
|                                |   |                                    |   |                                   |   |   |   |   |   |
| Selling, general and administrative |   | 19,094                                  |   | 24,329                                 |   | 50,255 |   | 62,905 |   |
| Research and development costs      |   | 5,592                                   |   | 9,059                                  |   | 14,725 |   | 24,462 |   |
| Depreciation and amortization       |   | 4,350                                   |   | 7,115                                  |   | 11,391 |   | 17,332 |   |
| Operating income                    |   | $                                       | 19,056 |                                   | $      | 20,096 |   | $ | 55,966 |   | $ | 68,670 |   |

 

29

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|                              |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-----------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                              |   | **2003**                                |   | **2004**                               |   | **2003** |   | **2004** |   |
| Operating Statistics:             |   |                                    |   |                                   |   |   |   |   |   |
| New Gaming  Devices Sold          |   | 4,550                                   |   | 4,150                                  |   | 13,980 |   | 13,940 |   |
| Game  Monitoring Units Sold       |   | 10,075                                  |   | 9,660                                  |   | 25,100 |   | 31,960 |   |
| End of  period installed base of: |   |                                    |   |                                   |   |   |   |   |   |
| WAP games                         |   | 1,720                                   |   | 1,670                                  |   |   |   |   |   |
| Daily-fee  games                  |   | 2,330                                   |   | 5,780                                  |   |   |   |   | ** ** |
| Centrally  determined games       |   | —                                  |   | 15,170                                 |   |   |   |   |   |

 

Our Bally Gaming and Systems business unit reported an overall increasein revenues of 24% for the quarter and 23% for the year-to-date period whencompared to the prior year periods. Bally game sales division reported anincrease in revenues of 5% for the quarter and an increase of 8% for theyear-to-date period. New units sold decreased 9% during the quarter andremained flat for the year-to-date period. The 9% decrease in new units soldfor the quarter on a comparative basis reflects customer requested delays indelivering gaming units. The average new-unit selling price (excluding OEMgames) increased 1% for the quarter and 8% for the year-to-date period.

 

Included in the Bally Gaming and Systems revenue discussed above is therevenue contribution from SDG, which totaled $15.2 million for the 29 days ofMarch 2004 following the completion of the acquisition of SDG.  SDG’s revenues from game sales totaled $11.5million and included the sale of 590 devices in the Washington and Rhode Islandmarkets.  SDG’s gaming operationscontributed $3.7 million in revenues from its daily-fee games discussed below.

 

Bally Systems division reported an increase in revenues of 44% for thequarter and 53% for the year-to-date period, when compared to the prior yearperiods, driven by a 4% decrease in game monitoring units shipped, offset by acontinued increase in the average selling price per unit, increased sales ofsoftware licenses for eTICKETTM, the industry’s leading single-wire TITOsolution, as well as sales of its bonusing and promotions software. BallySystems recurring hardware and software revenues for the quarter increased to$5.3 million, resulting from the larger base of installed systems, which nowstands at approximately 265,000 units in 213 casinos world-wide.

 

The Gaming Operations division reported an increase of 55% in revenuesfor the quarter and an increase of 28% for the year-to-date period whencompared to the prior year periods, driven by the 50% increase for the quarterand the 33% increase for the year-to-date-period in the average installed baseof wide-area progressive (WAP) and daily-fee games deployed, which now total1,670 and 5,780, respectively. This unit increase was driven by increases inthe daily-fee games deployed during the quarter led by the installation of acombined 1,710 video lottery terminals for the three Racino properties thatopened in New York during the quarter (820 Bally units, 890 SDG units). Inaddition to the New York placements, the gross placements for all otherdaily-fee and WAP games totaled 1,630 units, and there were 890 units returnedresulting in a 740 net increase in the installed base of games on a sequentialbasis as of March 31, 2004 compared to December 31, 2003.  The base of recurring fee games now includesthose from SDG, consisting of 10,700 in Washington and 4,200 Class II/Centraldetermination games primarily in Oklahoma and Florida, and 200 Raining Diamondsgames.

 

For the quarter ended March 31, 2004, the overall gross marginpercentage for Bally Gaming and Systems increased to 59% and to 60% for theyear-to-date period, primarily as a result of an increase in higher margin inGaming and Systems operation revenues.

