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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q

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

For the Quarter ended September 30, 2001
 OR

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

For the transition period from                   to
 Commission File Number 0-4281

ALLIANCE GAMING CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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



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

The number of shares of Common Stock, $0.10 par value, outstanding as of
November 6, 2001, according to the records of the registrants registrar and
transfer agent was 21,979,280.



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TABLE OF CONTENTS



|           |                                                                                               |                                                                         |  |  |  |  |  | 
|---------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- |  |  |  |  |  | 
|PART 1    
|           |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS                        
|           |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS              
|           |                                                                                               | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
|           |                                                                                               | 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                           
|PART II   
|           | Item 1. Legal Proceedings                                                                    
|           | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES



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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-Q
 
For the Quarter Ended September 30, 2001
 
 I N D E X

|                                   |                                                                                                                       |  |      |    | 
|---------------------------------- | --------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|PART I.      FINANCIAL INFORMATION |                                                                                                                       |  | Page
|                                  
|Item 1.                            | Unaudited Financial Statements                                                                                        | 
|                                  
|                                   | Unaudited Condensed Consolidated Balance Sheets as of June 30, 2001
and September 30, 2001                            |  |      | 3  | 
|                                  
|                                   | Unaudited Condensed Consolidated Statements of Operations
for the three months ended September 30, 2000 and 2001      |  |      | 4  | 
|                                  
|                                   | Unaudited Condensed Consolidated Statements of Stockholders Deficiency
for the three months ended September 30, 2001 |  |      | 5  | 
|                                  
|                                   | Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 2000 and 2001      |  |      | 6  | 
|                                  
|                                   | Notes to Unaudited Condensed Consolidated Financial Statements                                                        |  |      | 7  | 
|                                  
|Item 2.                            | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  |      | 19 | 
|                                  
|Item 3.                            | Quantitative and Qualitative Disclosures About Market Risk                                                            |  |      | 25 | 
|                                  
|PART II.      OTHER INFORMATION    |                                                                                                                      
|                                  
|Item 1.                            | Legal Proceedings                                                                                                     |  |      | 25 | 
|                                  
|Item 6.                            | Exhibits and Reports on Form 8-K                                                                                      |  |      | 25 | 
|                                  
|SIGNATURES                         |                                                                                                                       |  | 26   |   



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PART 1
 ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In 000s, except share data)

