##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the Quarter ended December 31, 2002


OR

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

For the transition period from                      to


Commission File Number 0-4281

ALLIANCE GAMING CORPORATION

(Exact name of registrant as specified in its charter)


| |  |                                                                                |  |                                                
| |  | ------------------------------------------------------------------------------ |  | -----------------------------------------------
| |  | NEVADA
(State or other jurisdiction of
incorporation or organization)          |  | 88-0104066
(I.R.S. Employer
Identification No.)
| |  |                                                                                |  |                                                
| |  | 6601 S. Bermuda Rd.
Las Vegas, Nevada
(Address of principal executive offices) |  | 89119
(Zip Code)                               

Registrants telephone number: (702) 270-7600
Registrants internet: www.alliancegaming.com

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

The number of shares of Common Stock, $0.10 par value, outstanding as of
February 1, 2002, according to the records of the registrants registrar and
transfer agent was 49,336,000.

1



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TABLE OF CONTENTS



|                               |                                                                                               |                                                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ |  |  |  |  |  | 
|PART I - FINANCIAL INFORMATION
|                               |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS                                     
|                               |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
|                               |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED  
|                               |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY                 
|                               |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                           
|                               |                                                                                               | 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                                                   
|                               | ITEM 1. Legal Proceedings                                                                    
|                               | ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|                               | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|CERTIFICATIONS                
|EXHIBIT 99.1                  



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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-Q

For the Quarter Ended December 31, 2002

I N D E X

|                                                                                              |                                                                                                                 |  |       |      | 
|--------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- |  | ----- | ---- | 
|PART I. FINANCIAL INFORMATION                                                                
|                                                                                              |                                                                                                                 |  | Page 
|Item 1. Unaudited Financial Statements                                                        |                                                                                                                 |  |       |     
|                                                                                              | Unaudited Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2002                       |  |       | 3    | 
|                                                                                              | Unaudited Condensed Consolidated Statements of Operations
for the three months ended December 31, 2001 and 2002 |  |       | 4    | 
|                                                                                              | Unaudited Condensed Consolidated Statements of Operations
for the six months ended December 31, 2001 and 2002   |  |       | 5    | 
|                                                                                              | Unaudited Condensed Consolidated Statements of Stockholders Equity
for the six months ended December 31, 2002  |  |       | 6    | 
|                                                                                              | Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 2001 and 2002   |  |       | 7    | 
|                                                                                              | Notes to Unaudited Condensed Consolidated Financial Statements                                                  |  |       | 8-22 | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                 |  | 23-30 |     
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                 |  | 31    |     
|Item 4. Disclosure Controls and Procedures                                                    |                                                                                                                 |  | 31    |     
|PART II. OTHER INFORMATION                                                                    |                                                                                                                 |  |       |     
|Item 1. Legal Proceedings                                                                     |                                                                                                                 |  | 32    |     
|Item 4. Submission of matters to a vote of Security Holders                                   |                                                                                                                 |  | 32    |     
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                 |  | 32    |     
|SIGNATURES                                                                                    |                                                                                                                 |  | 33    |     
|CERTIFICATIONS                                                                                |                                                                                                                 |  | 34-36 |     

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##### Table of Contents






PART 1
ALLIANCE GAMING CORPORATION AND SUBSIDIARIES




UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In 000s, except share data)


|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |          |         |        |         | 
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------- | ------------------------------------------ | ------- | -------- | ------- | -------- | ------- | ------ | ------- | 
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         | June 30, |         | Dec. 31,
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         | 2002     |         | 2002    
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|ASSETS                                                                                                      
|Current assets:                                                                                              |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|                                                                                                             | Cash and cash equivalents                                                                                                       |                            | $                         | 62,508                                     |         |          | $       | 54,920   |        
|                                                                                                             | Short-term investments (restricted)                                                                                             |                            |                           | 896                                        |         |          |         | 845      |        
|                                                                                                             | Accounts and short-term notes receivable, net of allowance
for doubtful accounts of $15,695 and $13,987                         |                            |                           | 96,832                                     |         |          |         | 111,642  |        
|                                                                                                             | Inventories, net of reserves of $7,814 and $6,512                                                                               |                            |                           | 42,997                                     |         |          |         | 41,079   |        
|                                                                                                             | Deferred tax assets, net                                                                                                        |                            |                           | 27,605                                     |         |          |         | 27,606   |        
|                                                                                                             | Other current assets                                                                                                            |                            |                           | 13,975                                     |         |          |         | 14,355   |        
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|                                                                                                             |                                                                                                                                 | Total current assets       |                           |                                            | 244,813 |          |         |          | 250,447 |       
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|Long-term notes receivable, net of allowance for doubtful
accounts of $456 and $366                          |                                                                                                                                 |                            | 2,389                     |                                            |         |          | 20,559  |         
|Leased equipment, net of accumulated depreciation of $9,931 and $13,800                                      |                                                                                                                                 |                            | 19,560                    |                                            |         |          | 27,554  |         
|Property, plant and equipment, net of accumulated depreciation and
amortization of $63,313 and $70,740       |                                                                                                                                 |                            | 90,314                    |                                            |         |          | 91,401  |         
|Excess of costs over net assets of acquired businesses, net of
accumulated amortization of $6,517 and $6,556 |                                                                                                                                 |                            | 47,713                    |                                            |         |          | 49,586  |         
|Intangible assets, net of accumulated amortization of $25,148 and $27,425                                    |                                                                                                                                 |                            | 32,512                    |                                            |         |          | 38,011  |         
|Deferred tax assets, net                                                                                     |                                                                                                                                 |                            | 18,240                    |                                            |         |          | 8,521   |         
|Other assets, net of reserves of $1,818 and $1,818                                                           |                                                                                                                                 |                            | 4,339                     |                                            |         |          | 4,775   |         
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|                                                                                                             |                                                                                                                                 |                            |                           | Total assets                               |         | $        | 459,880 |          |         | $      | 490,854 | 
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                        
|Current liabilities:                                                                                         |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|                                                                                                             | Accounts payable                                                                                                                |                            | $                         | 15,894                                     |         |          | $       | 16,106   |        
|                                                                                                             | Accrued liabilities                                                                                                             |                            |                           | 45,841                                     |         |          |         | 47,559   |        
|                                                                                                             | Jackpot liabilities                                                                                                             |                            |                           | 5,915                                      |         |          |         | 8,798    |        
|                                                                                                             | Current maturities of long-term debt                                                                                            |                            |                           | 4,116                                      |         |          |         | 4,944    |        
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|                                                                                                             |                                                                                                                                 |                            | Total current liabilities |                                            |         | 71,766   |         |          |         | 77,407 |        
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|Long-term debt, net                                                                                          |                                                                                                                                 |                            | 338,148                   |                                            |         |          | 338,169 |         
|Other liabilities                                                                                            |                                                                                                                                 |                            | 2,747                     |                                            |         |          | 3,552   |         
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|                                                                                                             |                                                                                                                                 |                            |                           | Total liabilities                          |         |          | 412,661 |          |         |        | 419,128 | 
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|Minority interest                                                                                            |                                                                                                                                 |                            | 1,233                     |                                            |         |          | 920     |         
|Commitments and contingencies                                                                                |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|Stockholders equity                                                                                         |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|                                                                                                             | Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value;
120 shares and 115 shares issued and outstanding |                            |                           | 12                                         |         |          |         | 12       |        
|                                                                                                             | Common Stock, $.10 par value; 100,000,000 shares authorized;
49,227,000 and 49,774,000 shares issued                            |                            |                           | 4,927                                      |         |          |         | 4,982    |        
|                                                                                                             | Treasury stock at cost, 513,000 shares                                                                                          |                            |                           | (501                                       | )       |          |         | (501     | )      
|                                                                                                             | Additional paid-in capital                                                                                                      |                            |                           | 157,866                                    |         |          |         | 161,641  |        
|                                                                                                             | Accumulated other comprehensive losses                                                                                          |                            |                           | (19,364                                    | )       |          |         | (16,485  | )      
|                                                                                                             | Accumulated deficit                                                                                                             |                            |                           | (96,954                                    | )       |          |         | (78,843  | )      
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|                                                                                                             |                                                                                                                                 | Total stockholders equity |                           |                                            | 45,986  |          |         |          | 70,806  |       
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         
|                                                                                                             |                                                                                                                                 |                            |                           | Total liabilities and stockholders equity |         | $        | 459,880 |          |         | $      | 490,854 | 
|                                                                                                             |                                                                                                                                 |                            |                           |                                            |         |          |         |         

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES




UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000s, except per share data)


|                                                                 |                                   |                                           |         |                                 |        |      |         |        |        | 
|---------------------------------------------------------------- | --------------------------------- | ----------------------------------------- | ------- | ------------------------------- | ------ | ---- | ------- | ------ | ------ | 
|                                                                 |                                   |                                           |         | Three Months Ended December 31,
|                                                                 |                                   |                                           |         | 2001                            |        | 2002
|                                                                 |                                   |                                           |         |                                 |        |     
|Revenues:                                                        |                                   |                                           |         |                                 |        |      |         |       
|                                                                 | Gaming equipment and systems      |                                           | $       | 51,783                          |        |      | $       | 86,627 |       
|                                                                 | Wall machines and amusement games |                                           |         | 25,462                          |        |      |         | 16,900 |       
|                                                                 | Route operations                  |                                           |         | 55,764                          |        |      |         | 53,321 |       
|                                                                 | Casino operations                 |                                           |         | 17,607                          |        |      |         | 16,778 |       
|                                                                 |                                   |                                           |         |                                 |        |      |         |       
|                                                                 |                                   |                                           | 150,616 |                                 |        |      | 173,626 |       
|                                                                 |                                   |                                           |         |                                 |        |      |         |       
|Costs and expenses:                                              |                                   |                                           |         |                                 |        |      |         |       
|                                                                 |                                   | Cost of gaming equipment and systems      |         |                                 | 22,844 |      |         |        | 39,663 | 
|                                                                 |                                   | Cost of wall machines and amusement games |         |                                 | 13,108 |      |         |        | 9,809  | 
|                                                                 |                                   | Cost of route operations                  |         |                                 | 46,074 |      |         |        | 44,682 | 
|                                                                 |                                   | Cost of casino operations                 |         |                                 | 7,866  |      |         |        | 8,062  | 
|                                                                 |                                   | Selling, general and administrative       |         |                                 | 29,201 |      |         |        | 31,124 | 
|                                                                 |                                   | Research and development costs            |         |                                 | 3,807  |      |         |        | 5,912  | 
|                                                                 |                                   | Depreciation and amortization             |         |                                 | 7,316  |      |         |        | 8,921  | 
|                                                                 |                                   |                                           |         |                                 |        |      |         |       
|                                                                 |                                   |                                           | 130,216 |                                 |        |      | 148,173 |       
|                                                                 |                                   |                                           |         |                                 |        |      |         |       
|Operating income                                                 |                                   |                                           | 20,400  |                                 |        |      | 25,453  |       
|Other income (expense):                                          |                                   |                                           |         |                                 |        |      |         |       
|                                                                 | Interest income                   |                                           |         | 369                             |        |      |         | 452    |       
|                                                                 | Interest expense                  |                                           |         | (7,033                          | )      |      |         | (6,566 | )     
|                                                                 | Minority interest                 |                                           |         | (405                            | )      |      |         | (309   | )     
|                                                                 | Other, net                        |                                           |         | (432                            | )      |      |         | 268    |       
|                                                                 |                                   |                                           |         |                                 |        |      |         |       
|Income before income taxes                                       |                                   |                                           | 12,899  |                                 |        |      | 19,298  |       
|Income tax provision                                             |                                   |                                           | (83     | )                               |        |      | (7,445  | )     
|                                                                 |                                   |                                           |         |                                 |        |      |         |       
|Net income                                                       |                                   | $                                         | 12,816  |                                 |        | $    | 11,853  |       
|                                                                 |                                   |                                           |         |                                 |        |      |         |       
|Basic earnings per share                                         |                                   | $                                         | 0.29    |                                 |        | $    | 0.24    |       
|                                                                 |                                   |                                           |         |                                 |        |      |         |       
|Diluted earnings per share                                       |                                   | $                                         | 0.27    |                                 |        | $    | 0.24    |       
|                                                                 |                                   |                                           |         |                                 |        |      |         |       
|Weighted average common shares outstanding                       |                                   |                                           | 44,950  |                                 |        |      | 49,208  |       
|                                                                 |                                   |                                           |         |                                 |        |      |         |       
|Weighted average common and common
share equivalents outstanding |                                   |                                           | 47,258  |                                 |        |      | 50,316  |       
|                                                                 |                                   |                                           |         |                                 |        |      |         |       

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES




UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000s, except per share data)


|                                                                 |                                           |                   |         |                               |         |      |         |         |         |  
|---------------------------------------------------------------- | ----------------------------------------- | ----------------- | ------- | ----------------------------- | ------- | ---- | ------- | ------- | ------- | -
|                                                                 |                                           |                   |         | Six Months Ended December 31,
|                                                                 |                                           |                   |         | 2001                          |         | 2002
|                                                                 |                                           |                   |         |                               |         |     
|Revenues:                                                        |                                           |                   |         |                               |         |      |         |        
|                                                                 | Gaming equipment and systems              |                   | $       | 97,098                        |         |      | $       | 150,166 |        
|                                                                 | Wall machines and amusement games         |                   |         | 38,123                        |         |      |         | 27,466  |        
|                                                                 | Route operations                          |                   |         | 109,564                       |         |      |         | 108,158 |        
|                                                                 | Casino operations                         |                   |         | 35,786                        |         |      |         | 34,568  |        
|                                                                 |                                           |                   |         |                               |         |      |         |        
|                                                                 |                                           |                   | 280,571 |                               |         |      | 320,358 |        
|                                                                 |                                           |                   |         |                               |         |      |         |        
|Costs and expenses:                                              |                                           |                   |         |                               |         |      |         |        
|                                                                 | Cost of gaming equipment and systems      |                   |         | 42,395                        |         |      |         | 65,921  |        
|                                                                 | Cost of wall machines and amusement games |                   |         | 20,613                        |         |      |         | 15,979  |        
|                                                                 | Cost of route operations                  |                   |         | 90,472                        |         |      |         | 90,402  |        
|                                                                 | Cost of casino operations                 |                   |         | 16,201                        |         |      |         | 16,250  |        
|                                                                 | Selling, general and administrative       |                   |         | 53,090                        |         |      |         | 60,540  |        
|                                                                 | Research and development costs            |                   |         | 7,499                         |         |      |         | 10,672  |        
|                                                                 | Depreciation and amortization             |                   |         | 15,040                        |         |      |         | 16,920  |        
|                                                                 |                                           |                   |         |                               |         |      |         |        
|                                                                 |                                           |                   | 245,310 |                               |         |      | 276,684 |        
|                                                                 |                                           |                   |         |                               |         |      |         |        
|Operating income                                                 |                                           |                   | 35,261  |                               |         |      | 43,674  |        
|Other income (expense):                                          |                                           |                   |         |                               |         |      |         |        
|                                                                 |                                           | Interest income   |         |                               | 764     |      |         |         | 733     |  
|                                                                 |                                           | Interest expense  |         |                               | (14,680 | )    |         |         | (13,202 | )
|                                                                 |                                           | Minority interest |         |                               | (868    | )    |         |         | (754    | )
|                                                                 |                                           | Other, net        |         |                               | (12     | )    |         |         | 197     |  
|                                                                 |                                           |                   |         |                               |         |      |         |        
|Income before income taxes                                       |                                           |                   | 20,465  |                               |         |      | 30,648  |        
|Income tax provision                                             |                                           |                   | (221    | )                             |         |      | (12,537 | )      
|                                                                 |                                           |                   |         |                               |         |      |         |        
|Net income                                                       |                                           | $                 | 20,244  |                               |         | $    | 18,111  |        
|                                                                 |                                           |                   |         |                               |         |      |         |        
|Basic earnings per share                                         |                                           | $                 | 0.46    |                               |         | $    | 0.37    |        
|                                                                 |                                           |                   |         |                               |         |      |         |        
|Diluted earnings per share                                       |                                           | $                 | 0.44    |                               |         | $    | 0.37    |        
|                                                                 |                                           |                   |         |                               |         |      |         |        
|Weighted average common shares outstanding                       |                                           |                   | 43,786  |                               |         |      | 48,461  |        
|                                                                 |                                           |                   |         |                               |         |      |         |        
|Weighted average common and common
share equivalents outstanding |                                           |                   | 45,700  |                               |         |      | 49,560  |        
|                                                                 |                                           |                   |         |                               |         |      |         |        