 

Selling, general and administrative expenses increased 27% over theprior year quarter, as a result of an overall increase in payroll, advertisingand marketing expenses. Selling, general and administrative costs as apercentage of this business unit’s revenue remained constant at 24% for thequarter and 22% for the year-to-date period. Research and development costs increased 62% for the quarter and 66% forthe year-to-date period, resulting from an increase in headcount and consultingfees.  Total depreciation expenseincreased 64% over the prior year quarter and 52% for the year-to-date period,driven by the increase in the installed base of wide-area progressive anddaily-fee games and as a result of the previously disclosed acquisitions.

 

30

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During fiscal year 2004, Bally Gaming and Systems has experienced analmost four fold increase in the volume of product submissions to the variousdomestic regulatory bodies, each of which charges fees for the testing andapproval of each product. Product testing costs are capitalized oncetechnological feasibility has been established and are amortized, generallyover a three year period once the product is placed in service. Product testingcosts related to projects that are discontinued are expensed when suchdetermination is made. The year-to-date fees incurred for such regulatoryapprovals and classified as Research and Development Cost exceeded $4.0million. Of these amounts incurred, for the quarter ended March 31, 2004,the Company capitalized a total of $1.6 million that was directly attributableto products that have been approved and recorded amortization expense totaling$0.3 million for the quarter.

 

***Rainbow CasinoOperation***

 

Summaryfinancial results and operating statistics (dollars in 000’s):

 
|                                |   | **Three  Months Ended  March 31,** |       | **Nine  Months Ended  March 31,** |       |
|-------------------------------------|--------|-----------------------------------------|------------|----------------------------------------|------------|
|                                |   | **2003**                                |       | **2004**                               |       | **2003** |   | **2004** |   |
|                                |   |                                    |       |                                   |       |   |   |   |   |
| Revenues                            |   | $                                       | 13,891     |                                   | $          | 14,262 |   | $ | 38,158 |   | $ | 39,329 |   |
| Gross Margin                        |   | 8,360                                   |       | 8,938                                  |       | 22,107 |   | 24,118 |   |
| Selling, general and administrative |   | 2,940                                   |       | 3,091                                  |       | 9,116 |   | 9,072 |   |
| Depreciation and amortization       |   | 577                                     |       | 690                                    |       | 1,603 |   | 2,061 |   |
| Operating income                    |   | $                                       | 4,843      |                                   | $          | 5,157 |   | $ | 11,388 |   | $ | 12,985 |   |
|                                |   |                                    |       |                                   |       |   |   |   |   |
| Operating Statistics:               |   |                                    | ** ** |                                   | ** ** |   | ** ** |   | ** ** |
| Average Number of Gaming Devices    |   | 950                                     |       | 930                                    |       | 940 |   | 930 | ** ** |
| Average Number of Table Games       |   | 16                                      |       | 12                                     |       | 16 |   | 12 | ** ** |

## ** **

Rainbow Casino revenues increased 3% for the quarter and 3% for theyear-to-date-period, when compared to the prior year periods. The revenueincrease in the quarter is a result of a 16% increase in net win per day pergaming machine to $161, offset by 2% decrease in the average number of gamingmachines for the quarter. The revenue increase for the year-to-date is a resultof a 4% increase in net win per day per gaming machine to $148, offset by 1%decrease in the average number of gaming machines.

 

The gross margin for Casino Operations as a percentage of revenuesincreased to 60% for the quarter as compared to 63% for the prior year quarter.This increase was a result of decreases in certain operating costs. Cost ofcasino revenues includes gaming taxes, rental costs and direct labor includingpayroll taxes and benefits. The gross margin as a percentage of revenueincreased to 61% for the year-to-date compared to 58% in the prior year period,primarily as a result of the reduction in headcount due to the conversion tocashless.

 

The overall selling, general and administrative expenses increased 5%over the prior year quarter, as a result of an increase in advertising andpromotional expenses. Selling, general and administrative costs as a percentageof this business unit’s revenue increased to 22% in the current quartercompared to 21% in the prior year quarter. Selling, general and administrativecosts as a percentage of this business unit’s revenue for the year-to-dateperiod decreased slightly to 23% from 24%. This decrease is primarily a resultof lower headcount. Total depreciation expense increased 20% over the prioryear quarter and 29% for the year-to-date period, as a result of the capitalimprovements made to the Rainbow Casino in the prior year.