|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |           |   |         |         |  
|------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------------------------------------------- | - | -------- | ------- | --------- | - | ------- | ------- | -
|                                                                                                             |                                                                                                                     |  |                           |                                                |   | June 30, |         | Sept. 30,
|                                                                                                             |                                                                                                                     |  |                           |                                                |   | 2001     |         | 2001     
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|ASSETS                                                                                                       |                                                                                                                     |  |                           |                                                |   |          |         |          
|Current assets:                                                                                              |                                                                                                                     |  |                           |                                                |   |          |         |          
|                                                                                                             | Cash and cash equivalents                                                                                           |  | $                         | 54,845                                         |   |          | $       | 57,539    |  
|                                                                                                             | Accounts and notes receivable, net of allowance for doubtful
accounts of $15,991 and $15,058                        |  |                           | 79,369                                         |   |          |         | 74,006    |  
|                                                                                                             | Inventories, net of reserves of $7,128 and $6,673                                                                   |  |                           | 35,082                                         |   |          |         | 41,428    |  
|                                                                                                             | Other current assets                                                                                                |  |                           | 10,814                                         |   |          |         | 9,244     |  
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|                                                                                                             |                                                                                                                     |  | Total current assets      |                                                |   | 180,110  |         |           |   | 182,217 |        
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|Long-term notes receivable, net of allowance for doubtful
accounts of $10 and $22                            |                                                                                                                     |  | 1,433                     |                                                |   |          | 1,649   |          
|Leased equipment, net of accumulated depreciation of $14,986 and $15,419                                     |                                                                                                                     |  | 22,677                    |                                                |   |          | 21,191  |          
|Property, plant and equipment, net of accumulated depreciation
of $74,245 and $78,842                        |                                                                                                                     |  | 88,412                    |                                                |   |          | 91,401  |          
|Excess of costs over net assets of acquired businesses, net of
accumulated amortization of $7,433 and $7,562 |                                                                                                                     |  | 49,514                    |                                                |   |          | 50,420  |          
|Intangible assets, net of accumulated amortization of $20,693 and $22,053                                    |                                                                                                                     |  | 22,212                    |                                                |   |          | 22,232  |          
|Deferred
tax assets, net of valuation allowance of $66,829 and $64,229                                       |                                                                                                                     |  | 11,944                    |                                                |   |          | 12,063  |          
|Other assets, net of reserves of $1,826 and $1,826                                                           |                                                                                                                     |  | 3,895                     |                                                |   |          | 3,801   |          
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|                                                                                                             |                                                                                                                     |  |                           | Total assets                                   |   | $        | 380,197 |           |   | $       | 384,974 |  
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|LIABILITIES AND STOCKHOLDERS DEFICIENCY                                                                     |                                                                                                                     |  |                           |                                                |   |          |         |          
|Current liabilities:                                                                                         |                                                                                                                     |  |                           |                                                |   |          |         |          
|                                                                                                             | Accounts payable                                                                                                    |  | $                         | 19,531                                         |   |          | $       | 15,919    |  
|                                                                                                             | Accrued liabilities                                                                                                 |  |                           | 46,978                                         |   |          |         | 42,824    |  
|                                                                                                             | Current maturities of long-term debt                                                                                |  |                           | 932                                            |   |          |         | 1,439     |  
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|                                                                                                             |                                                                                                                     |  | Total current liabilities |                                                |   | 67,441   |         |           |   | 60,182  |        
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|Long-term debt, net                                                                                          |                                                                                                                     |  | 339,168                   |                                                |   |          | 338,598 |          
|Other liabilities                                                                                            |                                                                                                                     |  | 11,493                    |                                                |   |          | 11,621  |          
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|                                                                                                             |                                                                                                                     |  |                           | Total liabilities                              |   |          | 418,102 |           |   |         | 410,401 |  
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|Minority interest                                                                                            |                                                                                                                     |  | 1,300                     |                                                |   |          | 1,343   |          
|Commitments and contingencies                                                                                |                                                                                                                     |  |                           |                                                |   |          |         |          
|Stockholders deficiency:                                                                                    |                                                                                                                     |  |                           |                                                |   |          |         |          
|                                                                                                             | Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value;
120 shares issued and outstanding    |  |                           | 12                                             |   |          |         | 12        |  
|                                                                                                             | Common Stock, $.10 par value; 50,000,000 shares authorized;
21,776,000 and 22,137,000 shares issued and outstanding |  |                           | 2,178                                          |   |          |         | 2,214     |  
|                                                                                                             | Treasury stock at cost, 256,000 shares                                                                              |  |                           | (501                                           | ) |          |         | (501      | )
|                                                                                                             | Additional paid-in capital                                                                                          |  |                           | 147,828                                        |   |          |         | 148,958   |  
|                                                                                                             | Accumulated other comprehensive losses                                                                              |  |                           | (27,919                                        | ) |          |         | (24,078   | )
|                                                                                                             | Accumulated deficit                                                                                                 |  |                           | (160,803                                       | ) |          |         | (153,375  | )
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|                                                                                                             |                                                                                                                     |  |                           | Total stockholders deficiency                 |   |          | (39,205 | )         |   |         | (26,770 | )
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          
|                                                                                                             |                                                                                                                     |  |                           | Total liabilities and stockholders deficiency |   | $        | 380,197 |           |   | $       | 384,974 |  
|                                                                                                             |                                                                                                                     |  |                           |                                                |   |          |         |          

See notes to unaudited condensed consolidated financial statements.