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES




UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Six Months Ended December 31, 2002
(In 000s)


|                                               |                            |  |              |  |          |   |               |  |         |   |               |  |        |   |          |   |        |   |            |  |  |   |         |   |       |   |             |   |       |   |        |        | 
|---------------------------------------------- | -------------------------- |  | ------------ |  | -------- | - | ------------- |  | ------- | - | ------------- |  | ------ | - | -------- | - | ------ | - | ---------- |  |  | - | ------- | - | ----- | - | ----------- | - | ----- | - | ------ | ------ | 
|                                               |                            |  |              |  |          |   |               |  |         |   |               |  |        |   |          |   |        |   |            |  |  |   |         |   |       |   | Accumulated |   | Total
|                                               |                            |  |              |  |          |   |               |  |         |   |               |  |        |   |          |   |        |   | Additional |  |  |   |         |   | Other |   | Stock-     
|                                               |                            |  | Common Stock |  | Series E |   | Treasury      |  | Paid-in |   | Comprehensive |  | Accum. |   | holders'
|                                               |                            |  | Shares       |  | Dollars  |   | Special Stock |  | Stock   |   | Capital       |  | Loss   |   | Deficit  |   | Equity
|                                               |                            |  |              |  |          |   |               |  |         |   |               |  |        |   |          |   |       
|Balances at June 30, 2002                      |                            |  | 49,227       |  |          | $ | 4,927         |  |         | $ | 12            |  |        | $ | (501     | ) |        | $ | 157,866    |  |  | $ | (19,364 | ) |       | $ | (96,954     | ) |       | $ | 45,986 |       
|Net income                                     |                            |  |             |  |          |   |              |  |         |   |              |  |        |   |         |   |        |   |           |  |  |   |        |   |       |   | 18,111      |   |       |   | 18,111 |       
|Foreign currency translation
adjustment        |                            |  |             |  |          |   |              |  |         |   |              |  |        |   |         |   |        |   |           |  |  |   | 2,879   |   |       |   |            |   |       |   | 2,879  |       
|                                               |                            |  |              |  |          |   |               |  |         |   |               |  |        |   |          |   |        |   |            |  |  |   |         |   |       |   |             |   |       |   |        |       
|                                               | Total comprehensive income |  |              |  |          |   |               |  |         |   |               |  |        |   |          |   |        |   |            |  |  |   |         |   |       |   |             |   |       |   |        | 20,990 | 
|Shares issued upon exercise
of options         |                            |  | 547          |  |          |   | 55            |  |         |   |              |  |        |   |         |   |        |   | 1,737      |  |  |   |        |   |       |   |            |   |       |   | 1,792  |       
|Tax benefit of employee stock
option exercises |                            |  |             |  |          |   |              |  |         |   |              |  |        |   |         |   |        |   | 2,038      |  |  |   |        |   |       |   |            |   |       |   | 2,038  |       
|                                               |                            |  |              |  |          |   |               |  |         |   |               |  |        |   |          |   |        |   |            |  |  |   |         |   |       |   |             |   |       |   |        |       
|Balances at December 31, 2002                  |                            |  | 49,774       |  |          | $ | 4,982         |  |         | $ | 12            |  |        | $ | (501     | ) |        | $ | 161,641    |  |  | $ | (16,485 | ) |       | $ | (78,843     | ) |       | $ | 70,806 |       
|                                               |                            |  |              |  |          |   |               |  |         |   |               |  |        |   |          |   |        |   |            |  |  |   |         |   |       |   |             |   |       |   |        |       

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES




UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000s)


|                                        |            |                                                                                   |     |                                                     |        |                               |         |        |         |   |         |  
|--------------------------------------- | ---------- | --------------------------------------------------------------------------------- | --- | --------------------------------------------------- | ------ | ----------------------------- | ------- | ------ | ------- | - | ------- | -
|                                        |            |                                                                                   |     |                                                     |        | Six Months Ended December 31,
|                                        |            |                                                                                   |     |                                                     |        | 2001                          |         | 2002  
|                                        |            |                                                                                   |     |                                                     |        |                               |         |       
|Cash flows from operating activities:   |            |                                                                                   |     |                                                     |        |                               |         |       
|                                        | Net income |                                                                                   | $   | 20,244                                              |        |                               | $       | 18,111 |        
|                                        |            | Adjustments to reconcile net income to net
cash provided by operating activities: |     |                                                     |        |                               |         |        |         |  
|                                        |            |                                                                                   |     | Depreciation and amortization                       |        |                               | 15,040  |        |         |   | 16,920  |  
|                                        |            |                                                                                   |     | Amortization of debt discount                       |        |                               | 40      |        |         |   | 40      |  
|                                        |            |                                                                                   |     | (Gain) loss on sale of assets                       |        |                               | 97      |        |         |   | (15     | )
|                                        |            |                                                                                   |     | Provision for losses on receivables                 |        |                               | 1,719   |        |         |   | 1,033   |  
|                                        |            |                                                                                   |     | Deferred income taxes                               |        |                               | (215    | )      |         |   | 9,718   |  
|                                        |            |                                                                                   |     | Other                                               |        |                               | 1,401   |        |         |   | (365    | )
|                                        |            | Net change in operating assets and liabilities:                                   |     |                                                     |        |                               |         |        |         |  
|                                        |            |                                                                                   |     | Accounts and notes receivable                       |        |                               | (10,312 | )      |         |   | (32,020 | )
|                                        |            |                                                                                   |     | Inventories                                         |        |                               | (11,024 | )      |         |   | (2,564  | )
|                                        |            |                                                                                   |     | Other current assets                                |        |                               | (1,656  | )      |         |   | 940     |  
|                                        |            |                                                                                   |     | Accounts payable                                    |        |                               | 1,702   |        |         |   | 2,180   |  
|                                        |            |                                                                                   |     | Accrued liabilities                                 |        |                               | 2,847   |        |         |   | 4,357   |  
|                                        |            |                                                                                   |     |                                                     |        |                               |         |       
|                                        |            |                                                                                   |     | Net cash provided by operating activities           |        |                               | 19,883  |        |         |   | 18,335  |  
|                                        |            |                                                                                   |     |                                                     |        |                               |         |       
|Cash flows from investing activities:   |            |                                                                                   |     |                                                     |        |                               |         |       
|                                        |            | Additions to property, plant and equipment                                        |     |                                                     | (6,205 | )                             |         |        | (8,775  | )
|                                        |            | Additions to leased gaming equipment                                              |     |                                                     | (8,248 | )                             |         |        | (10,010 | )
|                                        |            | Additions to other long-term assets                                               |     |                                                     | (1,976 | )                             |         |        | (4,311  | )
|                                        |            | Acquisitions, net of cash acquired                                                |     |                                                     | (6,731 | )                             |         |        | (3,038  | )
|                                        |            | Proceeds from disposal of property and equipment and other assets                 |     |                                                     | 42     |                               |         |        | 9       |  
|                                        |            |                                                                                   |     |                                                     |        |                               |         |       
|                                        |            |                                                                                   |     | Net cash used in investing activities               |        |                               | (23,118 | )      |         |   | (26,125 | )
|                                        |            |                                                                                   |     |                                                     |        |                               |         |       
|Cash flows from financing activities:   |            |                                                                                   |     |                                                     |        |                               |         |       
|                                        |            | Reduction of long-term debt                                                       |     |                                                     | (746   | )                             |         |        | (2,190  | )
|                                        |            | Capitalized debt issuance costs                                                   |     |                                                     | (651   | )                             |         |        |        |  
|                                        |            | Net increase (decrease) in revolving credit facility                              |     |                                                     |       |                               |         |        |        |  
|                                        |            | Proceeds from exercise of stock options and warrants                              |     |                                                     | 4,080  |                               |         |        | 1,792   |  
|                                        |            |                                                                                   |     |                                                     |        |                               |         |       
|                                        |            |                                                                                   |     | Net cash provided by (used in) financing activities |        |                               | 2,683   |        |         |   | (398    | )
|                                        |            |                                                                                   |     |                                                     |        |                               |         |       
|Effect of exchange rate changes on cash |            |                                                                                   | 154 |                                                     |        |                               | 600     |       
|Cash and cash equivalents:              |            |                                                                                   |     |                                                     |        |                               |         |       
|                                        |            |                                                                                   |     | Increase (decrease) for period                      |        |                               | (398    | )      |         |   | (7,588  | )
|                                        |            |                                                                                   |     | Balance, beginning of period                        |        |                               | 54,845  |        |         |   | 62,508  |  
|                                        |            |                                                                                   |     |                                                     |        |                               |         |       
|                                        |            |                                                                                   |     | Balance, end of period                              |        | $                             | 54,447  |        |         | $ | 54,920  |  
|                                        |            |                                                                                   |     |                                                     |        |                               |         |       

See notes to unaudited condensed consolidated financial statements

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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES




NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Six Months Ended December 31, 2001 and 2002

1. BASIS OF PRESENTATION



| |  | Principles of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring
adjustments, which management believes are necessary to present fairly the
financial position, results of operations and cash flows of Alliance Gaming
Corporation (Alliance or the Company) for the respective periods
presented. The results of operations for an interim period are not
necessarily indicative of the results that may be expected for any other
interim period or for the year as a whole. The accompanying unaudited
interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes in the
Companys annual report on Form 10-K for the year ended June 30, 2002. All
intercompany accounts and transactions have been eliminated in
consolidation.                         
|
| |  | The accompanying consolidated financial statements include the accounts of
Alliance Gaming Corporation, and its wholly owned and partially owned,
controlled subsidiaries. In the case of Video Services, Inc. (VSI), the
Company 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. All significant intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made to prior year financial
statements to conform to the current year presentation.                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company, through a wholly-owned subsidiary, is the general partner of
Rainbow Casino Vicksburg Partnership, L.P. (RCVP) the limited partnership
that operates the Rainbow Casino. The limited partner, Rainbow Corporation,
an independent third party, is entitled to receive 10% of the net available
cash flows after debt service and other items, as defined (which amount
increases to 20% of such amount for the proportional revenues above $35.0
million) each year through December 31, 2010. The Company holds the
remaining economic interest in the partnership and consolidates the
partnership with minority interest being reflected for the portion not
owned.                                                                                                                                                                                                                               
|
| |  | On November 13, 2002, the Company announced the acquisition of Casino
Management System Software Company (CMS), a leading supplier of software
solutions focusing on player database management, player tracking and casino
promotions. The $6.5 million purchase, consisting of cash and a two-year
note, was accounted for pursuant to the provisions of Statement of Financial
Accounting Standards No.141 Business Combinations (SFAS No. 141). Certain pro forma disclosure for the CMS acquisition normally
required under SFAS No. 141 have been omitted as this acquisition did not
exceed the materiality provisions contained therein. The allocation of the
purchase price to the assets and liabilities acquired will be completed
prior to June 30, 2003.                                                                                                                                            
|
| |  | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Revenue from sales of gaming machines and amusement games is generally
recognized at the time products are shipped and title has passed to the
customer. The Company sells gaming equipment on normal credit terms
(generally 2%, net 30) and also offers financing to qualified customers for
periods generally between 6 and 48 months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Revenue from sales of computerized monitoring systems 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 the sales 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 of systems are deferred and begin to be
recognized at the point when the system is deemed to be functionally
operational, and the residual method is used to recognize revenue for the
remaining elements as they are delivered, each having vendor specific
objective evidence of relative sales values. Post-contract customer support revenues
are recognized over the period of the support agreement (generally one
year).

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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Six Months Ended December 31, 2001 and 2002



| |  | Our Bally Gaming and Systems business unit earns revenues from recurring
revenue sources which consist of the operations of the wide-area progressive
jackpot systems and revenues from gaming machines placed in a casino on a
daily lease or rental basis. Revenue from these sources is recognized based
on the contractual terms of the participation or rental agreements and is
generally based on a share of money wagered, a share of the net winnings, or
on a fixed daily rental rate basis.                                                              
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In accordance with industry practice, we recognize gaming revenues in our
route and casino operations as the net win from gaming machine operations,
which is the difference between coins and currency deposited into the
machines and payments to customers and, for other games, the difference
between gaming wins and losses. We recognize total net win from gaming
machines as revenues for route operations which we operate pursuant to
revenue-sharing arrangements and revenue-sharing payments (either fixed or
variable) as a cost of route operations.
|
| |  | The Company constantly monitors its exposure for credit losses and
maintains allowances for anticipated losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                     

2. 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 and
finished goods include raw materials, freight, direct labor and
manufacturing overhead.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Inventories, net of reserves, consist of the following (in 000s):                                                                                                                                                                       

|                |                   |   |          |        |          |   |        |        | 
|--------------- | ----------------- | - | -------- | ------ | -------- | - | ------ | ------ | 
|                |                   |   | June 30, |        | Dec. 31,
|                |                   |   | 2002     |        | 2002    
|                |                   |   |          |        |         
|Raw materials   |                   | $ | 17,158   |        |          | $ | 17,960 |       
|Work-in-process |                   |   | 936      |        |          |   | 2,764  |       
|Finished goods  |                   |   | 24,903   |        |          |   | 20,355 |       
|                |                   |   |          |        |          |   |        |       
|                | Total inventories |   | $        | 42,997 |          |   | $      | 41,079 | 
|                |                   |   |          |        |          |   |        |       

3. DEBT



| |  | Long-term debt consists of the following (in 000s):
| |  | ----------------------------------------------------

|                                                                                     |                                         |   |          |         |          |   |         |         | 
|------------------------------------------------------------------------------------ | --------------------------------------- | - | -------- | ------- | -------- | - | ------- | ------- | 
|                                                                                     |                                         |   | June 30, |         | Dec. 31,
|                                                                                     |                                         |   | 2002     |         | 2002    
|                                                                                     |                                         |   |          |         |         
|Term loan facility                                                                   |                                         | $ | 189,525  |         |          | $ | 188,575 |        
|10% Senior Subordinated Notes due 2007, net of unamortized
discount of $416 and $376 |                                         |   | 149,584  |         |          |   | 149,624 |        
|Other subordinated debt                                                              |                                         |   | 2,495    |         |          |   | 1,495   |        
|Other, primarily secured by related equipment                                        |                                         |   | 660      |         |          |   | 3,419   |        
|                                                                                     |                                         |   |          |         |          |   |         |        
|                                                                                     |                                         |   | 342,264  |         |          |   | 343,113 |        
|Less current maturities                                                              |                                         |   | 4,116    |         |          |   | 4,944   |        
|                                                                                     |                                         |   |          |         |          |   |         |        
|                                                                                     | Long-term debt, less current maturities |   | $        | 338,148 |          |   | $       | 338,169 | 
|                                                                                     |                                         |   |          |         |          |   |         |        



| |  | The Companys debt structure consists primarily of a $190 million term loan
facility and a $25 million revolving credit facility (which can be increased
by $15 million at the Companys discretion) (collectively referred to herein
as the bank facility) and $150 million Senior Subordinated Notes. The term
loan has an interest rate of LIBOR plus 3.25% (or 4.7% as of December 31,
2002), has a 1% per year mandatory principal amortization, and
matures on December 31, 2006. The revolving credit facility commitment
decreases ratably over its 5 year commitment, which ends on June 30, 2005.
As of December 31, 2002, there were no borrowings outstanding on the
revolving credit facility. The bank facility loan contains certain customary
financial and operational covenants.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31, 2001 and 2002



| |  | The bank facility is collateralized by substantially all domestic property
and is guaranteed by each domestic subsidiary of the U.S. Borrower and
German Subsidiaries (both as defined in the credit agreement), other than
the entity that holds the Companys interest in its Louisiana and
Mississippi operations, and is secured by both a U.S. and German Pledge
Agreement (both as defined). The bank facility contains a number of
maintenance covenants and other significant covenants that, among other
things, restrict the ability of the Company and the ability of certain of
its subsidiaries to dispose of assets, incur additional indebtedness, pay
dividends or make other distributions, enter into certain acquisitions,
repurchase equity interests or subordinated indebtedness, issue or sell
equity interests of the Companys subsidiaries, engage in mergers or
acquisitions, or engage in certain transactions with subsidiaries and
affiliates, and that otherwise restrict corporate activities. As of December
31, 2002, we are in compliance with these covenants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Senior Subordinated Notes bear interest at 10%, are due in 2007, and are
general unsecured obligations of the Company, ranking subordinate in right
of payment to all Senior Debt (as defined) of the Company, including
indebtedness under the bank facility. The Senior Subordinated Notes are
fully and unconditionally guaranteed on a joint and several senior
subordinated basis by all existing and future domestic Restricted
Subsidiaries of the Company, subject to certain exceptions including the
partially-owned entities through which its Mississippi casino and Louisiana
route operations are conducted. The Subsidiary Guarantees are general
unsecured obligations of the Guarantors, ranking subordinate in right of
payment to all Senior Debt of the Guarantors. The Company will be able to
designate other current or future subsidiaries as Unrestricted Subsidiaries
under certain circumstances. Unrestricted Subsidiaries will not be required
to issue a Subsidiary Guarantee and will not be subject to many of the
restrictive covenants set forth in the Indenture pursuant to which the
Senior Subordinated Notes were issued. The Indenture for the Companys
Senior Subordinated Notes contains various covenants, including limitations
on incurrence of additional indebtedness, on restricted payments and on
dividend and payment restrictions on subsidiaries. The Senior Subordinated
Notes may be redeemed beginning in August 2002 at 105%, which decreases
ratably over the remaining term. Upon the occurrence of a Change of Control
(as defined), the holders of the Senior Subordinated Notes will have the
right to require the Company to purchase their notes at a price equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase. As of December 31, 2002, we are also in
compliance with the covenants contained in the Indenture for the Senior
Subordinated Notes.