 

31

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***DiscontinuedOperations***

 

As previously discussed, we announced that we had entered intodefinitive agreements for the sale of our two route operations inJuly 2003 and the sale of our Rail City Casino in December 2003. Forpurposes of financial reporting, these three business units are now treated asdiscontinued operations.

 

***Rail City Casino***

 

As previously discussed, we announced that we had entered intodefinitive agreements for the sale of our two route operations inJuly 2003 and the sale of our Rail City Casino in December 2003. Forpurposes of financial reporting, these three business units are now treated asdiscontinued operations.

 

Summaryfinancial results and operating statistics are as follows (dollars in 000’s):

 
|                                |   | **Three  Months Ended  March 31,** |       | **Nine  Months Ended  March 31,** |       |
|-------------------------------------|--------|-----------------------------------------|------------|----------------------------------------|------------|
|                                |   | **2003**                                |       | **2004**                               |       | **2003** |   | **2004** |   |
|                                |   |                                    |       |                                   |       |   |   |   |   |
| Revenues                            |   | $                                       | 5,466      |                                   | $          | 5,955 |   | $ | 15,767 |   | $ | 17,202 |   |
| Gross Margin                        |   | 2,641                                   |       | 2,906                                  |       | 7,212 |   | 8,092 |   |
| Selling, general and administrative |   | 985                                     |       | 905                                    |       | 2,757 |   | 2,811 |   |
| Depreciation and amortization       |   | 319                                     |       | —                                 |       | 827 |   | 565 |   |
| Operating income                    |   | $                                       | 1,337      |                                   | $          | 2,001 |   | $ | 3,628 |   | $ | 4,716 |   |
|                                |   |                                    |       |                                   |       |   |   |   |   |
| Operating Statistics:               |   |                                    | ** ** |                                   | ** ** |   | ** ** |   | ** ** |
| Average Number of Gaming Devices    |   | 560                                     |       | 580                                    |       | 550 |   | 580 |   |
| Average Number of Table Games       |   | 8                                       |       | 6                                      |       | 8 |   | 7 |   |

 

Rail City Casino revenues increased 9% for the quarter and increased 9%for the year-to-date period, when compared to the prior year periods. Therevenue improvement in the quarter was attributable to a 4% increase in theaverage number of gaming machines and 6% increase in net win per day per gamingmachine to $96. The revenue increase for the year-to-date is due to a 5%increase in the average number of gaming machines and a 7% increase in net winper day per gaming machine to $92.

 

The gross margin for Casino Operations as a percentage of revenuesincreased to 49% for the quarter and to 47% for the year-to-date period. Thisincrease was a result of decreases in certain operating costs. Cost of casinorevenues includes gaming taxes, rental costs and direct labor including payrolltaxes and benefits.

 

The overall selling, general and administrative expenses decreased 8%over the prior year quarter, as a result of a decrease in advertising andpromotional expenses. For the year-to-date period selling, general andadministrative costs increased by 2% compared to the prior year period, as aresult of an increase in payroll and payroll related costs. Selling, generaland administrative costs as a percentage of this business unit’s revenuedecreased to 15% in the current quarter and to 16% for the year-to-date period.In accordance with generally accepted accounting principles, depreciation andamortization for this discontinued operation ceased as of December 8, 2003as a result of its designation as assets held for sale. Had depreciation andamortization expense been recorded for the current period, operating income forthe discontinued operation would have decreased by $0.3 million for the quarterand $0.5 million for the year-to-date period.

 

The sale of the Rail City Casino to The Sands Regent was completed onMay 3, 2004.