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

|                                                                 |  |                                           |         |                                  |        |      |         |   |        |  
|---------------------------------------------------------------- |  | ----------------------------------------- | ------- | -------------------------------- | ------ | ---- | ------- | - | ------ | -
|                                                                 |  |                                           |         | Three Months Ended September 30,
|                                                                 |  |                                           |         |                                 
|                                                                 |  |                                           |         | 2000                             |        | 2001
|                                                                 |  |                                           |         |                                  |        |     
|Revenues:                                                        |  |                                           |         |                                  |        |      |         |  
|                                                                 |  | Gaming equipment and systems              |         | $                                | 33,661 |      |         | $ | 45,161 |  
|                                                                 |  | Wall machines and amusement games         |         |                                  | 14,860 |      |         |   | 12,661 |  
|                                                                 |  | Route operations                          |         |                                  | 52,903 |      |         |   | 53,800 |  
|                                                                 |  | Casino operations                         |         |                                  | 17,882 |      |         |   | 18,179 |  
|                                                                 |  |                                           |         |                                  |        |      |         |  
|                                                                 |  |                                           | 119,306 |                                  |        |      | 129,801 |  
|                                                                 |  |                                           |         |                                  |        |      |         |  
|Costs and expenses:                                              |  |                                           |         |                                  |        |      |         |  
|                                                                 |  | Cost of gaming equipment and systems      |         |                                  | 15,368 |      |         |   | 19,551 |  
|                                                                 |  | Cost of wall machines and amusement games |         |                                  | 8,295  |      |         |   | 7,505  |  
|                                                                 |  | Cost of route operations                  |         |                                  | 42,616 |      |         |   | 42,578 |  
|                                                                 |  | Cost of casino operations                 |         |                                  | 7,481  |      |         |   | 8,335  |  
|                                                                 |  | Selling, general and administrative       |         |                                  | 22,725 |      |         |   | 25,555 |  
|                                                                 |  | Research and development                  |         |                                  | 3,183  |      |         |   | 3,692  |  
|                                                                 |  | Depreciation and amortization             |         |                                  | 6,507  |      |         |   | 7,724  |  
|                                                                 |  |                                           |         |                                  |        |      |         |  
|                                                                 |  |                                           | 106,175 |                                  |        |      | 114,940 |  
|                                                                 |  |                                           |         |                                  |        |      |         |  
|Operating income                                                 |  |                                           | 13,131  |                                  |        |      | 14,861  |  
|Other income (expense):                                          |  |                                           |         |                                  |        |      |         |  
|                                                                 |  | Interest income                           |         |                                  | 155    |      |         |   | 395    |  
|                                                                 |  | Interest expense                          |         |                                  | (9,039 | )    |         |   | (7,647 | )
|                                                                 |  | Minority interest                         |         |                                  | (543   | )    |         |   | (463   | )
|                                                                 |  | Other, net                                |         |                                  | 121    |      |         |   | 420    |  
|                                                                 |  |                                           |         |                                  |        |      |         |  
|Income before income taxes                                       |  |                                           | 3,825   |                                  |        |      | 7,566   |  
|Income tax provision                                             |  |                                           | (460    | )                                |        |      | (138    | )
|                                                                 |  |                                           |         |                                  |        |      |         |  
|Net income                                                       |  | $                                         | 3,365   |                                  |        | $    | 7,428   |  
|                                                                 |  |                                           |         |                                  |        |      |         |  
|Basic earnings per share                                         |  | $                                         | 0.17    |                                  |        | $    | 0.34    |  
|                                                                 |  |                                           |         |                                  |        |      |         |  
|Diluted earnings per share                                       |  | $                                         | 0.16    |                                  |        | $    | 0.32    |  
|                                                                 |  |                                           |         |                                  |        |      |         |  
|Weighted average common shares outstanding                       |  |                                           | 20,504  |                                  |        |      | 21,825  |  
|                                                                 |  |                                           |         |                                  |        |      |         |  
|Weighted average common and common
share equivalents outstanding |  |                                           | 20,958  |                                  |        |      | 23,247  |  
|                                                                 |  |                                           |         |                                  |        |      |         |  

See notes to unaudited condensed consolidated financial statements.



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ALLIANCE GAMING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY
 
(In 000s)