4. INCOME TAXES



| |  | The Company has significant deferred tax assets, which consist primarily of
net operating loss carry forwards and other timing differences. Management
conducts periodic recoverability assessments of these deferred tax assets,
which includes evaluating both positive and negative evidential matter to
determine if it is more likely than not that the deferred tax assets will
be realizable. On June 30, 2002, management conducted a recoverability
assessment and determined that $37 million in previously reserved deferred
tax assets were realizable due to the Companys profitable operating results
in 2001 and 2002 and projected future taxable income. Until the fourth
quarter of fiscal year 2002, management did not believe sufficient evidence
existed that it was more likely than not that such profitable operating
results would allow such deferred tax assets to be realized.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Beginning July 1, 2002, the Company began recognizing Federal income tax
expense based on 35% of pre-tax domestic income and state income taxes at a
rate of approximately 2% of domestic income. For the prior year quarter
ended December 31, 2001, substantially all of the Companys taxable income
was offset against Federal
net operating loss carry forwards, which reduced the Companys tax expense
for the quarter ended December 31, 2001 from approximately $4.6 million to
approximately $83,000.                                                                                                                                                                                                                                                                                                                                                                                               

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31, 2001 and 2002

5. EARNINGS PER SHARE



| |  | The computation of basic and diluted earnings per share is as follows (in
000s except per share amounts):
| |  | ----------------------------------------------------------------------------------------------------------

|                                                                  |                                     |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |       | 
|----------------------------------------------------------------- | ----------------------------------- | - | ------------------ | ----- | ---------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                  |                                     |   | Three months ended |       | Six months ended
|                                                                  |                                     |   | December 31,       |       | December 31,    
|                                                                  |                                     |   | 2001               |       | 2002             |   | 2001   |       | 2002
|                                                                  |                                     |   |                    |       |                  |   |        |       |     
|Net income                                                        |                                     | $ | 12,816             |       |                  | $ | 11,853 |       |      | $ | 20,244 |       |  | $ | 18,111 |      
|Weighted average common shares outstanding                        |                                     |   | 44,950             |       |                  |   | 49,208 |       |      |   | 43,786 |       |  |   | 48,461 |      
|                                                                  | Effect of stock options outstanding |   |                    | 1,694 |                  |   |        | 1,106 |      |   |        | 1,606 |  |   |        | 1,097 | 
|                                                                  | Effect of warrants outstanding      |   |                    | 612   |                  |   |        |      |      |   |        | 306   |  |   |        |      | 
|                                                                  | Effect of Series E Special Stock    |   |                    | 2     |                  |   |        | 2     |      |   |        | 2     |  |   |        | 2     | 
|                                                                  |                                     |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |      
|Weighted average common and potential
dilutive shares outstanding |                                     |   | 47,258             |       |                  |   | 50,316 |       |      |   | 45,700 |       |  |   | 49,560 |      
|Basic earnings per share                                          |                                     | $ | 0.29               |       |                  | $ | 0.24   |       |      | $ | 0.46   |       |  | $ | 0.37   |      
|                                                                  |                                     |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |      
|Diluted earnings per share                                        |                                     | $ | 0.27               |       |                  | $ | 0.24   |       |      | $ | 0.44   |       |  | $ | 0.37   |      
|                                                                  |                                     |   |                    |       |                  |   |        |       |      |   |        |       |  |   |        |      



| |  | Stock options outstanding that were potentially convertible into
approximately 600,000 common shares as of December 31, 2002, were not
included in the computation of diluted EPS because the exercise price was
greater than the average market price of the common shares during the
period.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6. SEGMENT AND GEOGRAPHICAL INFORMATION



| |  | The Company operates in four business segments: (i) Gaming Equipment and
Systems designs, manufactures and distributes gaming machines and
computerized monitoring systems for gaming machines; (ii) Wall Machines and
Amusement Games designs, manufactures and distributes wall-mounted gaming
machines and distributes third party manufactured amusement games; (iii)
Route Operations owns and manages a significant installed base of gaming
machines; and (iv) Casino Operations owns and operates two regional casinos.
The accounting policies of these segments are consistent with Companys
policies for the Consolidated Financial Statements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The tables below present information as to the Companys revenues,
intersegment revenues and operating income (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                            |                                   |   |                    |        |                  |   |         |        |      |   |         |         |  |   |         |         | 
|--------------------------- | --------------------------------- | - | ------------------ | ------ | ---------------- | - | ------- | ------ | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                            |                                   |   | Three Months Ended |        | Six Months Ended
|                            |                                   |   | December 31,       |        | December 31,    
|                            |                                   |   | 2001               |        | 2002             |   | 2001    |        | 2002
|                            |                                   |   |                    |        |                  |   |         |        |     
|Revenues:                   |                                   |   |                    |        |                  |   |         |        |      |   |         |         |  |   |         |        
|                            | Gaming equipment and systems      |   | $                  | 51,783 |                  |   | $       | 86,627 |      |   | $       | 97,098  |  |   | $       | 150,166 | 
|                            | Wall machines and amusement games |   |                    | 25,462 |                  |   |         | 16,900 |      |   |         | 38,123  |  |   |         | 27,466  | 
|                            | Route operations                  |   |                    | 55,764 |                  |   |         | 53,321 |      |   |         | 109,564 |  |   |         | 108,158 | 
|                            | Casino operations                 |   |                    | 17,607 |                  |   |         | 16,778 |      |   |         | 35,786  |  |   |         | 34,568  | 
|                            |                                   |   |                    |        |                  |   |         |        |      |   |         |         |  |   |         |        
|Total revenues              |                                   | $ | 150,616            |        |                  | $ | 173,626 |        |      | $ | 280,571 |         |  | $ | 320,358 |        
|                            |                                   |   |                    |        |                  |   |         |        |      |   |         |         |  |   |         |        
|Intersegment revenues:      |                                   |   |                    |        |                  |   |         |        |      |   |         |         |  |   |         |        
|                            | Gaming equipment and systems      |   | $                  | 4,752  |                  |   | $       | 9,270  |      |   | $       | 8,286   |  |   | $       | 14,326  | 
|                            | Wall machines and amusement games |   |                    |       |                  |   |         |       |      |   |         |        |  |   |         |        | 
|                            | Route operations                  |   |                    |       |                  |   |         |       |      |   |         |        |  |   |         |        | 
|                            | Casino operations                 |   |                    |       |                  |   |         |       |      |   |         |        |  |   |         |        | 
|                            |                                   |   |                    |        |                  |   |         |        |      |   |         |         |  |   |         |        
|Total intersegment revenues |                                   | $ | 4,752              |        |                  | $ | 9,270   |        |      | $ | 8,286   |         |  | $ | 14,326  |        
|                            |                                   |   |                    |        |                  |   |         |        |      |   |         |         |  |   |         |        

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31, 2001 and 2002

|                       |                                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |        |  
|---------------------- | --------------------------------- | - | ------------------ | ------ | ---------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                       |                                   |   | Three Months Ended |        | Six Months Ended
|                       |                                   |   | December 31,       |        | December 31,    
|                       |                                   |   | 2001               |        | 2002             |   | 2001   |        | 2002
|                       |                                   |   |                    |        |                  |   |        |        |     
|Operating income:      |                                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       
|                       | Gaming equipment and systems      |   | $                  | 10,009 |                  |   | $      | 21,775 |      |   | $      | 19,939 |   |   | $      | 36,910 |  
|                       | Wall machines and amusement games |   |                    | 4,491  |                  |   |        | 554    |      |   |        | 3,133  |   |   |        | (1,261 | )
|                       | Route operations                  |   |                    | 4,024  |                  |   |        | 2,468  |      |   |        | 7,144  |   |   |        | 5,133  |  
|                       | Casino operations                 |   |                    | 5,284  |                  |   |        | 3,821  |      |   |        | 11,151 |   |   |        | 8,836  |  
|                       | Corporate                         |   |                    | (3,408 | )                |   |        | (3,165 | )    |   |        | (6,106 | ) |   |        | (5,944 | )
|                       |                                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       
|Total operating income |                                   | $ | 20,400             |        |                  | $ | 25,453 |        |      | $ | 35,261 |        |   | $ | 43,674 |       
|                       |                                   |   |                    |        |                  |   |        |        |      |   |        |        |   |   |        |       



| |  | The Company has operations based primarily in the United States and Germany.
The German operations customers are a diverse group of operators of wall
machines and amusement games at arcades, hotels, restaurants and taverns,
primarily in Germany. Gaming Equipment and Systems customers are primarily
casinos and gaming machine distributors in the United States and abroad.
Receivables of the German operations and Gaming Equipment and Systems are
generally collateralized by the related equipment.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The table below presents information as to the Companys revenues and
operating income by geographic region (in 000s):                                                                                                                                                                                                                                                                                                                                                                                           

|                       |               |   |         |                    |  |                  |         |         |  |      |         |         |  |   |         |         |  | 
|---------------------- | ------------- | - | ------- | ------------------ |  | ---------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- |  | 
|                       |               |   |         | Three Months Ended |  | Six Months Ended
|                       |               |   |         | December 31,       |  | December 31,    
|                       |               |   |         | 2001               |  | 2002             |         | 2001    |  | 2002
|                       |               |   |         |                    |  |                  |         |         |  |     
|Revenues:              |               |   |         |                    |  |                  |         |         |  |      |         |         |  |   |         |        
|                       | United States |   | $       | 117,545            |  |                  | $       | 144,445 |  |      | $       | 230,427 |  |   | $       | 274,926 | 
|                       | Germany       |   |         | 30,361             |  |                  |         | 26,931  |  |      |         | 44,857  |  |   |         | 41,883  | 
|                       | Other foreign |   |         | 2,710              |  |                  |         | 2,250   |  |      |         | 5,287   |  |   |         | 3,549   | 
|                       |               |   |         |                    |  |                  |         |         |  |      |         |         |  |   |         |        
|Total revenues         |               | $ | 150,616 |                    |  | $                | 173,626 |         |  | $    | 280,571 |         |  |   | 320,358 |        
|                       |               |   |         |                    |  |                  |         |         |  |      |         |         |  |   |         |        
|Operating income:      |               |   |         |                    |  |                  |         |         |  |      |         |         |  |   |         |        
|                       | United States |   | $       | 14,074             |  |                  | $       | 23,519  |  |      | $       | 29,363  |  |   | $       | 43,350  | 
|                       | Germany       |   |         | 5,658              |  |                  |         | 1,799   |  |      |         | 4,432   |  |   |         | 306     | 
|                       | Other foreign |   |         | 668                |  |                  |         | 135     |  |      |         | 1,466   |  |   |         | 18      | 
|                       |               |   |         |                    |  |                  |         |         |  |      |         |         |  |   |         |        
|Total operating income |               | $ | 20,400  |                    |  | $                | 25,453  |         |  | $    | 35,261  |         |  | $ | 43,674  |        
|                       |               |   |         |                    |  |                  |         |         |  |      |         |         |  |   |         |        

7. SUPPLEMENTAL CASH FLOW INFORMATION



| |  | The following supplemental information is related to the unaudited condensed
consolidated statements of cash flows (in 000s).
| |  | ------------------------------------------------------------------------------------------------------------------------------

|                                                         |  |                               |        |      |  |   |        |  
|-------------------------------------------------------- |  | ----------------------------- | ------ | ---- |  | - | ------ | -
|                                                         |  | Six months ended December 31,
|                                                         |  |                              
|                                                         |  | 2001                          |        | 2002
|                                                         |  |                               |        |     
|Interest expense paid                                    |  | $                             | 13,430 |      |  | $ | 13,164 |  
|State income taxes paid                                  |  |                               | 220    |      |  |   | 1,001  |  
|Non-cash transactions:                                   |  |                               |        |      |  |   |        |  
|Reclassify other assets to property, plant and equipment |  | $                             | 3,037  |      |  | $ | 4,764  |  
|(Favorable) unfavorable translation rate adjustment      |  |                               | (2,538 | )    |  |   | (2,279 | )
|Notes payable issued in acquisitions                     |  |                               | 4,000  |      |  |   | 3,000  |  

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended December 31, 2001 and 2002

8. UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS



| |  | The following unaudited condensed consolidating financial statements are
presented to provide certain financial information regarding guaranteeing
and non-guaranteeing subsidiaries in relation to the Companys Senior
Subordinated Notes (see note 3). The financial information presented
includes Alliance Gaming Corporation (the Parent), its wholly-owned
guaranteeing subsidiaries (Guaranteeing Subsidiaries), and the
non-guaranteeing subsidiaries, Video Services, Inc., United Gaming Rainbow,
BGI Australia Pty. Limited, Bally Gaming de Puerto Rico, Inc., and Alliance
Automaten GmbH & Co. KG (the subsidiary that holds the Companys German
interests) (together the Non-Guaranteeing Subsidiaries). The notes to
consolidating financial statements should be read in conjunction with these
consolidating financial statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS
June 30, 2002
(In 000s)