 

32

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***Route Operations***

 

Summaryfinancial results and operating statistics are as follows (dollars in 000’s):

 
|                                |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                |   | **2003**                                |   | **2004**                               |   | **2003** |   | **2004** |   |
| Revenues                            |   |                                    |   |                                   |   |   |   |   |   |
| Nevada                              |   | $                                       | 50,873 |                                   | $      | 58,030 |   | $ | 151,747 |   | $ | 162,426 |   |
| Louisiana                           |   | 3,910                                   |   | 4,812                                  |   | 11,194 |   | 12,702 |   |
| Total revenues                      |   | 54,783                                  |   | 62,842                                 |   | 162,941 |   | 175,128 |   |
|                                |   |                                    |   |                                   |   |   |   |   |   |
| Gross Margin                        |   |                                    |   |                                   |   |   |   |   |   |
| Nevada                              |   | 7,681                                   |   | 8,699                                  |   | 23,009 |   | 24,622 |   |
| Louisiana                           |   | 1,296                                   |   | 1,662                                  |   | 3,724 |   | 4,290 |   |
| Total gross margin                  |   | 8,977                                   |   | 10,361                                 |   | 26,733 |   | 28,912 |   |
|                                |   |                                    |   |                                   |   |   |   |   |   |
| Selling, general and administrative |   | 3,597                                   |   | 3,646                                  |   | 9,595 |   | 10,166 |   |
| Depreciation and amortization       |   | 3,817                                   |   | —                                 |   | 10,442 |   | — |   |
|                                |   |                                    |   |                                   |   |   |   |   |   |
| Operating income                    |   |                                    |   |                                   |   |   |   |   |   |
| Nevada                              |   | 962                                     |   | 5,784                                  |   | 5,188 |   | 16,661 |   |
| Louisiana                           |   | 601                                     |   | 931                                    |   | 1,508 |   | 2,085 |   |
| Total operating income              |   | $                                       | 1,563  |                                   | $      | 6,715 |   | $ | 6,696 |   | $ | 18,746 |   |
|                                |   |                                    |   |                                   |   |   |   |   |   |
| Operating Statistics:               |   |                                    |   |                                   |   |   |   |   |   |
| Average Number of Gaming Devices    |   |                                    |   |                                   |   |   |   |   |   |
| Nevada                              |   | 7,985                                   |   | 8,360                                  |   | 8,155 |   | 8,205 |   |
| Louisiana                           |   | 725                                     |   | 760                                    |   | 715 |   | 740 |   |
| Total Gaming Devices                |   | 8,710                                   |   | 9,120                                  |   | 8,870 |   | 8,945 |   |

 

Revenues from the Nevada route operations increased 14% for the quarterand 7% for the year-to-date period. For the quarter the increase was attributableto a 5% increase in the average number of gaming machines for the quarter andan increase in the average net win per gaming machine per day of 7% to $74.00from $69.00. For the year-to-date period the increase is attributable to a 6%increase in the average net win per gaming machine per day to $70.50 from$66.60 and a slight increase in an average number of gaming machines deployed.Gamblers’ Bonus, a cardless players club and player tracking system, continuedto have a favorable impact on the net win per day. As of March 31, 2004,the Gamblers’ Bonus product was installed in over 4,230 gaming machines atapproximately 435 locations statewide or 51% of the installed base of gamingmachines.

 

Revenues from Louisiana route operations increased 23% for the quarterand 13% for the year-to-date period. For the quarter the increase is a resultof a 17% increase in the net win per gaming machine per day to $71.10 from$60.50 and a 5% increase in the number of units deployed compared to the prioryear quarter. For the year-to-date period the increase is a result of a 9%increase in the net win per gaming machines per day to $61.80 from $56.50 and a4% increase in the number of units deployed compared to the prior year period.

 

For the quarter ended March 31, 2004, the overall gross marginpercentage for the Route Operations remained relatively constant at 16%. Theoverall selling, general and administrative expenses in the quarter increased1% and 6% for the year-to-date period, primarily as a result of an increase inpayroll and payroll related costs. Selling, general and administrative costs asa percentage of revenue remained at 6% compared to the prior year quarter.

 

The results of the Nevada and Louisiana Route operations for thequarter and the nine months ended March 31, 2003 include depreciation andamortization expense. In accordance with generally accepted accountingprinciples, depreciation and amortization for these discontinued operationsceased as of July 1, 2003 as a result of their designation as assets heldfor

 

33

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sale. Had depreciation and amortization expense been recorded for thecurrent period, operating income for the discontinued operations would havedecreased by $3.6 million for the quarter and $10.9 million for theyear-to-date period.