|                                                    |                            |  |              |  |          |   |               |  |         |   |               |  |            |   |         |   |              |   |         |  |          |   |             |   |  |   |          |   |        |   |         |        | 
|--------------------------------------------------- | -------------------------- |  | ------------ |  | -------- | - | ------------- |  | ------- | - | ------------- |  | ---------- | - | ------- | - | ------------ | - | ------- |  | -------- | - | ----------- | - |  | - | -------- | - | ------ | - | ------- | ------ | 
|                                                    |                            |  |              |  |          |   |               |  |         |   |               |  |            |   |         |   |              |   |         |  |          |   |             |   |  |   |          |   |        |   | Total  
|                                                    |                            |  |              |  |          |   |               |  |         |   |               |  |            |   |         |   |              |   |         |  |          |   | Accumulated |   |  |   |          |   | Stock-
|                                                    |                            |  | Common Stock |  |          |   |               |  |         |   |               |  | Additional |   | Other   |   |              |   |         |  | holders'
|                                                    |                            |  |              |  | Series E |   | Treasury      |  | Paid-in |   | Comprehensive |  | Accum.     |   | Equity 
|                                                    |                            |  | Shares       |  | Dollars  |   | Special Stock |  | Stock   |   | Capital       |  | Loss       |   | Deficit |   | (Deficiency)
|                                                    |                            |  |              |  |          |   |               |  |         |   |               |  |            |   |         |   |             
|Balances at June 30, 2001                           |                            |  | 21,776       |  |          | $ | 2,178         |  |         | $ | 12            |  |            | $ | (501    | ) |              | $ | 147,828 |  |          | $ | (27,919     | ) |  | $ | (160,803 | ) |        | $ | (39,205 | )     
|Net income                                          |                            |  |             |  |          |   |              |  |         |   |              |  |            |   |        |   |              |   |        |  |          |   |            |   |  |   | 7,428    |   |        |   | 7,428   |       
|Foreign currency translation
adjustment             |                            |  |             |  |          |   |              |  |         |   |              |  |            |   |        |   |              |   |        |  |          |   | 3,841       |   |  |   |         |   |        |   | 3,841   |       
|                                                    |                            |  |              |  |          |   |               |  |         |   |               |  |            |   |         |   |              |   |         |  |          |   |             |   |  |   |          |   |        |   |         |       
|                                                    | Total comprehensive income |  |              |  |          |   |               |  |         |   |               |  |            |   |         |   |              |   |         |  |          |   |             |   |  |   |          |   |        |   |         | 11,269 | 
|Shares issued upon exercise
of options and warrants |                            |  | 361          |  |          |   | 36            |  |         |   |              |  |            |   |        |   |              |   | 1,130   |  |          |   |            |   |  |   |         |   |        |   | 1,166   |       
|                                                    |                            |  |              |  |          |   |               |  |         |   |               |  |            |   |         |   |              |   |         |  |          |   |             |   |  |   |          |   |        |   |         |       
|Balances at September 30, 2001                      |                            |  | 22,137       |  |          | $ | 2,214         |  |         | $ | 12            |  |            | $ | (501    | ) |              | $ | 148,958 |  |          | $ | (24,078     | ) |  | $ | (153,375 | ) |        | $ | (26,770 | )     
|                                                    |                            |  |              |  |          |   |               |  |         |   |               |  |            |   |         |   |              |   |         |  |          |   |             |   |  |   |          |   |        |   |         |       

See notes to unaudited condensed consolidated financial statements.