|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |          |         |        |         | 
|----------------------------------------------------------- | --------------------------------------------- | --------------------------------------- | -------------------------- | ------------------------- | ------- | ------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | -------- | ------- | -------- | ----------- | -------- | -------- | ------- | ------ | ------- | 
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          | Reclas-     |          | Alliance
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          | sification  |          | Gaming  
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         | Non-         |          | and     |          | Corporation
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         | Guaranteeing |         | Guaranteeing |         | Elimina-     |          | and    
|                                                            |                                               |                                         |                            |                           |         | Parent |         | Subsidiaries |         | Subsidiaries |         | tions        |         | Subsidiaries
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |             
|ASSETS                                                      |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|Current assets:                                             |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|                                                            | Cash and cash equivalents                     |                                         | $                          | 8,121                     |         |        | $       | 38,362       |         |              | $       | 16,025       |         |              | $        |        |          |             | $        | 62,508   |        
|                                                            | Short-term investments (restricted)           |                                         |                            |                          |         |        |         | 896          |         |              |         |             |         |              |          |        |          |             |          | 896      |        
|                                                            | Accounts and short-term notes receivable, net |                                         |                            | 13,860                    |         |        |         | 52,838       |         |              |         | 43,956       |         |              |          | (13,822 | )        |             |          | 96,832   |        
|                                                            | Inventories, net                              |                                         |                            |                          |         |        |         | 28,469       |         |              |         | 14,738       |         |              |          | (210    | )        |             |          | 42,997   |        
|                                                            | Deferred tax assets, net                      |                                         |                            | 16,489                    |         |        |         | 11,097       |         |              |         | 19           |         |              |          |        |          |             |          | 27,605   |        
|                                                            | Other current assets                          |                                         |                            | 260                       |         |        |         | 12,307       |         |              |         | 1,408        |         |              |          |        |          |             |          | 13,975   |        
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|                                                            |                                               |                                         |                            | Total current assets      |         |        | 38,730  |              |         |              | 143,969 |              |         |              | 76,146   |         |          |             | (14,032  | )        |         |        | 244,813 | 
|Long-term notes receivable, net                             |                                               |                                         | 147,595                    |                           |         |        | 60,912  |              |         |              | 408     |              |         |              | (206,526 | )       |          |             | 2,389    |         
|Leased equipment, net                                       |                                               |                                         |                           |                           |         |        | 19,560  |              |         |              |        |              |         |              |         |         |          |             | 19,560   |         
|Property, plant and equipment, net                          |                                               |                                         | 129                        |                           |         |        | 57,368  |              |         |              | 32,817  |              |         |              |         |         |          |             | 90,314   |         
|Excess of costs over net assets of acquired
businesses, net |                                               |                                         | (4,842                     | )                         |         |        | 48,232  |              |         |              | 4,323   |              |         |              |         |         |          |             | 47,713   |         
|Intangible assets, net                                      |                                               |                                         | 9,033                      |                           |         |        | 23,478  |              |         |              | 1       |              |         |              |         |         |          |             | 32,512   |         
|Investment in subsidiaries                                  |                                               |                                         | 335,739                    |                           |         |        | 81,855  |              |         |              |        |              |         |              | (417,594 | )       |          |             |         |         
|Deferred tax assets, net                                    |                                               |                                         | 22,394                     |                           |         |        |        |              |         |              | 751     |              |         |              | (4,905   | )       |          |             | 18,240   |         
|Other assets, net                                           |                                               |                                         | (145,694                   | )                         |         |        | 154,180 |              |         |              | (4,131  | )            |         |              | (16      | )       |          |             | 4,339    |         
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|                                                            |                                               | $                                       | 403,084                    |                           |         | $      | 589,554 |              |         | $            | 110,315 |              |         | $            | (643,073 | )       |          | $           | 459,880  |         
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|LIABILITIES AND STOCKHOLDERS EQUITY                        |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|Current liabilities:                                        |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|                                                            | Accounts payable                              |                                         | $                          | 135                       |         |        | $       | 13,398       |         |              | $       | 2,361        |         |              | $        |        |          |             | $        | 15,894   |        
|                                                            | Accrued liabilities                           |                                         |                            | 11,506                    |         |        |         | 22,333       |         |              |         | 13,033       |         |              |          | (1,031  | )        |             |          | 45,841   |        
|                                                            | Jackpot liabilities                           |                                         |                            |                          |         |        |         | 5,812        |         |              |         | 103          |         |              |          |        |          |             |          | 5,915    |        
|                                                            | Current maturities of long-term debt          |                                         |                            | 3,900                     |         |        |         | 79           |         |              |         | 12,952       |         |              |          | (12,815 | )        |             |          | 4,116    |        
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|                                                            |                                               |                                         |                            | Total current liabilities |         |        | 15,541  |              |         |              | 41,622  |              |         |              | 28,449   |         |          |             | (13,846  | )        |         |        | 71,766  | 
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|Long term debt                                              |                                               |                                         | 337,704                    |                           |         |        | 206,698 |              |         |              | 12      |              |         |              | (206,266 | )       |          |             | 338,148  |         
|Deferred tax liabilities, net                               |                                               |                                         |                           |                           |         |        | 4,905   |              |         |              |        |              |         |              | (4,905   | )       |          |             |         |         
|Other liabilities                                           |                                               |                                         | 2,620                      |                           |         |        | 127     |              |         |              |        |              |         |              |         |         |          |             | 2,747    |         
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|                                                            |                                               |                                         |                            | Total liabilities         |         |        | 355,865 |              |         |              | 253,352 |              |         |              | 28,461   |         |          |             | (225,017 | )        |         |        | 412,661 | 
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|Minority interest                                           |                                               |                                         | 1,233                      |                           |         |        |        |              |         |              |        |              |         |              |         |         |          |             | 1,233    |         
|Commitments and contingencies                               |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|Stockholders equity:                                       |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|                                                            |                                               | Series E Special Stock                  |                            |                           | 12      |        |         |              |        |              |         |              |        |              |          |         |         |             |          |          | 12      |       
|
|                                                            |                                               | Common Stock                            |                            |                           | 4,927   |        |         |              | 478     |              |         |              | 17,832  |              |          |         | (18,310  | )           |          |          | 4,927   |       
|                                                            |                                               | Treasury stock                          |                            |                           | (501    | )      |         |              |        |              |         |              |        |              |          |         |         |             |          |          | (501    | )     
|
|                                                            |                                               | Additional paid-in capital              |                            |                           | 157,866 |        |         |              | 190,449 |              |         |              | 70,382  |              |          |         | (260,831 | )           |          |          | 157,866 |       
|                                                            |                                               | Accumulated other comprehensive loss    |                            |                           | (19,364 | )      |         |              | (19,361 | )            |         |              | (19,384 | )            |          |         | 38,745   |             |          |          | (19,364 | )     
|
|                                                            |                                               | Retained earnings (accumulated deficit) |                            |                           | (96,954 | )      |         |              | 164,636 |              |         |              | 13,024  |              |          |         | (177,660 | )           |          |          | (96,954 | )     
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|                                                            |                                               |                                         | Total stockholders equity |                           |         | 45,986 |         |              |         | 336,202      |         |              |         | 81,854       |          |         |          | (418,056    | )        |          |         | 45,986 |        
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         
|
|                                                            |                                               | $                                       | 403,084                    |                           |         | $      | 589,554 |              |         | $            | 110,315 |              |         | $            | (643,073 | )       |          | $           | 459,880  |         
|                                                            |                                               |                                         |                            |                           |         |        |         |              |         |              |         |              |         |              |          |         |          |             |          |         

See accompanying unaudited note.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS
December 31, 2002
(In 000s)

|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |          |         |        |         | 
|----------------------------------------------------------- | ------------------------------------ | --------------------------------------------- | -------------------------- | ------------------------- | ------- | ------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | -------- | ------ | -------- | ----------- | -------- | -------- | ------- | ------ | ------- | 
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          | Reclas-     |          | Alliance
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          | sification  |          | Gaming  
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         | Non-         |          | and    |          | Corporation
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         | Guaranteeing |         | Guaranteeing |         | Elimina-     |          | and   
|                                                            |                                      |                                               |                            |                           |         | Parent |         | Subsidiaries |         | Subsidiaries |         | tions        |         | Subsidiaries
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |             
|ASSETS                                                      |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|Current assets:                                             |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|                                                            |                                      | Cash and cash equivalents                     |                            | $                         | 11,418  |        |         | $            | 24,635  |              |         | $            | 18,867  |              |          | $      |         |             |          | $        | 54,920  |       
|                                                            |                                      | Short term investments (restricted)           |                            |                           |        |        |         |              | 845     |              |         |              |        |              |          |        |         |             |          |          | 845     |       
|                                                            |                                      | Accounts and short-term notes receivable, net |                            |                           | 10,114  |        |         |              | 65,137  |              |         |              | 46,456  |              |          |        | (10,065  | )           |          |          | 111,642 |       
|                                                            |                                      | Inventories, net                              |                            |                           |        |        |         |              | 30,764  |              |         |              | 10,547  |              |          |        | (232     | )           |          |          | 41,079  |       
|                                                            |                                      | Deferred tax assets                           |                            |                           | 16,490  |        |         |              | 11,097  |              |         |              | 19      |              |          |        |         |             |          |          | 27,606  |       
|                                                            |                                      | Other current assets                          |                            |                           | 446     |        |         |              | 12,805  |              |         |              | 1,104   |              |          |        |         |             |          |          | 14,355  |       
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|                                                            |                                      |                                               |                            | Total current assets      |         |        | 38,468  |              |         |              | 145,283 |              |         |              | 76,993   |        |          |             | (10,297  | )        |         |        | 250,447 | 
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|Long-term notes receivable, net                             |                                      |                                               | 153,659                    |                           |         |        | 84,823  |              |         |              | 334     |              |         |              | (218,257 | )      |          |             | 20,559   |         
|Leased equipment, net                                       |                                      |                                               |                           |                           |         |        | 23,134  |              |         |              | 4,420   |              |         |              |         |        |          |             | 27,554   |         
|Property, plant and equipment, net                          |                                      |                                               | 98                         |                           |         |        | 56,876  |              |         |              | 34,427  |              |         |              |         |        |          |             | 91,401   |         
|Excess of costs over net assets of acquired
businesses, net |                                      |                                               | (4,706                     | )                         |         |        | 49,694  |              |         |              | 4,598   |              |         |              |         |        |          |             | 49,586   |         
|Intangible assets, net                                      |                                      |                                               | 7,981                      |                           |         |        | 29,928  |              |         |              | 102     |              |         |              |         |        |          |             | 38,011   |         
|Investment in subsidiaries                                  |                                      |                                               | 373,084                    |                           |         |        | 85,864  |              |         |              |        |              |         |              | (458,948 | )      |          |             |         |         
|Deferred tax assets, net                                    |                                      |                                               | 12,489                     |                           |         |        |        |              |         |              | 802     |              |         |              | (4,770   | )      |          |             | 8,521    |         
|Other assets, net                                           |                                      |                                               | (160,889                   | )                         |         |        | 175,909 |              |         |              | (10,200 | )            |         |              | (45      | )      |          |             | 4,775    |         
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|                                                            |                                      | $                                             | 420,184                    |                           |         | $      | 651,511 |              |         | $            | 111,476 |              |         | $            | (692,317 | )      |          | $           | 490,854  |         
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|LIABILITIES AND STOCKHOLDERS EQUITY                        |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|Current liabilities:                                        |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|                                                            | Accounts payable                     |                                               | $                          | 197                       |         |        | $       | 12,959       |         |              | $       | 2,950        |         |              | $        |       |          |             | $        | 16,106   |        
|                                                            | Accrued liabilities                  |                                               |                            | 5,947                     |         |        |         | 29,207       |         |              |         | 13,347       |         |              |          | (942   | )        |             |          | 47,559   |        
|                                                            | Jackpot liabilities                  |                                               |                            |                          |         |        |         | 8,675        |         |              |         | 123          |         |              |          |       |          |             |          | 8,798    |        
|                                                            | Current maturities of long-term debt |                                               |                            | 3,395                     |         |        |         | 1,538        |         |              |         | 9,186        |         |              |          | (9,175 | )        |             |          | 4,944    |        
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|                                                            |                                      |                                               |                            | Total current liabilities |         |        | 9,539   |              |         |              | 52,379  |              |         |              | 25,606   |        |          |             | (10,117  | )        |         |        | 77,407  | 
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|Long term debt                                              |                                      |                                               | 336,299                    |                           |         |        | 219,861 |              |         |              | 6       |              |         |              | (217,997 | )      |          |             | 338,169  |         
|Deferred tax liabilities, net                               |                                      |                                               |                           |                           |         |        | 4,770   |              |         |              |        |              |         |              | (4,770   | )      |          |             |         |         
|Other liabilities                                           |                                      |                                               | 2,620                      |                           |         |        | 932     |              |         |              |        |              |         |              |         |        |          |             | 3,552    |         
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|                                                            |                                      |                                               |                            | Total liabilities         |         |        | 348,458 |              |         |              | 277,942 |              |         |              | 25,612   |        |          |             | (232,884 | )        |         |        | 419,128 | 
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|Minority interest                                           |                                      |                                               | 920                        |                           |         |        |        |              |         |              |        |              |         |              |         |        |          |             | 920      |         
|Commitments and contingencies                               |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|Stockholders equity:                                       |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|                                                            |                                      | Series E Special Stock                        |                            |                           | 12      |        |         |              |        |              |         |              |        |              |          |        |         |             |          |          | 12      |       
|                                                            |                                      | Common Stock                                  |                            |                           | 4,982   |        |         |              | 478     |              |         |              | 17,832  |              |          |        | (18,310  | )           |          |          | 4,982   |       
|                                                            |                                      | Treasury stock                                |                            |                           | (501    | )      |         |              |        |              |         |              |        |              |          |        |         |             |          |          | (501    | )     
|                                                            |                                      | Additional paid-in capital                    |                            |                           | 161,641 |        |         |              | 190,449 |              |         |              | 70,418  |              |          |        | (260,867 | )           |          |          | 161,641 |       
|                                                            |                                      | Accumulated other comprehensive loss          |                            |                           | (16,485 | )      |         |              | (16,482 | )            |         |              | (16,505 | )            |          |        | 32,987   |             |          |          | (16,485 | )     
|                                                            |                                      | Retained earnings (accumulated deficit)       |                            |                           | (78,843 | )      |         |              | 199,124 |              |         |              | 14,119  |              |          |        | (213,243 | )           |          |          | (78,843 | )     
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|                                                            |                                      |                                               | Total stockholders equity |                           |         | 70,806 |         |              |         | 373,569      |         |              |         | 85,864       |          |        |          | (459,433    | )        |          |         | 70,806 |        
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         
|                                                            |                                      | $                                             | 420,184                    |                           |         | $      | 651,511 |              |         | $            | 111,476 |              |         | $            | (692,317 | )      |          | $           | 490,854  |         
|                                                            |                                      |                                               |                            |                           |         |        |         |              |         |              |         |              |         |              |          |        |          |             |          |         

See accompanying unaudited note.

15



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended December 31, 2001
(In 000s)

|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |        |  
|------------------------------------- | ----------------------------------------- | - | ------ | ------ | ------------ | - | ------------ | ------ | ------------ | - | ------------ | ------ | --- | - | ------- | ------ | ----------- | - | -------- | ------ | -
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   | Alliance
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   | Gaming  
|                                      |                                           |   |        |        |              |   |              |        |              |   | Non-         |        |     |   |         |        | Corporation
|                                      |                                           |   |        |        |              |   | Guaranteeing |        | Guaranteeing |   | Elimina-     |        | and
|                                      |                                           |   | Parent |        | Subsidiaries |   | Subsidiaries |        | tions        |   | Subsidiaries
|                                      |                                           |   |        |        |              |   |              |        |              |   |             
|Revenues:                             |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|                                      | Gaming equipment and systems              |   | $      |       |              |   | $            | 48,911 |              |   | $            | 7,624  |     |   | $       | (4,752 | )           |   | $        | 51,783 |  
|                                      | Wall machines and amusement games         |   |        |       |              |   |              |       |              |   |              | 25,462 |     |   |         |       |             |   |          | 25,462 |  
|                                      | Route operations                          |   |        |       |              |   |              | 52,283 |              |   |              | 3,481  |     |   |         |       |             |   |          | 55,764 |  
|                                      | Casino operations                         |   |        |       |              |   |              | 5,518  |              |   |              | 14,214 |     |   |         | (2,125 | )           |   |          | 17,607 |  
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|                                      |                                           |   |       |        |              |   | 106,712      |        |              |   | 50,781       |        |     |   | (6,877  | )      |             |   | 150,616  |       
|Costs and expenses:                   |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|                                      | Cost of gaming equipment and systems      |   |        |       |              |   |              | 22,806 |              |   |              | 4,775  |     |   |         | (4,737 | )           |   |          | 22,844 |  
|                                      | Cost of wall machines and amusement games |   |        |       |              |   |              |       |              |   |              | 13,108 |     |   |         |       |             |   |          | 13,108 |  
|                                      | Cost of route operations                  |   |        |       |              |   |              | 43,761 |              |   |              | 2,313  |     |   |         |       |             |   |          | 46,074 |  
|                                      | Cost of casino operations                 |   |        |       |              |   |              | 2,784  |              |   |              | 5,082  |     |   |         |       |             |   |          | 7,866  |  
|                                      | Selling, general and administrative       |   |        | 2,826  |              |   |              | 16,139 |              |   |              | 12,376 |     |   |         | (2,140 | )           |   |          | 29,201 |  
|                                      | Research and development costs            |   |        |       |              |   |              | 3,142  |              |   |              | 665    |     |   |         |       |             |   |          | 3,807  |  
|                                      | Depreciation and amortization             |   |        | 582    |              |   |              | 5,197  |              |   |              | 1,726  |     |   |         | (189   | )           |   |          | 7,316  |  
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|                                      |                                           |   | 3,408  |        |              |   | 93,829       |        |              |   | 40,045       |        |     |   | (7,066  | )      |             |   | 130,216  |       
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|Operating income (loss)               |                                           |   | (3,408 | )      |              |   | 12,883       |        |              |   | 10,736       |        |     |   | 189     |        |             |   | 20,400   |       
|Earnings in consolidated subsidiaries |                                           |   | 18,962 |        |              |   | 8,837        |        |              |   |             |        |     |   | (27,799 | )      |             |   |         |       
|Other income (expense):               |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|                                      | Interest income                           |   |        | 3,061  |              |   |              | 1,479  |              |   |              | 242    |     |   |         | (4,413 | )           |   |          | 369    |  
|                                      | Interest expense                          |   |        | (7,019 | )            |   |              | (4,124 | )            |   |              | (303   | )   |   |         | 4,413  |             |   |          | (7,033 | )
|                                      | Rainbow royalty                           |   |        | 1,589  |              |   |              |       |              |   |              | (1,589 | )   |   |         |       |             |   |          |       |  
|                                      | Minority interest                         |   |        | (405   | )            |   |              |       |              |   |              |       |     |   |         |       |             |   |          | (405   | )
|                                      | Other, net                                |   |        | (32    | )            |   |              | (271   | )            |   |              | (129   | )   |   |         |       |             |   |          | (432   | )
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|Income before income taxes            |                                           |   | 12,748 |        |              |   | 18,804       |        |              |   | 8,957        |        |     |   | (27,610 | )      |             |   | 12,899   |       
|Income tax provision                  |                                           |   | 68     |        |              |   | (31          | )      |              |   | (120         | )      |     |   |        |        |             |   | (83      | )     
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|Net income                            |                                           | $ | 12,816 |        |              | $ | 18,773       |        |              | $ | 8,837        |        |     | $ | (27,610 | )      |             | $ | 12,816   |       
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       

See accompanying unaudited note.