 

***ParentCompany and other unallocated income (expense)***

 

Summary financial results (dollars in 000’s):

 
|                          |   | **Three  Months Ended  March 31,** |       | **Nine  Months Ended  March 31,** |       |
|-------------------------------|--------|-----------------------------------------|------------|----------------------------------------|------------|
|                          |   | **2003**                                |       | **2004**                               |       | **2003** |   | **2004** |   |
|                          |   |                                    |       |                                   |       |   |   |   |   |
| General and administrative    |   | $                                       | 2,896      |                                   | $          | 2,778 |   | $ | 7,754 |   | $ | 8,835 |   |
| Depreciation and amortization |   | 600                                     |       | 323                                    |       | 1,686 |   | 1,202 |   |
| Total Parent company expense  |   | $                                       | 3,496      |                                   | $          | 3,101 |   | $ | 9,440 |   | $ | 10,037 |   |
|                          |   |                                    | ** ** |                                   | ** ** |   | ** ** |   | ** ** |
| Other income (expense):       |   |                                    | ** ** |                                   | ** ** |   | ** ** |   | ** ** |
| Interest income               |   | $                                       | 54         |                                   | $          | 1,817 |   | $ | 181 |   | $ | 1,943 |   |
| Interest expense              |   | (6,269                                  | )          | (4,590                                 | )          | (19,464 | ) | (14,188 | ) |
| Minority interest             |   | (729                                    | )          | (722                                   | )          | (1,483 | ) | (1,749 | ) |
| Refinancing charge            |   | —                                  |       | —                                 |       | — |   | (12,293 | ) |
| Other, net                    |   | 121                                     |       | (182                                   | )          | 487 |   | (1,081 | ) |
| Total other expense           |   | $                                       | (6,823     | )                                      | $          | (3,677 | ) | $ | (20,279 | ) | $ | (27,368 | ) |
|                          |   |                                    |       |                                   |       |   |   |   |   |
| Income tax expense            |   | $                                       | 4,653      |                                   | $          | 6,234 |   | $ | 14,609 |   | $ | 15,944 |   |

 

The general and administrative expenses decreased 4% over the prioryear quarter. This decrease was driven by lower corporate litigation costs anda recovery of certain legal costs previously paid. Total depreciation expensedecreased 46% for the quarter as a result of lower amortization expenses due tolower capitalized costs in the recent debt refinancing transaction.

 

Interest expense (net of interest income) for the current quartertotaled $2.8 million compared to $6.2 million in the prior year period. Thelower interest expense in the current quarter reflects reduced interest in thecurrent rates post-refinancing. Interest income during the quarter ended March31, 2004 included $1.5 million of interest on the loans to SDG, which ceasedupon the acquisition of SDG on March 2, 2004.

 

The nine months ended March 31, 2004, reflect a $12.3 millionrefinancing charge recorded in the first quarter consisting primarily of a $5.0million prepayment penalty for the redemption of our Subordinated Notes, anon-cash charge of $7.0 million to write off the deferred financing costs, and$0.3 million of fees and expenses. We recorded a tax benefit from these chargestotaling approximately $4.8 million.

 

The continuing operations tax rate of 34% for the quarter and 36% forthe year-to-date period reflects the realization of research and developmenttax credits and a reconciliation of certain deferred tax assets and liabilitiesto the 2003 tax return.

 

34

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**Results of Operations**

 

The following table reconciles our earnings before interest, taxes,depreciation and amortization (“EBITDA”) to our consolidated net income fromcontinuing operations (in 000’s):

 
|                                  |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|---------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                  |   | **2003**                                |   | **2004**                               |   | **2003** |   | **2004** |   |
|                                  |   |                                    |   |                                   |   |   |   |   |   |
| Net income from continuing operations |   | $                                       | 8,927  |                                   | $      | 12,241 |   | $ | 23,026 |   | $ | 28,306 |   |
| Income tax expense                    |   | 4,653                                   |   | 6,234                                  |   | 14,609 |   | 15,944 |   |
| Other expense, net                    |   | 608                                     |   | 904                                    |   | 996 |   | 2,830 |   |
| Interest expense, net                 |   | 6,215                                   |   | 2,773                                  |   | 19,283 |   | 12,245 |   |
| Refinancing charge                    |   | —                                  |   | —                                 |   | — |   | 12,293 |   |
| Operating income                      |   | 20,403                                  |   | 22,152                                 |   | 57,914 |   | 71,618 |   |
| Depreciation and amortization         |   | 5,527                                   |   | 8,128                                  |   | 14,680 |   | 20,595 |   |
| EBITDA from continuing operations     |   | $                                       | 25,930 |                                   | $      | 30,280 |   | $ | 72,594 |   | $ | 92,213 |   |