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

|                                        |            |                                                                                             |                              |                                                     |        |                                  |        |       |        |        |        |  
|--------------------------------------- | ---------- | ------------------------------------------------------------------------------------------- | ---------------------------- | --------------------------------------------------- | ------ | -------------------------------- | ------ | ----- | ------ | ------ | ------ | -
|                                        |            |                                                                                             |                              |                                                     |        | Three Months Ended September 30,
|                                        |            |                                                                                             |                              |                                                     |        |                                 
|                                        |            |                                                                                             |                              |                                                     |        | 2000                             |        | 2001 
|                                        |            |                                                                                             |                              |                                                     |        |                                  |        |      
|Cash flows from operating activities:   |            |                                                                                             |                              |                                                     |        |                                  |        |      
|                                        | Net income |                                                                                             | $                            | 3,365                                               |        |                                  | $      | 7,428 |       
|                                        |            | Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |                              |                                                     |        |                                  |        |       |        |       
|                                        |            |                                                                                             |                              | Depreciation and amortization                       |        |                                  | 6,507  |       |        |        | 7,724  |  
|                                        |            |                                                                                             |                              | Amortization of debt discount                       |        |                                  | 13     |       |        |        | 20     |  
|                                        |            |                                                                                             |                              | (Gain) loss on sale of assets                       |        |                                  | (137   | )     |        |        | 25     |  
|                                        |            |                                                                                             |                              | Provision for losses on doubtful receivables        |        |                                  | 1,234  |       |        |        | 379    |  
|                                        |            |                                                                                             |                              | Other                                               |        |                                  | 150    |       |        |        | 552    |  
|                                        |            | Net change in operating assets and liabilities:                                             |                              |                                                     |        |                                  |        |       |        |       
|                                        |            |                                                                                             |                              | Accounts and notes receivable                       |        |                                  | 11,941 |       |        |        | 6,091  |  
|                                        |            |                                                                                             |                              | Inventories                                         |        |                                  | (4,248 | )     |        |        | (6,608 | )
|                                        |            |                                                                                             |                              | Other current assets                                |        |                                  | 351    |       |        |        | 1,602  |  
|                                        |            |                                                                                             |                              | Accounts payable                                    |        |                                  | 3,260  |       |        |        | (3,657 | )
|                                        |            |                                                                                             |                              | Accrued liabilities                                 |        |                                  | (938   | )     |        |        | (4,473 | )
|                                        |            |                                                                                             |                              |                                                     |        |                                  |        |      
|                                        |            |                                                                                             |                              | Net cash provided by (used in) operating activities |        |                                  | 21,498 |       |        |        | 9,083  |  
|                                        |            |                                                                                             |                              |                                                     |        |                                  |        |      
|Cash flows from investing activities:   |            |                                                                                             |                              |                                                     |        |                                  |        |      
|                                        |            | Additions to property, plant and equipment                                                  |                              |                                                     | (2,119 | )                                |        |       | (3,450 | )     
|                                        |            | Additions to participation gaming devices                                                   |                              |                                                     | (2,968 | )                                |        |       | (2,887 | )     
|                                        |            | Additions to other long term assets                                                         |                              |                                                     | (231   | )                                |        |       | (1,305 | )     
|                                        |            | Proceeds from disposal of property and equipment and other assets                           |                              |                                                     |       |                                  |        |       | 16     |       
|                                        |            |                                                                                             |                              |                                                     |        |                                  |        |      
|                                        |            |                                                                                             |                              | Net cash used in investing activities               |        |                                  | (5,318 | )     |        |        | (7,626 | )
|                                        |            |                                                                                             |                              |                                                     |        |                                  |        |      
|Cash flows from financing activities:   |            |                                                                                             |                              |                                                     |        |                                  |        |      
|                                        |            | Reduction of long-term debt                                                                 |                              |                                                     | (1,444 | )                                |        |       | (123   | )     
|                                        |            | Net increase (decrease) in revolving credit facility                                        |                              |                                                     | (5,096 | )                                |        |       |       |       
|                                        |            | Proceeds from exercise of stock options and warrants                                        |                              |                                                     |       |                                  |        |       | 1,166  |       
|                                        |            |                                                                                             |                              |                                                     |        |                                  |        |      
|                                        |            |                                                                                             |                              | Net cash provided by (used in) financing activities |        |                                  | (6,540 | )     |        |        | 1,043  |  
|                                        |            |                                                                                             |                              |                                                     |        |                                  |        |      
|Effect of exchange rate changes on cash |            |                                                                                             | (405                         | )                                                   |        |                                  | 194    |      
|Cash and cash equivalents:              |            |                                                                                             |                              |                                                     |        |                                  |        |      
|                                        |            |                                                                                             |                              | Increase for period                                 |        |                                  | 9,235  |       |        |        | 2,694  |  
|                                        |            |                                                                                             | Balance, beginning of period |                                                     |        | 32,044                           |        |       |        | 54,845 |       
|                                        |            |                                                                                             |                              |                                                     |        |                                  |        |      
|                                        |            |                                                                                             | Balance, end of period       |                                                     | $      | 41,279                           |        |       | $      | 57,539 |       
|                                        |            |                                                                                             |                              |                                                     |        |                                  |        |      

See notes to unaudited condensed consolidated financial statements



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ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Three Months Ended September 30, 2000 and 2001

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   | The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring
adjustments, which management believes are necessary to present fairly the
financial position, results of operations and cash flows of Alliance Gaming
Corporation (Alliance or the Company) for the respective periods
presented. The results of operations for an interim period are not
necessarily indicative of the results, which may be expected for any other
interim period, or for the year as a whole. The accompanying unaudited
interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes in the
Companys annual report on Form 10-K for the year ended June 30, 2001. All
intercompany accounts and transactions have been eliminated in
consolidation.
|  
|   | The accompanying condensed consolidated financial statements at June 30,
2001, was derived from audited consolidated financial statements, but does
not include all disclosures required under generally accepted accounting
principles. Certain reclassifications have been made to conform to
the current
year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|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, |        | Sept. 30,
|                |                   |   | 2001     |        | 2001     
|                |                   |   |          |        |          
|Raw materials   |                   | $ | 15,222   |        |           | $ | 15,842 |       
|Work-in-process |                   |   | 1,774    |        |           |   | 3,155  |       
|Finished goods  |                   |   | 18,086   |        |           |   | 22,431 |       
|                |                   |   |          |        |           |   |        |       
|                | Total inventories |   | $        | 35,082 |           |   | $      | 41,428 | 
|                |                   |   |          |        |           |   |        |       

|   |                                                    
|-- | ---------------------------------------------------
|3. | DEBT                                               
|  
|   | Long-term debt consists of the following (in 000s):