16



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2002
(In 000s)

|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |        |  
|------------------------------------- | ----------------------------------------- | - | ------ | ------ | ------------ | - | ------------ | ------ | ------------ | - | ------------ | ------ | --- | - | ------- | ------ | ----------- | - | -------- | ------ | -
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   | Alliance
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   | Gaming  
|                                      |                                           |   |        |        |              |   |              |        |              |   | Non-         |        |     |   |         |        | Corporation
|                                      |                                           |   |        |        |              |   | Guaranteeing |        | Guaranteeing |   | Elimina-     |        | and
|                                      |                                           |   | Parent |        | Subsidiaries |   | Subsidiaries |        | tions        |   | Subsidiaries
|                                      |                                           |   |        |        |              |   |              |        |              |   |             
|Revenues:                             |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|                                      | Gaming equipment and systems              |   | $      |       |              |   | $            | 83,616 |              |   | $            | 12,304 |     |   | $       | (9,293 | )           |   | $        | 86,627 |  
|                                      | Wall machines and amusement games         |   |        |       |              |   |              |       |              |   |              | 16,900 |     |   |         |       |             |   |          | 16,900 |  
|                                      | Route operations                          |   |        |       |              |   |              | 49,727 |              |   |              | 3,594  |     |   |         |       |             |   |          | 53,321 |  
|                                      | Casino operations                         |   |        |       |              |   |              | 5,800  |              |   |              | 13,186 |     |   |         | (2,208 | )           |   |          | 16,778 |  
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|                                      |                                           |   |       |        |              |   | 139,143      |        |              |   | 45,984       |        |     |   | (11,501 | )      |             |   | 173,626  |       
|Costs and expenses:                   |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|                                      | Cost of gaming equipment and systems      |   |        |       |              |   |              | 39,835 |              |   |              | 9,076  |     |   |         | (9,248 | )           |   |          | 39,663 |  
|                                      | Cost
of wall machines and amusement games |   |        |       |              |   |              |       |              |   |              | 9,809  |     |   |         |       |             |   |          | 9,809  |  
|                                      | Cost of route operations                  |   |        |       |              |   |              | 42,295 |              |   |              | 2,387  |     |   |         |       |             |   |          | 44,682 |  
|                                      | Cost of casino operations                 |   |        |       |              |   |              | 2,839  |              |   |              | 5,223  |     |   |         |       |             |   |          | 8,062  |  
|                                      | Selling, general and administrative       |   |        | 2,623  |              |   |              | 19,068 |              |   |              | 11,664 |     |   |         | (2,231 | )           |   |          | 31,124 |  
|                                      | Research and development costs            |   |        |       |              |   |              | 4,159  |              |   |              | 1,753  |     |   |         |       |             |   |          | 5,912  |  
|                                      | Depreciation and amortization             |   |        | 542    |              |   |              | 7,324  |              |   |              | 1,055  |     |   |         |       |             |   |          | 8,921  |  
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|                                      |                                           |   | 3,165  |        |              |   | 115,520      |        |              |   | 40,967       |        |     |   | (11,479 | )      |             |   | 148,173  |       
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|Operating income (loss)               |                                           |   | (3,165 | )      |              |   | 23,623       |        |              |   | 5,017        |        |     |   | (22     | )      |             |   | 25,453   |       
|Earnings in consolidated subsidiaries |                                           |   | 21,821 |        |              |   | 3,168        |        |              |   |             |        |     |   | (24,989 | )      |             |   |         |       
|Other income (expense):               |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|                                      | Interest income                           |   |        | 3,274  |              |   |              | 1,648  |              |   |              | 347    |     |   |         | (4,817 | )           |   |          | 452    |  
|                                      | Interest expense                          |   |        | (6,501 | )            |   |              | (4,678 | )            |   |              | (204   | )   |   |         | 4,817  |             |   |          | (6,566 | )
|                                      | Rainbow royalty                           |   |        | 1,458  |              |   |              |       |              |   |              | (1,458 | )   |   |         |       |             |   |          |       |  
|                                      | Minority interest                         |   |        | (309   | )            |   |              |       |              |   |              |       |     |   |         |       |             |   |          | (309   | )
|                                      | Other, net                                |   |        | 665    |              |   |              | (1,282 | )            |   |              | 885    |     |   |         |       |             |   |          | 268    |  
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|Income before income taxes            |                                           |   | 17,243 |        |              |   | 22,479       |        |              |   | 4,587        |        |     |   | (25,011 | )      |             |   | 19,298   |       
|Income tax provision                  |                                           |   | (5,390 | )      |              |   | (636         | )      |              |   | (1,419       | )      |     |   |        |        |             |   | (7,445   | )     
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       
|Net income                            |                                           | $ | 11,853 |        |              | $ | 21,843       |        |              | $ | 3,168        |        |     | $ | (25,011 | )      |             | $ | 11,853   |       
|                                      |                                           |   |        |        |              |   |              |        |              |   |              |        |     |   |         |        |             |   |          |       

See accompanying unaudited note.

17



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended December 31, 2001
(In 000s)

|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   |          |         |  
|------------------------------------- | ----------------------------------------- | - | ------ | ------- | ------------ | - | ------------ | ------- | ------------ | - | ------------ | ------ | --- | - | ------- | ------ | ----------- | - | -------- | ------- | -
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   | Alliance
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   | Gaming  
|                                      |                                           |   |        |         |              |   |              |         |              |   | Non-         |        |     |   |         |        | Corporation
|                                      |                                           |   |        |         |              |   | Guaranteeing |         | Guaranteeing |   | Elimina-     |        | and
|                                      |                                           |   | Parent |         | Subsidiaries |   | Subsidiaries |         | tions        |   | Subsidiaries
|                                      |                                           |   |        |         |              |   |              |         |              |   |             
|Revenues:                             |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   |          |        
|                                      | Gaming equipment and systems              |   | $      |        |              |   | $            | 93,333  |              |   | $            | 12,051 |     |   | $       | (8,286 | )           |   | $        | 97,098  |  
|                                      | Wall machines and amusement games         |   |        |        |              |   |              |        |              |   |              | 38,123 |     |   |         |       |             |   |          | 38,123  |  
|                                      | Route operations                          |   |        |        |              |   |              | 102,554 |              |   |              | 7,010  |     |   |         |       |             |   |          | 109,564 |  
|                                      | Casino operations                         |   |        |        |              |   |              | 11,033  |              |   |              | 28,976 |     |   |         | (4,223 | )           |   |          | 35,786  |  
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   |          |        
|                                      |                                           |   |       |         |              |   | 206,920      |         |              |   | 86,160       |        |     |   | (12,509 | )      |             |   | 280,571  |        
|Costs and expenses:                   |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   |          |        
|                                      | Cost of gaming equipment and systems      |   |        |        |              |   |              | 43,126  |              |   |              | 7,525  |     |   |         | (8,256 | )           |   |          | 42,395  |  
|                                      | Cost of wall machines and amusement games |   |        |        |              |   |              |        |              |   |              | 20,613 |     |   |         |       |             |   |          | 20,613  |  
|                                      | Cost of route operations                  |   |        |        |              |   |              | 85,872  |              |   |              | 4,600  |     |   |         |       |             |   |          | 90,472  |  
|                                      | Cost of casino operations                 |   |        |        |              |   |              | 5,554   |              |   |              | 10,647 |     |   |         |       |             |   |          | 16,201  |  
|                                      | Selling, general and administrative       |   |        | 5,002   |              |   |              | 29,787  |              |   |              | 22,554 |     |   |         | (4,253 | )           |   |          | 53,090  |  
|                                      | Research and development costs            |   |        |        |              |   |              | 6,212   |              |   |              | 1,287  |     |   |         |       |             |   |          | 7,499   |  
|                                      | Depreciation and amortization             |   |        | 1,104   |              |   |              | 10,905  |              |   |              | 3,410  |     |   |         | (379   | )           |   |          | 15,040  |  
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   |          |        
|                                      |                                           |   | 6,106  |         |              |   | 181,456      |         |              |   | 70,636       |        |     |   | (12,888 | )      |             |   | 245,310  |        
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   |          |        
|Operating income (loss)               |                                           |   | (6,106 | )       |              |   | 25,464       |         |              |   | 15,524       |        |     |   | 379     |        |             |   | 35,261   |        
|Earnings in consolidated subsidiaries |                                           |   | 31,195 |         |              |   | 11,070       |         |              |   |             |        |     |   | (42,265 | )      |             |   |         |        
|Other income (expense):               |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   |          |        
|                                      | Interest income                           |   |        | 6,050   |              |   |              | 2,943   |              |   |              | 459    |     |   |         | (8,688 | )           |   |          | 764     |  
|                                      | Interest expense                          |   |        | (14,643 | )            |   |              | (8,064  | )            |   |              | (661   | )   |   |         | 8,688  |             |   |          | (14,680 | )
|                                      | Rainbow royalty                           |   |        | 3,235   |              |   |              |        |              |   |              | (3,235 | )   |   |         |       |             |   |          |        |  
|                                      | Minority interest                         |   |        | (868    | )            |   |              |        |              |   |              |       |     |   |         |       |             |   |          | (868    | )
|                                      | Other, net                                |   |        | 1,246   |              |   |              | (552    | )            |   |              | (706   | )   |   |         |       |             |   |          | (12     | )
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   |          |        
|Income before income taxes            |                                           |   | 20,109 |         |              |   | 30,861       |         |              |   | 11,381       |        |     |   | (41,886 | )      |             |   | 20,465   |        
|Income tax provision                  |                                           |   | 135    |         |              |   | (45          | )       |              |   | (311         | )      |     |   |        |        |             |   | (221     | )      
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   |          |        
|Net income                            |                                           | $ | 20,244 |         |              | $ | 30,816       |         |              | $ | 11,070       |        |     | $ | (41,886 | )      |             | $ | 20,244   |        
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |        |             |   |          |        

See accompanying unaudited note.

18



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended December 31, 2002
(In 000s)

|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   |          |         |  
|------------------------------------- | ----------------------------------------- | - | ------ | ------- | ------------ | - | ------------ | ------- | ------------ | - | ------------ | ------ | --- | - | ------- | ------- | ----------- | - | -------- | ------- | -
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   | Alliance
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   | Gaming  
|                                      |                                           |   |        |         |              |   |              |         |              |   | Non-         |        |     |   |         |         | Corporation
|                                      |                                           |   |        |         |              |   | Guaranteeing |         | Guaranteeing |   | Elimina-     |        | and
|                                      |                                           |   | Parent |         | Subsidiaries |   | Subsidiaries |         | tions        |   | Subsidiaries
|                                      |                                           |   |        |         |              |   |              |         |              |   |             
|Revenues:                             |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   |          |        
|                                      | Gaming equipment and systems              |   | $      |        |              |   | $            | 146,526 |              |   | $            | 18,005 |     |   | $       | (14,365 | )           |   | $        | 150,166 |  
|                                      | Wall machines and amusement games         |   |        |        |              |   |              |        |              |   |              | 27,466 |     |   |         |        |             |   |          | 27,466  |  
|                                      | Route operations                          |   |        |        |              |   |              | 100,874 |              |   |              | 7,284  |     |   |         |        |             |   |          | 108,158 |  
|                                      | Casino operations                         |   |        |        |              |   |              | 11,512  |              |   |              | 27,431 |     |   |         | (4,375  | )           |   |          | 34,568  |  
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   |          |        
|                                      |                                           |   |       |         |              |   | 258,912      |         |              |   | 80,186       |        |     |   | (18,740 | )       |             |   | 320,358  |        
|Costs and expenses:                   |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   |          |        
|                                      | Cost of gaming equipment and systems      |   |        |        |              |   |              | 67,638  |              |   |              | 12,587 |     |   |         | (14,304 | )           |   |          | 65,921  |  
|                                      | Cost of wall machines and amusement games |   |        |        |              |   |              |        |              |   |              | 15,979 |     |   |         |        |             |   |          | 15,979  |  
|                                      | Cost of route operations                  |   |        |        |              |   |              | 85,546  |              |   |              | 4,856  |     |   |         |        |             |   |          | 90,402  |  
|                                      | Cost of casino operations                 |   |        |        |              |   |              | 5,730   |              |   |              | 10,520 |     |   |         |        |             |   |          | 16,250  |  
|                                      | Selling, general and administrative       |   |        | 4,858   |              |   |              | 36,679  |              |   |              | 23,417 |     |   |         | (4,414  | )           |   |          | 60,540  |  
|                                      | Research and development costs            |   |        |        |              |   |              | 7,342   |              |   |              | 3,330  |     |   |         |        |             |   |          | 10,672  |  
|                                      | Depreciation and amortization             |   |        | 1,086   |              |   |              | 14,114  |              |   |              | 1,720  |     |   |         |        |             |   |          | 16,920  |  
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   |          |        
|                                      |                                           |   | 5,944  |         |              |   | 217,049      |         |              |   | 72,409       |        |     |   | (18,718 | )       |             |   | 276,684  |        
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   |          |        
|Operating income (loss)               |                                           |   | (5,944 | )       |              |   | 41,863       |         |              |   | 7,777        |        |     |   | (22     | )       |             |   | 43,674   |        
|Earnings in consolidated subsidiaries |                                           |   | 37,406 |         |              |   | 4,035        |         |              |   |             |        |     |   | (41,441 | )       |             |   |         |        
|Other income (expense):               |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   |          |        
|                                      | Interest income                           |   |        | 6,573   |              |   |              | 3,274   |              |   |              | 553    |     |   |         | (9,667  | )           |   |          | 733     |  
|                                      | Interest expense                          |   |        | (13,119 | )            |   |              | (9,300  | )            |   |              | (450   | )   |   |         | 9,667   |             |   |          | (13,202 | )
|                                      | Rainbow royalty                           |   |        | 3,044   |              |   |              |        |              |   |              | (3,044 | )   |   |         |        |             |   |          |        |  
|                                      | Minority interest                         |   |        | (754    | )            |   |              |        |              |   |              |       |     |   |         |        |             |   |          | (754    | )
|                                      | Other, net                                |   |        | 766     |              |   |              | (1,349  | )            |   |              | 780    |     |   |         |        |             |   |          | 197     |  
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   |          |        
|Income before income taxes            |                                           |   | 27,972 |         |              |   | 38,523       |         |              |   | 5,616        |        |     |   | (41,463 | )       |             |   | 30,648   |        
|Income tax provision                  |                                           |   | (9,861 | )       |              |   | (1,095       | )       |              |   | (1,581       | )      |     |   |        |         |             |   | (12,537  | )      
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   |          |        
|Net income                            |                                           | $ | 18,111 |         |              | $ | 37,428       |         |              | $ | 4,035        |        |     | $ | (41,463 | )       |             | $ | 18,111   |        
|                                      |                                           |   |        |         |              |   |              |         |              |   |              |        |     |   |         |         |             |   |          |        

See accompanying unaudited note.