 

The following tables reconcile operating income by business segment toEBITDA:

 

For the three months ended March 31, 2003 (from continuingoperations) (in 000’s):

 
|                     |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|--------------------------|--------|-------------------------------|--------|-------------------------------------|--------|------------|--------|
|                     |   |                          |   |                                |   |       |   |
| Bally Gaming and Systems |   | $                             | 19,056 |                                | $      | 4,350      |   | $ | 23,406 |   |
| Casino Operations        |   | 4,843                         |   | 577                                 |   | 5,420      |   |
| Corporate expenses       |   | (3,496                        | )      | 600                                 |   | (2,896     | )      |
|                     |   | $                             | 20,403 |                                | $      | 5,527      |   | $ | 25,930 |   |

 

For the three months ended March 31, 2004 (from continuingoperations) (in 000’s):

 
|                     |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|--------------------------|--------|-------------------------------|--------|-------------------------------------|--------|------------|--------|
|                     |   |                          |   |                                |   |       |   |
| Bally Gaming and Systems |   | $                             | 20,096 |                                | $      | 7,115      |   | $ | 27,211 |   |
| Casino Operations        |   | 5,157                         |   | 690                                 |   | 5,847      |   |
| Corporate expenses       |   | (3,101                        | )      | 323                                 |   | (2,778     | )      |
|                     |   | $                             | 22,152 |                                | $      | 8,128      |   | $ | 30,280 |   |

 

For the nine months ended March 31, 2003 (from continuingoperations) (in 000’s):

 
|                     |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|--------------------------|--------|-------------------------------|--------|-------------------------------------|--------|------------|--------|
|                     |   |                          |   |                                |   |       |   |
| Bally Gaming and Systems |   | $                             | 55,966 |                                | $      | 11,391     |   | $ | 67,357 |   |
| Rainbow Casino           |   | 11,388                        |   | 1,603                               |   | 12,991     |   |
| Corporate expenses       |   | (9,440                        | )      | 1,686                               |   | (7,754     | )      |
|                     |   | $                             | 57,914 |                                | $      | 14,680     |   | $ | 72,594 |   |

 

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For the nine months ended March 31, 2004 (from continuingoperations) (in 000’s):

 
|                     |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|--------------------------|--------|-------------------------------|--------|-------------------------------------|--------|------------|--------|
|                     |   |                          |   |                                |   |       |   |
| Bally Gaming and Systems |   | $                             | 68,670 |                                | $      | 17,332     |   | $ | 86,002 |   |
| Rainbow Casino           |   | 12,985                        |   | 2,061                               |   | 15,046     |   |
| Corporate expenses       |   | (10,037                       | )      | 1,202                               |   | (8,835     | )      |
|                     |   | $                             | 71,618 |                                | $      | 20,595     |   | $ | 92,213 |   |

 

The following table reconciles our earnings before interest, taxes,depreciation and amortization (“EBITDA”) to our consolidated net income fromour discontinued operations (in 000’s):

 
|                                    |   | **Three  Months Ended  March 31,** |   | **Nine  Months Ended  March 31,** |   |
|-----------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                    |   | **2003**                                |   | **2004**                               |   | **2003** |   | **2004** |   |
|                                    |   |                                    |   |                                   |   |   |   |   |   |
| Net income from discontinued operations |   | $                                       | 3,853  |                                   | $      | 1,593 |   | $ | 7,865 |   | $ | 10,299 |   |
| Income tax expense                      |   | 920                                     |   | 7,023                                  |   | 3,501 |   | 11,747 |   |
| Other expense, net                      |   | 338                                     |   | 83                                     |   | 507 |   | 1,076 |   |
| Interest (income) expense, net          |   | (236                                    | )      | 17                                     |   | (835 | ) | 340 |   |
| Operating income                        |   | 4,875                                   |   | 8,716                                  |   | 11,038 |   | 23,462 |   |
| Depreciation and amortization           |   | 4,943                                   |   | —                                 |   | 12,710 |   | 565 |   |
| EBITDA from discontinued operations     |   | $                                       | 9,818  |                                   | $      | 8,716 |   | $ | 23,748 |   | $ | 24,027 |   |

 

For the three months ended March 31, 2003 (from discontinuedoperations) (in 000’s):

 
|                              |   | **Operating  Income** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|-----------------------------------|--------|-----------------------|--------|-------------------------------------|--------|------------|--------|
|                              |   |                  |   |                                |   |       |   |
| Route Operations                  |   | $                     | 1,563  |                                | $      | 3,817      |   | $ | 5,380 |   |
| Wall Machines and Amusement Games |   | 1,975                 |   | 807                                 |   | 2,782      |   |
| Rail City Casino                  |   | 1,337                 |   | 319                                 |   | 1,656      |   |
|                              |   | $                     | 4,875  |                                | $      | 4,943      |   | $ | 9,818 |   |

 

For the three months ended March 31, 2004 (from discontinuedoperations) (in 000’s):

 
|             |   | **Operating  Income** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|------------------|--------|-----------------------|--------|-------------------------------------|--------|------------|--------|
|             |   |                  |   |                                |   |       |   |
| Route Operations |   | $                     | 6,715  |                                | $      | —     |   | $ | 6,715 |   |
| Rail City Casino |   | 2,001                 |   | —                              |   | 2,001      |   |
|             |   | $                     | 8,716  |                                | $      | —     |   | $ | 8,716 |   |

 

36

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For the nine months ended March 31, 2003 (from discontinuedoperations) (in 000’s):

 
|                                |   | **Operating  Income  (Loss)** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|-------------------------------------|--------|-------------------------------|--------|-------------------------------------|--------|------------|--------|
|                                |   |                          |   |                                |   |       |   |
| Route Operations                    |   | $                             | 6,696  |                                | $      | 10,442     |   | $ | 17,138 |   |
| Wall Machines & Amusement Games |   | 714                           |   | 1,441                               |   | 2,155      |   |
| Rail City Casino                    |   | 3,628                         |   | 827                                 |   | 4,455      |   |
|                                |   | $                             | 11,038 |                                | $      | 12,710     |   | $ | 23,748 |   |

 

For the nine months ended March 31, 2004 (from discontinuedoperations) (in 000’s):

 
|             |   | **Operating  Income** |   | **Depreciation  and  Amortization** |   | **EBITDA** |   |
|------------------|--------|-----------------------|--------|-------------------------------------|--------|------------|--------|
| Route Operations |   | $                     | 18,746 |                                | $      | —     |   | $ | 18,746 |   |
| Rail City Casino |   | 4,716                 |   | 565                                 |   | 5,281      |   |
|             |   | $                     | 23,462 |                                | $      | 565        |   | $ | 24,027 |   |

 

We believe that the analysis of EBITDA is a useful adjunct to operatingincome, net income, cash flows and other GAAP-based measures. However, EBITDAshould not be construed as an alternative to net income (loss) or cash flowsfrom operating, investing and financing activities determined in accordancewith GAAP or as a measure of liquidity. EBITDA is a common measure ofperformance in the gaming industry but may not be comparable to similarlytitled measures reported by other companies. We disclose EBITDA primarilybecause it is a performance measure used by management in evaluating theperformance of our business units and is one of several performance measuresused in our management incentive plan. Additionally, EBITDA is utilized as a performance measure in covenantsfor our bank credit agreement.

 

37

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**ITEM3****.****                             QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

***Currency RateFluctuations***

 

We derive revenues from our non-U.S. subsidiaries, all of whichrevenues are denominated in their local currencies, and their results areaffected by changes in the relative values of non-U.S. currencies and the U.S.dollar. Most of the currencies in countries in which we have foreign operationsstrengthened versus the U.S. dollar in 2003 and 2004, which resulted in assetsand liabilities denominated in local currencies being translated into lessdollars. We do not currently utilize hedging instruments.