19



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWSSix Months Ended December 31, 2001
(In 000s)

|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |        |          |         |  
|--------------------------------------------------- | ----------------------------------------------------------------- | - | --------------------------------------------------- | ------ | ------ | ----- | ------------ | ------ | ------------ | ------- | ------------ | ------ | ------------ | ------ | ------ | ----- |  | ----- | ----------- | ------ | -------- | ------- | -
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |        | Alliance
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |        | Gaming  
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        | Non-         |        |        |       |  |       | Corporation
|                                                    |                                                                   |   |                                                     |        |        |       |              |        | Guaranteeing |         | Guaranteeing |        | Elimina-     |        | and   
|                                                    |                                                                   |   |                                                     |        | Parent |       | Subsidiaries |        | Subsidiaries |         | tions        |        | Subsidiaries
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |             
|Net cash provided by (used in)
operating activities |                                                                   | $ | (5,333                                              | )      |        | $     | 17,055       |        |              | $       | 11,231       |        |              | $      | (3,070 | )     |  | $     | 19,883      |       
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |       
|Cash flows from investing activities:               |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |       
|                                                    | Additions to property, plant and equipment                        |   |                                                     | (15    | )      |       |              | (5,112 | )            |         |              | (1,078 | )            |        |        |      |  |       |             | (6,205 | )       
|                                                    | Additions to leased gaming equipment                              |   |                                                     |       |        |       |              | (8,248 | )            |         |              |       |              |        |        |      |  |       |             | (8,248 | )       
|                                                    | Additions to other long term assets                               |   |                                                     |       |        |       |              | (1,976 | )            |         |              |       |              |        |        |      |  |       |             | (1,976 | )       
|                                                    | Acquisitions, net of cash acquired                                |   |                                                     |       |        |       |              | (6,731 | )            |         |              |       |              |        |        |      |  |       |             | (6,731 | )       
|                                                    | Proceeds from disposal of property and
equipment and other assets |   |                                                     |       |        |       |              | 15     |              |         |              | 27     |              |        |        |      |  |       |             | 42     |         
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |       
|                                                    |                                                                   |   | Net cash used in investing activities               |        |        | (15   | )            |        |              | (22,052 | )            |        |              | (1,051 | )      |       |  |      |             |        |          | (23,118 | )
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |       
|Cash flows from financing activities:               |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |       
|                                                    | Reduction of long-term debt                                       |   |                                                     | (506   | )      |       |              | (5     | )            |         |              | (3,305 | )            |        |        | 3,070 |  |       |             | (746   | )       
|                                                    | Debt issuance costs                                               |   |                                                     | (651   | )      |       |              |       |              |         |              |       |              |        |        |      |  |       |             | (651   | )       
|                                                    | Proceeds from exercise of stock options                           |   |                                                     | 4,080  |        |       |              |       |              |         |              |       |              |        |        |      |  |       |             | 4,080  |         
|                                                    | Dividends received (paid)                                         |   |                                                     |       |        |       |              | 5,121  |              |         |              | (5,121 | )            |        |        |      |  |       |             |       |         
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |       
|                                                    |                                                                   |   | Net cash provided by (used in)
financing activities |        |        | 2,923 |              |        |              | 5,116   |              |        |              | (8,426 | )      |       |  | 3,070 |             |        |          | 2,683   |  
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |       
|Effect of exchange rate changes on cash             |                                                                   |   |                                                    |        |        |       |             |        |              |         | 154          |        |              |        |       |       |  |       | 154         |       
|Cash and cash equivalents:                          |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |       
|                                                    | Increase (decrease) for period                                    |   |                                                     | (2,425 | )      |       |              | 119    |              |         |              | 1,908  |              |        |        |      |  |       |             | (398   | )       
|                                                    | Balance, beginning of period                                      |   |                                                     | 18,237 |        |       |              | 23,265 |              |         |              | 13,343 |              |        |        |      |  |       |             | 54,845 |         
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |       
|                                                    | Balance, end of period                                            |   | $                                                   | 15,812 |        |       | $            | 23,384 |              |         | $            | 15,251 |              |        | $      |      |  |       | $           | 54,447 |         
|                                                    |                                                                   |   |                                                     |        |        |       |              |        |              |         |              |        |              |        |        |       |  |       |             |       

See accompanying unaudited note.

20



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWSSix Months Ended December 31, 2002
(In 000s)

|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |          |         |  
|--------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------------- | ----- | ------ | ---- | ------------ | ----- | ------------ | ------- | ------------ | ------ | ------------ | ------ | --- | ------ | ----- | ----- | ----------- | ------ | -------- | ------- | -
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        | Alliance
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        | Gaming  
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        | Non-         |        |     |        |       |       | Corporation
|                                                    |                                                                   |                                                     |       |        |      |              |       | Guaranteeing |         | Guaranteeing |        | Elimina-     |        | and
|                                                    |                                                                   |                                                     |       | Parent |      | Subsidiaries |       | Subsidiaries |         | tions        |        | Subsidiaries
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |             
|Net cash provided by (used in)
operating activities |                                                                   | $                                                   | 3,458 |        |      | $            | 7,241 |              |         | $            | 11,750 |              |        | $   | (4,114 | )     |       | $           | 18,335 |         
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |         
|Cash flows from investing activities:               |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |         
|                                                    | Additions to property, plant and equipment                        |                                                     |       | (3     | )    |              |       | (6,041       | )       |              |        | (2,731       | )      |     |        |      |       |             |        | (8,775   | )      
|                                                    | Additions to leased gaming equipment                              |                                                     |       |       |      |              |       | (10,010      | )       |              |        |             |        |     |        |      |       |             |        | (10,010  | )      
|                                                    | Additions to other long term assets                               |                                                     |       |       |      |              |       | (4,210       | )       |              |        | (101         | )      |     |        |      |       |             |        | (4,311   | )      
|                                                    | Acquisitions, net of cash acquired                                |                                                     |       |       |      |              |       | (3,038       | )       |              |        |             |        |     |        |      |       |             |        | (3,038   | )      
|                                                    | Proceeds from disposal of property
and equipment and other assets |                                                     |       |       |      |              |       | 9            |         |              |        |             |        |     |        |      |       |             |        | 9        |        
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |         
|                                                    |                                                                   | Net cash used in investing activities               |       |        | (3   | )            |       |              | (23,290 | )            |        |              | (2,832 | )   |        |       |      |             |        |          | (26,125 | )
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |         
|Cash flows from financing activities:               |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |         
|                                                    | Reduction of long-term debt                                       |                                                     |       | (1,950 | )    |              |       | (618         | )       |              |        | (3,772       | )      |     |        | 4,150 |       |             |        | (2,190   | )      
|                                                    | Proceeds from exercise of stock options                           |                                                     |       | 1,792  |      |              |       |             |         |              |        |             |        |     |        |      |       |             |        | 1,792    |        
|                                                    | Dividends received (paid)                                         |                                                     |       |       |      |              |       | 2,940        |         |              |        | (2,940       | )      |     |        |      |       |             |        |         |        
|                                                    | Other                                                             |                                                     |       |       |      |              |       |             |         |              |        | 36           |        |     |        | (36   | )     |             |        |         |        
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |         
|                                                    |                                                                   | Net cash provided by (used in)
financing activities |       |        | (158 | )            |       |              | 2,322   |              |        |              | (6,676 | )   |        |       | 4,114 |             |        |          | (398    | )
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |         
|Effect of exchange rate changes on cash             |                                                                   |                                                     |      |        |      |              |      |              |         |              | 600    |              |        |     |       |       |       |             | 600    |         
|Cash and cash equivalents:                          |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |         
|                                                    | Increase (decrease) for period                                    |                                                     |       | 3,297  |      |              |       | (13,727      | )       |              |        | 2,842        |        |     |        |      |       |             |        | (7,588   | )      
|                                                    | Balance, beginning of period                                      |                                                     |       | 8,121  |      |              |       | 38,362       |         |              |        | 16,025       |        |     |        |      |       |             |        | 62,508   |        
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |         
|                                                    | Balance, end of period                                            |                                                     | $     | 11,418 |      |              | $     | 24,635       |         |              | $      | 18,867       |        |     | $      |      |       |             | $      | 54,920   |        
|                                                    |                                                                   |                                                     |       |        |      |              |       |              |         |              |        |              |        |     |        |       |       |             |        |         

See accompanying unaudited note.

21



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



| |  | Debt and Revolving Credit Facility                                                         
| |  | -------------------------------------------------------------------------------------------
|
| |  | Long-term debt and lines of credit at June 30, 2002, consisted of the following (in 000s):

|                                                                    |  |        |         |              |  |              |         |              |  |              |        |     |  |   |          |             |  |          |         | 
|------------------------------------------------------------------- |  | ------ | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------ | --- |  | - | -------- | ----------- |  | -------- | ------- | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |        |     |  |   |          |             |  | Alliance
|                                                                    |  |        |         |              |  |              |         |              |  |              |        |     |  |   |          |             |  | Gaming  
|                                                                    |  |        |         |              |  |              |         |              |  | Non-         |        |     |  |   |          | Corporation
|                                                                    |  |        |         |              |  | Guaranteeing |         | Guaranteeing |  | Elimina-     |        | and
|                                                                    |  | Parent |         | Subsidiaries |  | Subsidiaries |         | tions        |  | Subsidiaries
|                                                                    |  |        |         |              |  |              |         |              |  |             
|Term loan facility                                                  |  | $      | 189,525 |              |  | $            |        |              |  | $            |       |     |  | $ |         |             |  | $        | 189,525 | 
|10% Senior Subordinated Notes due
2007, net of unamortized discount |  |        | 149,584 |              |  |              |        |              |  |              |       |     |  |   |         |             |  |          | 149,584 | 
|Other subordinated note                                             |  |        | 2,495   |              |  |              |        |              |  |              |       |     |  |   |         |             |  |          | 2,495   | 
|Intercompany notes payable                                          |  |        |        |              |  |              | 206,267 |              |  |              | 12,814 |     |  |   | (219,081 | )           |  |          |        | 
|Other                                                               |  |        |        |              |  |              | 510     |              |  |              | 150    |     |  |   |         |             |  |          | 660     | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |        |     |  |   |          |             |  |          |         | 
|                                                                    |  |        | 341,604 |              |  |              | 206,777 |              |  |              | 12,964 |     |  |   | (219,081 | )           |  |          | 342,264 | 
|Less current maturities                                             |  |        | 3,900   |              |  |              | 79      |              |  |              | 12,952 |     |  |   | (12,815  | )           |  |          | 4,116   | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |        |     |  |   |          |             |  |          |         | 
|Long-term debt, less current
maturities                             |  | $      | 337,704 |              |  | $            | 206,698 |              |  | $            | 12     |     |  | $ | (206,266 | )           |  | $        | 338,148 | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |        |     |  |   |          |             |  |          |         | 



|Long-term debt and lines of credit at December 31, 2002, consisted of the following (in 000s):
|-----------------------------------------------------------------------------------------------

|                                                                    |  |        |         |              |  |              |         |              |  |              |       |     |  |   |          |             |  |          |         | 
|------------------------------------------------------------------- |  | ------ | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ----- | --- |  | - | -------- | ----------- |  | -------- | ------- | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |       |     |  |   |          |             |  | Alliance
|                                                                    |  |        |         |              |  |              |         |              |  |              |       |     |  |   |          |             |  | Gaming  
|                                                                    |  |        |         |              |  |              |         |              |  | Non-         |       |     |  |   |          | Corporation
|                                                                    |  |        |         |              |  | Guaranteeing |         | Guaranteeing |  | Elimina-     |       | and
|                                                                    |  | Parent |         | Subsidiaries |  | Subsidiaries |         | tions        |  | Subsidiaries
|                                                                    |  |        |         |              |  |              |         |              |  |             
|Term loan facility                                                  |  | $      | 188,575 |              |  | $            |        |              |  | $            |      |     |  | $ |         |             |  | $        | 188,575 | 
|10% Senior Subordinated Notes due
2007, net of unamortized discount |  |        | 149,624 |              |  |              |        |              |  |              |      |     |  |   |         |             |  |          | 149,624 | 
|Other subordinated note                                             |  |        | 1,495   |              |  |              |        |              |  |              |      |     |  |   |         |             |  |          | 1,495   | 
|Intercompany notes payable                                          |  |        |        |              |  |              | 217,998 |              |  |              | 9,174 |     |  |   | (227,172 | )           |  |          |        | 
|Other                                                               |  |        |        |              |  |              | 3,401   |              |  |              | 18    |     |  |   |         |             |  |          | 3,419   | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |       |     |  |   |          |             |  |          |         | 
|                                                                    |  |        | 339,694 |              |  |              | 221,399 |              |  |              | 9,192 |     |  |   | (227,172 | )           |  |          | 343,113 | 
|Less current maturities                                             |  |        | 3,395   |              |  |              | 1,538   |              |  |              | 9,186 |     |  |   | (9,175   | )           |  |          | 4,944   | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |       |     |  |   |          |             |  |          |         | 
|Long-term debt, less current
maturities                             |  | $      | 336,299 |              |  | $            | 219,861 |              |  | $            | 6     |     |  | $ | (217,997 | )           |  | $        | 338,169 | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |       |     |  |   |          |             |  |          |         | 

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002




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

Liquidity and Capital Resources

As of December 31, 2002, the Company had $54.9 million in cash and cash
equivalents, and $40.0 million in unborrowed availability on its revolving
credit facility. In addition we had net working capital of approximately $173.0
million at December 31, 2002, virtually unchanged compared to the balance at
June 30, 2002. The changes within working capital are more fully described in
the cash flow section below. Consolidated cash and cash equivalents at December
31, 2002, includes approximately $21.7 million of cash which is utilized in
Casino and Route Operations held in vaults, cages or change banks, as well as
$8.8 million held in jackpot reserve accounts which we maintain to ensure
availability of funds to pay wide-area progressive jackpot awards. We also
maintain restricted investments to pay the annual installments for the
long-term jackpots previously awarded, which totaled $0.8 million at December
30, 2002.

Management believes that cash flows from operating activities, cash and cash
equivalents held and the up to $40.0 million revolving credit facility
commitment will provide the Company with sufficient capital resources and
liquidity. At December 31, 2002, we had no material commitments for capital
expenditures.

Cash Flow

During the six months ended December 31, 2002, we generated $18.3 million of
cash flows from operating activities, which was down compared to $19.9 million
in the prior period. The current period operating cash flow included cash used
by increases in both accounts and notes receivable of $32.0 million and
inventories of $2.6 million, offset by increases in accrued liabilities and
accounts payable of $6.5 million. The increase in accounts and notes receivable
resulted from the increase in sales at the Bally Gaming and Systems business
unit and the financing of two significant product sales to Native American
casinos during the quarter ended December 31, 2002.

During the six months ended December 31, 2002, we used $26.1 million of cash in
investing activities resulting from capital expenditures totaling $8.8 million,
costs incurred to produce participation games totaling $10.0 million, and
payments for gaming rights totaling $2.8 million.

During the six months ended December 31, 2002, cash flow from financing
activities included $1.8 million of cash provided from the exercise of stock
options, offset by principal payments on other long term debt totaling $2.2
million.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Results of Operations:

General

The following tables set forth operating income for the Companys four business
units and the earnings before interest, taxes, depreciation and amortization
(EBITDA) for the following periods (in 000s):

|                                  |                        |   |                                  |        |                                |   |        |        |      |   |        |        |  |   |        |        | 
|--------------------------------- | ---------------------- | - | -------------------------------- | ------ | ------------------------------ | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                  |                        |   | Three Months Ending December 31, |        | Six Months Ending December 31,
|                                  |                        |   | 2001                             |        | 2002                           |   | 2001   |        | 2002
|                                  |                        |   |                                  |        |                                |   |        |        |     
|Operating Income (Expense):       |                        |   |                                  |        |                                |   |        |        |      |   |        |        |  |   |        |       
|Bally Gaming and Systems          |                        | $ | 10,009                           |        |                                | $ | 21,775 |        |      | $ | 19,939 |        |  | $ | 36,910 |       
|Wall Machines and Amusement Games |                        |   | 4,491                            |        |                                |   | 554    |        |      |   | 3,133  |        |  |   | (1,261 | )     
|Route Operations                  |                        |   | 4,024                            |        |                                |   | 2,468  |        |      |   | 7,144  |        |  |   | 5,133  |       
|Casino Operations                 |                        |   | 5,284                            |        |                                |   | 3,821  |        |      |   | 11,151 |        |  |   | 8,836  |       
|Corporate Administrative Expenses |                        |   | (3,408                           | )      |                                |   | (3,165 | )      |      |   | (6,106 | )      |  |   | (5,944 | )     
|                                  |                        |   |                                  |        |                                |   |        |        |      |   |        |        |  |   |        |       
|                                  | Total Operating Income |   | $                                | 20,400 |                                |   | $      | 25,453 |      |   | $      | 35,261 |  |   | $      | 43,674 | 
|                                  |                        |   |                                  |        |                                |   |        |        |      |   |        |        |  |   |        |       
|EBITDA by Business Unit:          |                        |   |                                  |        |                                |   |        |        |      |   |        |        |  |   |        |       
|Bally Gaming and Systems          |                        | $ | 12,405                           |        |                                | $ | 25,552 |        |      | $ | 24,289 |        |  | $ | 43,951 |       
|Wall Machines and Amusement Games |                        |   | 5,782                            |        |                                |   | 1,049  |        |      |   | 5,693  |        |  |   | (627   | )     
|Route Operations                  |                        |   | 6,596                            |        |                                |   | 5,783  |        |      |   | 13,236 |        |  |   | 11,758 |       
|Casino Operations                 |                        |   | 5,759                            |        |                                |   | 4,613  |        |      |   | 12,085 |        |  |   | 10,370 |       
|Corporate Administrative Expenses |                        |   | (2,826                           | )      |                                |   | (2,623 | )      |      |   | (5,002 | )      |  |   | (4,858 | )     
|                                  |                        |   |                                  |        |                                |   |        |        |      |   |        |        |  |   |        |       
|                                  | EBITDA                 |   | $                                | 27,716 |                                |   | $      | 34,374 |      |   | $      | 50,301 |  |   | $      | 60,594 | 
|                                  |                        |   |                                  |        |                                |   |        |        |      |   |        |        |  |   |        |       

We believe that the analysis of EBITDA is a useful adjunct to operating income,
net income, cash flow and other GAAP measurement. However, this information
should not be construed as an alternative to net income (loss) or any other
GAAP measure of performance as an indicator of our performance or to
GAAP-defined cash flows generated by (or used in) operating, investing and
financing activities as an indicator of cash flows or a measure of liquidity.
EBITDA may not be comparable to similarly titled measures reported by other
companies.

We disclose EBITDA primarily because it is a common metric utilized by analysts
for our industry and also because it is utilized in both our bank credit
agreement and the Indenture of our Senior Subordinated Notes for purposes of
computing various covenants.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Bally Gaming and Systems

|                                    |                        |                    |        |                                  |        |                                |        |        |        |      |        |        |        |   |        |        |         | 
|----------------------------------- | ---------------------- | ------------------ | ------ | -------------------------------- | ------ | ------------------------------ | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------- | 
|                                    |                        |                    |        | Three Months Ending December 31, |        | Six Months Ending December 31,
|                                    |                        |                    |        | 2001                             |        | 2002                           |        | 2001   |        | 2002
|                                    |                        |                    |        |                                  |        |                                |        |        |        |     
|Revenues                            |                        |                    |        |                                  |        |                                |        |        |        |      |        |        |        |   |        |       
|                                    | Game sales             |                    | $      | 26,935                           |        |                                | $      | 50,421 |        |      | $      | 47,883 |        |   | $      | 84,204 |        
|                                    | System sales           |                    |        | 11,934                           |        |                                |        | 23,041 |        |      |        | 24,924 |        |   |        | 38,316 |        
|                                    | Gaming operations      |                    |        | 12,914                           |        |                                |        | 13,165 |        |      |        | 24,291 |        |   |        | 27,646 |        
|                                    |                        |                    |        |                                  |        |                                |        |        |        |      |        |        |        |   |        |       
|                                    |                        | Total revenues     |        |                                  | 51,783 |                                |        |        | 86,627 |      |        |        | 97,098 |   |        |        | 150,166 | 
|Gross Margin                        |                        |                    |        |                                  |        |                                |        |        |        |      |        |        |        |   |        |       
|                                    | Game sales             |                    |        | 10,043                           |        |                                |        | 21,621 |        |      |        | 20,427 |        |   |        | 37,546 |        
|                                    | System sales           |                    |        | 9,110                            |        |                                |        | 17,106 |        |      |        | 18,666 |        |   |        | 29,039 |        
|                                    | Gaming operations      |                    |        | 9,786                            |        |                                |        | 8,237  |        |      |        | 15,610 |        |   |        | 17,660 |        
|                                    |                        |                    |        |                                  |        |                                |        |        |        |      |        |        |        |   |        |       
|                                    |                        | Total gross margin |        |                                  | 28,939 |                                |        |        | 46,964 |      |        |        | 54,703 |   |        |        | 84,245  | 
|Selling, general and administrative |                        |                    | 13,392 |                                  |        |                                | 16,254 |        |        |      | 24,202 |        |        |   | 31,161 |       
|Research and development costs      |                        |                    | 3,142  |                                  |        |                                | 5,158  |        |        |      | 6,212  |        |        |   | 9,133  |       
|Depreciation and amortization       |                        |                    | 2,396  |                                  |        |                                | 3,777  |        |        |      | 4,350  |        |        |   | 7,041  |       
|                                    |                        |                    |        |                                  |        |                                |        |        |        |      |        |        |        |   |        |       
|Operating income                    |                        | $                  | 10,009 |                                  |        | $                              | 21,775 |        |        | $    | 19,939 |        |        | $ | 36,910 |       
|                                    |                        |                    |        |                                  |        |                                |        |        |        |      |        |        |        |   |        |       
|Operating Statistics:               |                        |                    |        |                                  |        |                                |        |        |        |      |        |        |        |   |        |       
|New Gaming Devices Sold             |                        |                    | 3,250  |                                  |        |                                | 5,430  |        |        |      | 5,700  |        |        |   | 9,430  |       
|Game Monitoring Units Sold          |                        |                    | 8,500  |                                  |        |                                | 8,900  |        |        |      | 17,580 |        |        |   | 15,030 |       
|WAP and daily-fee games             |                        |                    |        |                                  |        |                                |        |        |        |      |        |        |        |   |        |       
|End of period installed base        |                        |                    | 3,700  |                                  |        |                                | 3,930  |        |        |      | 3,700  |        |        |   | 3,930  |       
|                                    | Average installed base |                    |        | 3,580                            |        |                                |        | 3,900  |        |      |        | 3,480  |        |   |        | 3,800  |        

Our Bally Gaming and Systems business unit reported an overall increase in
revenues of 67% for the quarter and 55% for the year-to-date period. Bally game
sales division reported an increase in revenues of 87% for the quarter and 76%
for the year-to-date period. New units sold increased 66% during the quarter
and 64% for the year-to-date period. The average new unit selling price
(excluding OEM games) increased 26% for the quarter and 21% for the
year-to-date period. Bally Systems reported an increase in revenues of 93% for
the quarter and 54% for the year-to-date period. Bally Systems reported a 6%
increase in sales of game monitoring units for the quarter, but a 14% decrease
for the year-to-date period. For the current quarter and year-to-date period,
Bally Systems experienced significantly higher average selling price per unit
driven by the larger proportion of player tracking and promotion software
revenues, as well as an increase in recurring hardware and software support
revenues to $4.2 million, resulting from the larger base of installed units,
which now stands at approximately 225,000. Gaming Operations reported an
increase of 2% in revenues for the quarter and 14% for the year-to-date period,
driven by the 9% increase in the average installed base of wide-area and
daily-fee games units outstanding.

For the quarter ended December 31, 2002, the overall gross margin percentage
for Bally Gaming and Systems decreased to 54% compared to 56% in the prior year
quarter, resulting from the higher mix of game sales revenue which have lower
margins compared to system and gaming operations. The year-to-date gross margin
percentage remained constant at 56%.

The overall selling, general and administrative expenses increased 21% for the
quarter and 29% for the year-to-date period, resulting from the additional
headcount added with the acquisition of Casino Marketplace in October 2001 and
Advanced Casino Systems Corporation in March 2002. Selling, general and
administrative costs as a percentage of this business units

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

revenue declined
to 21% in the current year-to-date period compared to 25% for the prior
year-to-date period. Research and development costs increased 64% for the
quarter and 47% for the year-to-date period, resulting from the increase in
hardware and software engineers added during the current year. Total
depreciation expense increased 58% for the quarter and 62% for the year-to-date
period, driven by the increase in the installed base of wide-area progressive
and daily fee games.

Wall Machines and Amusement Games

|                                    |  |                                  |        |                                |  |      |        |      |  |   |        |  |  |   |        |  
|----------------------------------- |  | -------------------------------- | ------ | ------------------------------ |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | -
|                                    |  | Three Months Ending December 31, |        | Six Months Ending December 31,
|                                    |  | 2001                             |        | 2002                           |  | 2001 |        | 2002
|                                    |  |                                  |        |                                |  |      |        |     
|Revenues                            |  | $                                | 25,462 |                                |  | $    | 16,900 |      |  | $ | 38,123 |  |  | $ | 27,466 |  
|Gross Margin                        |  |                                  | 12,354 |                                |  |      | 7,091  |      |  |   | 17,510 |  |  |   | 11,487 |  
|Selling, general and administrative |  |                                  | 5,907  |                                |  |      | 5,288  |      |  |   | 10,530 |  |  |   | 10,575 |  
|Research and development costs      |  |                                  | 665    |                                |  |      | 754    |      |  |   | 1,287  |  |  |   | 1,539  |  
|Depreciation and amortization       |  |                                  | 1,291  |                                |  |      | 495    |      |  |   | 2,560  |  |  |   | 634    |  
|                                    |  |                                  |        |                                |  |      |        |      |  |   |        |  |  |   |        |  
|Operating income (loss)             |  | $                                | 4,491  |                                |  | $    | 554    |      |  | $ | 3,133  |  |  | $ | (1,261 | )
|                                    |  |                                  |        |                                |  |      |        |      |  |   |        |  |  |   |        |  
|Operating Statistics:               |  |                                  |        |                                |  |      |        |      |  |   |        |  |  |   |        |  
|Number of New Wall Machines Sold    |  |                                  | 3,960  |                                |  |      | 1,770  |      |  |   | 5,810  |  |  |   | 2,470  |  
|Number of New Wall Machines Leased  |  |                                  | 1,630  |                                |  |      | 1,380  |      |  |   | 2,610  |  |  |   | 2,320  |  
|Installed Base of Leased Machines   |  |                                  | 7,130  |                                |  |      | 6,680  |      |  |   | 7,130  |  |  |   | 6,680  |  

Wall Machines and Amusement Games reported a decrease in revenues of 34% for
the quarter and 28% for the year-to-date period. For the quarter, the decrease
in revenues was a result of a 55% decrease in new units sold, offset by a 34%
increase in the average selling price and a 17% increase in revenues from
leased games. For the year-to-date period, the decrease in revenues is a result
of a 58% decrease in new units sold, offset by a 21% increase in the average
selling price and a 19% increase in revenues from leased games. The prior
years quarterly and year-to-date results reflect the positive impact of units
that were sold to meet the deadline for the full implementation of the Euro
currency. In general, the Wall Machine industry in Germany is currently
experiencing a significant slowdown that is tied to the overall slowness in the
German economy. The current quarters revenues included approximately 1,000 Sky
games which were delivered in the September 2002 quarter but which had certain
right of return privileges that did not expire until the December 2002 quarter,
at which time revenue was recognized.

For the quarter ended December 31, 2002, the gross margin percentage for Wall
Machines and Amusement Games decreased to 42% compared to 49% in the prior year
quarter, resulting primarily from fixed manufacturing overhead costs being
allocated over fewer units produced. The year to-date gross margin percentage
decreased to 42% from 46% for the same reason.

The selling, general and administrative expenses decreased 10% for the quarter,
which reflects the reduction in both permanent and temporary staff as a result
of the workforce reductions put in place in light of the lower sales levels.
Research and development costs increased 13% for the quarter and 20% for the
year-to-date period as a result of the increase in new product development
efforts. Total depreciation expense decreased 62% for the quarter and 75% for
the year-to-date period, which reflects the fact that almost all of the
long-lived assets were fully written off in June 2002.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Route Operations

|                                    |           |                      |       |                                  |        |                                |       |        |        |      |       |         |         |   |       |         |         | 
|----------------------------------- | --------- | -------------------- | ----- | -------------------------------- | ------ | ------------------------------ | ----- | ------ | ------ | ---- | ----- | ------- | ------- | - | ----- | ------- | ------- | 
|                                    |           |                      |       | Three Months Ending December 31, |        | Six Months Ending December 31,
|                                    |           |                      |       | 2001                             |        | 2002                           |       | 2001   |        | 2002
|                                    |           |                      |       |                                  |        |                                |       |        |        |     
|Revenues                            |           |                      |       |                                  |        |                                |       |        |        |      |       |         |         |   |       |        
|                                    | Nevada    |                      | $     | 52,283                           |        |                                | $     | 49,727 |        |      | $     | 102,554 |         |   | $     | 100,874 |        
|                                    | Louisiana |                      |       | 3,481                            |        |                                |       | 3,594  |        |      |       | 7,010   |         |   |       | 7,284   |        
|                                    |           |                      |       |                                  |        |                                |       |        |        |      |       |         |         |   |       |        
|                                    |           | Total revenues       |       |                                  | 55,764 |                                |       |        | 53,321 |      |       |         | 109,564 |   |       |         | 108,158 | 
|Gross Margin                        |           |                      |       |                                  |        |                                |       |        |        |      |       |         |         |   |       |        
|                                    | Nevada    |                      |       | 8,522                            |        |                                |       | 7,432  |        |      |       | 16,682  |         |   |       | 15,328  |        
|                                    | Louisiana |                      |       | 1,168                            |        |                                |       | 1,207  |        |      |       | 2,410   |         |   |       | 2,428   |        
|                                    |           |                      |       |                                  |        |                                |       |        |        |      |       |         |         |   |       |        
|                                    |           | Total gross margin   |       |                                  | 9,690  |                                |       |        | 8,639  |      |       |         | 19,092  |   |       |         | 17,756  | 
|Selling, general and administrative |           |                      | 3,094 |                                  |        |                                | 2,856 |        |        |      | 5,856 |         |         |   | 5,998 |        
|Depreciation and amortization       |           |                      | 2,572 |                                  |        |                                | 3,315 |        |        |      | 6,092 |         |         |   | 6,625 |        
|                                    |           |                      |       |                                  |        |                                |       |        |        |      |       |         |         |   |       |        
|Operating income                    |           | $                    | 4,024 |                                  |        | $                              | 2,468 |        |        | $    | 7,144 |         |         | $ | 5,133 |        
|                                    |           |                      |       |                                  |        |                                |       |        |        |      |       |         |         |   |       |        
|Operating Statistics:               |           |                      |       |                                  |        |                                |       |        |        |      |       |         |         |   |       |        
|Average Number of Gaming Devices    |           |                      |       |                                  |        |                                |       |        |        |      |       |         |         |   |       |        
|                                    | Nevada    |                      |       | 8,380                            |        |                                |       | 8,130  |        |      |       | 8,275   |         |   |       | 8,235   |        
|                                    | Louisiana |                      |       | 680                              |        |                                |       | 711    |        |      |       | 665     |         |   |       | 711     |        
|                                    |           |                      |       |                                  |        |                                |       |        |        |      |       |         |         |   |       |        
|                                    |           | Total Gaming Devices |       |                                  | 9,060  |                                |       |        | 8,841  |      |       |         | 8,940   |   |       |         | 8,946   | 

Revenues from the Nevada route operations decreased 5% for the quarter and 2%
for year-to-date period. This decrease was attributable to a decrease in the
average net win per gaming machine per day of 2% to $65.85 from $67.25 and a 3%
decrease in the weighted average number of gaming machines for the quarter. The
revenue decrease for the year-to-date period is a result of a 2% decrease in
the average net win per gaming machine per day to $65.50 from $66.80 and the
weighted average number of games remained relatively flat. The Nevada route
operations were adversely impacted during the quarter by the closure of the
Raleys supermarkets locations in Southern Nevada. Certain of these locations
later re-opened as Food-4-Less stores, where we retained the gaming rights.
Gamblers Bonus, a cardless players club and player tracking system continued
to have a favorable impact on the net win per day. As of December 31, 2002, the
Gamblers Bonus product was installed in over 4,140 gaming machines at
approximately 415 locations statewide or 52% of the installed base of gaming
machines. Revenues from route operations in Louisiana reported a slight
increase of 3% for the quarter and 4% for year-to-date period. For the quarter
the increase was primarily the result of a 5% increase in the number of gaming
units deployed, offset by a slight decline in the net win per gaming machine
per day of 2% to $54.65 from $55.50. For the year-to-date period the revenue
increase resulted from a 7% increase in the number of gaming units deployed,
offset by a 3% decline in the net win per gaming machine per day.