 

***Market Risks***

 

During the normal course of our business, we are routinely subjected toa variety of market risks, examples of which include, but are not limited to,interest and currency rate movements, collectibility of accounts and notes receivable,and recoverability of residual values on leased assets. We continually assessthese risks and have established policies and practices designed to protectagainst the adverse effects of these and other potential exposures. Although wedo not anticipate any material losses in these risk areas, no assurances can bemade that material losses will not be incurred in these areas in the future.

 

We have performed a sensitivity analysis of our financial instruments,which consist of our cash and cash equivalents and debt. We have no derivativefinancial instruments. In performing the sensitivity analysis, we define riskof loss as the hypothetical impact on earnings of changes in the marketinterest rates or currency exchange rates.

 

The results of the sensitivity analysis at March 31, 2004, are asfollows:

 

Interest Rate Risk:

 

As of March 2004, we had total debt of approximately $429.5million, consisting primarily of the new $350 million term loan and the initial$70 million borrowing on the revolver. The interest rate for each loan is seton the borrowing date and is effective for the term outstanding. If the LIBORrates were to increase or decrease by 100 basis points, with all other factorsremaining constant, earnings would decrease or increase by approximately $4.3million on a pre-tax basis.

 

Foreign Currency Exchange Rate Risk:

 

Our foreign subsidiaries generally use their domestic currency as theirfunctional currency. A 10% fluctuation in the exchange rates of thesecurrencies against the U.S. dollar would result in a corresponding change inearnings reported in the consolidated group of approximately $90,000.

 

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**ITEM4****.****                             DISCLOSURECONTROLS AND PROCEDURES**

 

The Company’s management, including the Chief Executive Officer andChief Financial Officer, conducted an evaluation of the effectiveness of thedesign and operation of the company’s disclosure controls and procedures asdefined in Securities Exchange Act Rule 13a-15(e) as described at the end of theperiod covered by this report.  Based onthat evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that as of the end of the period covered by this report, theCompany’s disclosure controls and procedures were effective.  During the period covered by this reportthere have been no changes in the Company’s internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect the Company’s internal control over financial reporting.

 

**PART II**

 

**ITEM 1.****                                  LegalProceedings**

 

There have been no material changes in any legal proceedings since thefiling of the Company’s annual report on Form 10-K for the fiscal year endedJune 30, 2003.

 

**ITEM 6.****                                  Exhibitsand Reports on Form 8-K**

 

a.                                       Exhibits

 
| 31.1   |   | Certification of Chief Executive Officer, pursuant to Rule 15d-15(e)  of the Securities Exchange Act of 1934, as amended.                                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                            |
| 31.2   |   | Certification of Chief Financial Officer, pursuant to Rule 15d-15(e)  of the Securities Exchange Act of 1934, as amended.                                       |
|   |   |                                                                                                                                                            |
| 32.1   |   | Certification of Chief Executive Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                            |
| 32.2   |   | Certification of Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002. |

 

39

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b.                                      Reports on Form8-K

 

•                  The Companyfiled a Form 8-K on January 15, 2004 announcing the financial results forthe period ended December 31, 2003.

•                  The Companyfiled a Form 8-K on February 19, 2004 announcing that the Company hadacquired substantially all the assets and liabilities of the privately heldMindPlay LLC.

•                  The Companyfiled a Form 8-K on March 2, 2004 announcing that the Company completedthe acquisition of the privately held Sierra Design Group.

 

40

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SIGNATURES

 

 

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

 

 
|   | ALLIANCE GAMING CORPORATION |                                      | Date: May 13, 2004 |
|--------|-----------------------------|-------------------------------------------|--------------------|
|   | (Registrant)                |                                      |               |
|   |                        |                                      |               |   |
|   |                        |                                      |               |   |
|   | By                          |   /s/ Robert L. Miodunski       |               |   |   |
|   |                        | President and Chief Executive Officer     |               |   |
|   |                        | (Principal Executive Officer)             |               |   |
|   |                        |                                      |               |   |
|   |                        |                                      |               |   |
|   | By                          |   /s/ Robert L. Saxton          |               |   |   |
|   |                        | Executive Vice President, Chief Financial |               |   |
|   |                        | Officer and Treasurer (Principal          |               |   |
|   |                        | Financial and Accounting Officer)         |               |   |
|        |                             |                                           |                    |  |  |  |

 

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