For the quarter and year-to-date ended December 31, 2002, the overall gross
margin percentage for the Route Operations decreased slightly to 16% compared
to 17% in the prior year. This decrease was a result of the decrease in
revenues, with incremental increases in certain operating costs.

The overall selling, general and administrative expenses decreased 8% for the
quarter and increased 2% for the year-to-date period. Selling, general and
administrative costs as a percentage of revenue remained constant at 5% for the
year-to-date period. Total depreciation expense increased 29% for the quarter and 9%
for the year-to-date period, driven by the increase in gaming rights fees
amortization and depreciation on a higher capital invested in the installed
base of gaming devices.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Casino Operations

|                                                |                  |                      |       |                                  |        |                                |       |        |        |      |        |        |        |   |       |        |        | 
|----------------------------------------------- | ---------------- | -------------------- | ----- | -------------------------------- | ------ | ------------------------------ | ----- | ------ | ------ | ---- | ------ | ------ | ------ | - | ----- | ------ | ------ | 
|                                                |                  |                      |       | Three Months Ending December 31, |        | Six Months Ending December 31,
|                                                |                  |                      |       | 2001                             |        | 2002                           |       | 2001   |        | 2002
|                                                |                  |                      |       |                                  |        |                                |       |        |        |     
|Revenues                                        |                  |                      |       |                                  |        |                                |       |        |        |      |        |        |        |   |       |       
|                                                | Rainbow Casino   |                      | $     | 12,621                           |        |                                | $     | 11,600 |        |      | $      | 25,823 |        |   | $     | 24,267 |       
|                                                | Rail City Casino |                      |       | 4,986                            |        |                                |       | 5,178  |        |      |        | 9,963  |        |   |       | 10,301 |       
|                                                |                  |                      |       |                                  |        |                                |       |        |        |      |        |        |        |   |       |       
|                                                |                  | Total revenues       |       |                                  | 17,607 |                                |       |        | 16,778 |      |        |        | 35,786 |   |       |        | 34,568 | 
|Gross Margin                                    |                  |                      |       |                                  |        |                                |       |        |        |      |        |        |        |   |       |       
|                                                | Rainbow Casino   |                      |       | 7,539                            |        |                                |       | 6,377  |        |      |        | 15,176 |        |   |       | 13,747 |       
|                                                | Rail City Casino |                      |       | 2,202                            |        |                                |       | 2,339  |        |      |        | 4,409  |        |   |       | 4,571  |       
|                                                |                  |                      |       |                                  |        |                                |       |        |        |      |        |        |        |   |       |       
|                                                |                  | Total gross margin   |       |                                  | 9,741  |                                |       |        | 8,716  |      |        |        | 19,585 |   |       |        | 18,318 | 
|Selling, general and administrative             |                  |                      | 3,982 |                                  |        |                                | 4,103 |        |        |      | 7,500  |        |        |   | 7,948 |       
|Depreciation and amortization                   |                  |                      | 475   |                                  |        |                                | 792   |        |        |      | 934    |        |        |   | 1,534 |       
|                                                |                  |                      |       |                                  |        |                                |       |        |        |      |        |        |        |   |       |       
|Operating income                                |                  | $                    | 5,284 |                                  |        | $                              | 3,821 |        |        | $    | 11,151 |        |        | $ | 8,836 |       
|                                                |                  |                      |       |                                  |        |                                |       |        |        |      |        |        |        |   |       |       
|Operating Statistics:                           |                  |                      |       |                                  |        |                                |       |        |        |      |        |        |        |   |       |       
|Average Number of Gaming Devices
Rainbow Casino |                  |                      | 970   |                                  |        |                                | 904   |        |        |      | 940    |        |        |   | 930   |       
|                                                | Rail City Casino |                      |       | 530                              |        |                                |       | 546    |        |      |        | 520    |        |   |       | 545    |       
|                                                |                  |                      |       |                                  |        |                                |       |        |        |      |        |        |        |   |       |       
|                                                |                  | Total Gaming Devices |       |                                  | 1,500  |                                |       |        | 1,450  |      |        |        | 1,460  |   |       |        | 1,475  | 
|Average Number of Table Games                   |                  |                      | 24    |                                  |        |                                | 24    |        |        |      | 24     |        |        |   | 24    |       

Rainbow Casino reported a decrease in revenues of 8% for the quarter and 6% for
the year-to-date period. The Rainbow Casino revenue decrease for the quarter
was attributable to a 7% decrease in the average number of gaming machines,
offset by a 1% increase in the slot machines net win per day to $135. The
Vicksburg gaming market grew approximately 3% in the December 31, 2002, quarter
compared to the prior year quarter. During the quarter Rainbow completed a
number of significant remodeling projects including the addition of a deli and
an entertainment lounge. The internal remodeling projects caused a significant
amount of disruption to the casino operations in the current quarter. The
external remodeling project, which began late in January and is expected to be
completed early in the June quarter, is expected to be less disruptive to the
casino operations. Rail City Casino reported an increase in revenues of 4% for
the quarter and 3% for the year-to-date period. The revenue improvement at the
Rail City Casino was attributable to a 2% increase in the average number of
gaming machines and an increase in the average gaming machine net win per day
of 2% to $83 for the quarter.

The cost of revenues for Casino Operations as a percentage of revenues,
increased to 48% for the quarter and 47% for the year-to-date period. This
increase was a result of the decrease in revenues, with incremental increases
in certain operating costs. Cost of casino revenues includes gaming taxes,
rental costs and direct labor including payroll taxes and benefits.

The overall selling, general and administrative expenses increased 3% for the
quarter and 6% for the year-to-date period, as result of an increase in
advertising and promotional expenses. Selling, general and administrative costs
as a percentage of revenue increased to 23% compared to 21% for the
year-to-date-period. Total depreciation expense increased 67% for the quarter
and 64% for the year-to-date period as a result of the additional capital
improvements made to the Rainbow Casino in the current year.

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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Parent Company and other unallocated other income (expense)

|                              |                              |                              |       |                                  |        |                                |        |        |        |      |       |         |         |   |         |         |         |  
|----------------------------- | ---------------------------- | ---------------------------- | ----- | -------------------------------- | ------ | ------------------------------ | ------ | ------ | ------ | ---- | ----- | ------- | ------- | - | ------- | ------- | ------- | -
|                              |                              |                              |       | Three Months Ending December 31, |        | Six Months Ending December 31,
|                              |                              |                              |       | 2001                             |        | 2002                           |        | 2001   |        | 2002
|                              |                              |                              |       |                                  |        |                                |        |        |        |     
|General and administrative    |                              | $                            | 2,826 |                                  |        | $                              | 2,623  |        |        | $    | 5,002 |         |         | $ | 4,858   |        
|Depreciation and amortization |                              |                              | 582   |                                  |        |                                | 542    |        |        |      | 1,104 |         |         |   | 1,086   |        
|                              |                              |                              |       |                                  |        |                                |        |        |        |      |       |         |         |   |         |        
|                              | Total Parent company expense |                              | $     | 3,408                            |        |                                | $      | 3,165  |        |      | $     | 6,106   |         |   | $       | 5,944   |        
|                              |                              |                              |       |                                  |        |                                |        |        |        |      |       |         |         |   |         |        
|Other income (expense):       |                              |                              |       |                                  |        |                                |        |        |        |      |       |         |         |   |         |        
|                              | Interest income              |                              | $     | 369                              |        |                                | $      | 452    |        |      | $     | 764     |         |   | $       | 733     |        
|                              | Interest expense             |                              |       | (7,033                           | )      |                                |        | (6,566 | )      |      |       | (14,680 | )       |   |         | (13,202 | )      
|                              | Minority interest            |                              |       | (405                             | )      |                                |        | (309   | )      |      |       | (868    | )       |   |         | (754    | )      
|                              | Other, net                   |                              |       | (432                             | )      |                                |        | 268    |        |      |       | (12     | )       |   |         | 197     |        
|                              |                              |                              |       |                                  |        |                                |        |        |        |      |       |         |         |   |         |        
|                              |                              | Total other income (expense) |       | $                                | (7,501 | )                              |        | $      | (6,155 | )    |       | $       | (14,796 | ) |         | $       | (13,026 | )
|                              |                              |                              |       |                                  |        |                                |        |        |        |      |       |         |         |   |         |        
|Income tax provision          |                              | $                            | (83   | )                                |        | $                              | (7,445 | )      |        | $    | (221  | )       |         | $ | (12,537 | )      
|                              |                              |                              |       |                                  |        |                                |        |        |        |      |       |         |         |   |         |        

The general and administrative expenses decreased 7% for the quarter and 3% for
the year-to-date period. Compared to the prior year periods, in the current
year periods we are incurring higher director and officer and general liability
insurance premiums, offset by lower accruals for certain elements of our
incentive based compensations plan. Total depreciation expense decreased 7% for
the quarter and 2% for the year-to-date period.

Interest expense (net of interest income) decreased 8% for the quarter and 10%
for the year-to-date-period. The decrease is a result of a lower interest rate
on our LIBOR-based bank credit facility.

The Company has significant deferred tax assets, which consist primarily of net
operating loss carry forwards and other timing differences. Management conducts
periodic recoverability assessments of these deferred tax assets, which
includes evaluating both positive and negative evidential matter to determine
if it is more likely than not that the deferred tax assets will be
realizable. On June 30, 2002, management conducted a recoverability assessment
and determined that $37 million in previously reserved deferred tax assets were
realizable due to the Companys profitable operating results in 2001 and 2002
and projected future taxable income. Until the fourth quarter of fiscal year
2002, management did not believe sufficient evidence existed that it was more
likely than not that such profitable operating results would allow such
deferred tax assets to be realized.

Beginning July 1, 2002, the Company began recognizing Federal income tax
expense based on 35% of pre-tax domestic income and state income taxes at a
rate of approximately 2% of domestic income. For the prior year quarter ended
December 31, 2001, substantially all of the Companys taxable income was offset
against Federal net operating loss carry forwards, which reduced the Companys
tax expense for the quarter ended December 31, 2001 from approximately $4.6
million to approximately $83,000.

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

* * * * *

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

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Rate Fluctuations

We derive revenues from our non-U.S. subsidiaries, all of which revenues are
denominated in their local currencies, and their results are affected 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 operations strengthened
versus the U.S. dollar in 2001 and 2002, which resulted in assets and
liabilities denominated in local currencies being translated into more dollars.
We do not currently utilize hedging instruments.

Market risks

During the normal course of our business, we are routinely subjected to a
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 assess these risks and have established policies and practices
designed to protect against the adverse effects of these and other potential
exposures. Although we do not anticipate any material losses in these risk
areas, no assurances can be made 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 derivative
financial instruments. In performing the sensitivity analysis, we define risk
of loss as the hypothetical impact on earnings of changes in the market
interest rates or currency exchange rates.

The results of the sensitivity analysis at December 31, 2002, are as follows:

Interest Rate Risk:

We had total debt as of December 31, 2002, of $343.1 million, of which $190.0
million are Term Loans with interest rates tied to LIBOR. These Term Loans are
broken into individual loans with varying terms from one to six months. The
interest rate for each loan is set on the borrowing date and is effective for
the term outstanding. If the LIBOR rates were to increase or decrease by 100
basis points, with all other factors remaining constant, earnings would
decrease or increase by approximately $0.5 million on a pre-tax basis.

Foreign Currency Exchange Rate Risk:

Our German subsidiaries currently utilize the euro as our functional currency.
Prior to January 2002, the German deutschemark was used. A 10% fluctuation in
the exchange rate against the U.S. dollar would result in an immaterial
corresponding change in earnings reported in the consolidated group. Such a
change in the euro would result in a charge to accumulated other comprehensive
income (loss), which is a component of stockholders equity, of approximately
$3.9 million, all other factors remaining constant.




ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

(a)  Evaluation of disclosure controls and procedures. Within the 90 days
prior to the date of this report, the Company carried out an evaluation, under
the supervision and with the participation of the Companys management,
including the Companys President and Chief Executive Officer and the Companys
Sr. Vice President, Chief Financial Officer and Treasurer, of the effectiveness
of the design and operation of the Companys disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Companys President and Chief

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

Executive Officer and the Companys Sr. Vice
President, Chief Financial Officer and Treasurer concluded that the Companys
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Companys periodic SEC filings.

(b)  Changes in internal control. No significant changes were made in the
Companys internal controls or in the other factors that could significantly
affect these controls subsequent to the date of their evaluation.

PART II




ITEM 1. Legal Proceedings



| |  |  | There have been no material changes in any legal proceedings since
filing of the Companys annual report on Form 10-K for the fiscal year
ended June 30, 2002.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------




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



| |  |  | On December 3, 2002, the Company held its annual shareholders meeting
at which the shareholders were asked to vote on the election of three
directors and the approval of the Companys Amended 2001 Long Term
Incentive Plan (the 2001 Plan). Of the 49,162,770 shares of common
stock outstanding, 36,932,014 shares were voted for and 4,918,105
withheld from Mr. Kevin Verner; 27,868,674 shares were voted for and
13,981,445 withheld from Mr. Joel Kirschbaum; and 29,448,618 shares
were voted for and 12,401,501 withheld from Mr. Anthony DiCesare; and
39,501,694 shares were voted for and 2,068,046 shares against the
approval of amendment to the 2001 Plan to increase the number of
shares of the Common Stock issuable thereunder by 2,000,000 shares.
Additionally, the shareholders ratified the Board of Directors
appointment of Deloitte & Touche LLP to act as independent public
accountants of the Company for the fiscal year ending June 30, 2003.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




ITEM 6. Exhibits and Reports on Form 8-K



| | a. |  | Exhibits   None          
| | -- |  | --------------------------
|
| | b. |  | Reports on Form 8-K  None
|
| | c. |  | Exhibits                  
|
| | c. |  | 99.1                      

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002




SIGNATURES

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




ALLIANCE GAMING
CORPORATION                                                                                                                  February
12, 2003
(Registrant)


| |    |  |                                                                                                     
| | -- |  | ----------------------------------------------------------------------------------------------------
| | By |  | /s/ Robert L. Miodunski                                                                             
| |    |  |                                                                                                     
| |    |  | President and Chief Executive Officer(Principal Executive Officer)                                  
| |    |  |                                                                                                     
| | By |  | /s/ Robert L. Saxton                                                                                
| |    |  |                                                                                                     
| |    |  | Sr. Vice President, Chief FinancialOfficer and Treasurer (PrincipalFinancial and Accounting Officer)

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002




CERTIFICATIONS

I, Robert L. Miodunski, certify that:



|1.
I have reviewed this quarterly report on Form 10-Q of Alliance Gaming
Corporation;                                                                                                                                                                                                                                            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                 
|2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
|                                                                                                                                                                                                                                                                                                                                 
|3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;                   
|                                                                                                                                                                                                                                                                                                                                 
|4.
The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                     

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;



|5.
The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and



|6.
The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: February 12, 2003



| | /s/ | Robert L.
Miodunski
Robert L. Miodunski
Director, President and
Chief Executive Officer
| | --- | ---------------------------------------------------------------------------------------

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ALLIANCE GAMING CORPORATION
FORM 10-Q

December 31, 2002

I, Robert L. Saxton, certify that:



|1.
  
I have reviewed this quarterly report on Form 10-Q of Alliance Gaming
Corporation;                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                    
|2.
  
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
|                                                                                                                                                                                                                                                                                                                                    
|3.
  
Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;                   
|                                                                                                                                                                                                                                                                                                                                    
|4.
  
The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                     

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;



|5.
  
The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and



|6.
  
The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: February 12, 2003



| | /s/ | Robert L. Saxton
Robert L. Saxton
Sr. Vice President, Treasurer and
Chief Financial Officer (Principal Financial and Accounting
Officer)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

35