|                                                                                     |                                         |   |          |         |           |   |         |         | 
|------------------------------------------------------------------------------------ | --------------------------------------- | - | -------- | ------- | --------- | - | ------- | ------- | 
|                                                                                     |                                         |   | June 30, |         | Sept. 30,
|                                                                                     |                                         |   | 2001     |         | 2001     
|                                                                                     |                                         |   |          |         |          
|10% Senior Subordinated Notes due 2007, net of unamortized
discount of $495 and $475 |                                         | $ | 149,505  |         |           | $ | 149,525 |        
|Term loan facility                                                                   |                                         |   | 190,000  |         |           |   | 190,000 |        
|Other,
secured by related equipment                                                  |                                         |   | 595      |         |           |   | 512     |        
|                                                                                     |                                         |   |          |         |           |   |         |        
|                                                                                     |                                         |   | 340,100  |         |           |   | 340,037 |        
|Less current maturities                                                              |                                         |   | 932      |         |           |   | 1,439   |        
|                                                                                     |                                         |   |          |         |           |   |         |        
|                                                                                     | Long-term debt, less current maturities |   | $        | 339,168 |           |   | $       | 338,598 | 
|                                                                                     |                                         |   |          |         |           |   |         |        

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 22, 2001, the Company completed a senior bank debt refinancing
transaction (the Refinancing) whereby the Company entered into 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 until
December 31, 2002). Proceeds from the new term loan were used to repay the
existing bank term loans and credit facility, totaling $166.0 million, repay
certain gaming equipment operating leases totaling $13.0 million, and to pay
transaction fees and expenses. The term loan has an interest rate of LIBOR
plus 3.75% (or 6.8% as of September 30, 2001), has a



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ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Three Months Ended September 30, 2000 and 2001

| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1% per year mandatory principal amortization, and a 5.5 year maturity. The
revolving credit facility commitment decreases ratably over its 5 year
commitment. As of September 30, 2001, there were no borrowings outstanding
on the revolving credit facility.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The bank facility is collateralized by substantially all domestic
property and is guaranteed by each domestic subsidiary of the U.S. Borrower
and German Subsidiaries (both as defined), other than the entity which holds
the Companys interest in its Louisiana 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 it and the
indenture have other significant covenants that, among other things,
restrict the ability of the Company and certain of its subsidiaries to
dispose of assets, incur additional indebtedness and issue preferred stock,
pay dividends or make other distributions, enter into certain acquisitions,
repurchase equity interests 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
September 30, 2001 the Company is 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 not be redeemed for the first five years. Upon the occurrence of
a Change of Control (as defined), the holders of the Senior Subordinated
Notes will have the right to require the Company to purchase their notes at
a price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of purchase. The Company is in
compliance with the operational covenants contained in the indenture for the
Senior Subordinated Notes.

|   |             
|-- | ------------
|4. | INCOME TAXES

| |                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys effective tax rate for the three months ended September 30,
2000, and 2001, differ from the statutory rate of 35% primarily because no
Federal income tax expense has been recorded for the taxable income produced
by the Companies domestic subsidiaries as such earnings were offset against
net operating loss carryforwards.

|   |                              
|-- | -----------------------------
|5. | NEW ACCOUNTING PRONOUNCEMENTS

| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141, Business Combinations (FASB No.
141) and No. 142, Goodwill and Other Intangible Assets (FASB No. 142).

| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FASB No. 141 establishes accounting and reporting standards for business
combinations and the related issues of allocations of purchase price to
assets and liabilities acquired. The Company does not expect that the



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ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Three Months Ended September 30, 2000 and 2001

| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | implementation of FASB No. 141 to have a material impact on the financial
condition or results of operations of the Company.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FASB No. 142 revises the existing accounting standards for both goodwill and
intangible assets. The Company adopted the provisions of FASB No. 142
effective July 1, 2001, pursuant to the early adoption rules. Accordingly,
the Company has six months from the adoption date to perform certain
impairment tests for the goodwill recorded for each of its reporting units,
and has until June 30, 2002 to measure an impairment loss, if any. Pursuant
to the transition rules, any impairment charge recognized as a result of the
initial assessment would be recognized as a change in accounting principle.
The Company will continue to perform tests of potential impairment of
goodwill on an annual basis. The Company does not currently believe that the
initial impairment test will result in an impairment charge, although there
can be no assurance that such a charge will not result from the analysis yet
to be performed. As a result of the cessation of goodwill amortization as of
July 1, 2001 amortization expense decrease by $0.3 million for the quarter
ended September 30, 2001.

|   |                   
|-- | ------------------
|6. | EARNINGS PER SHARE

| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | The computation of Basic and Diluted EPS is as follows (in 000s except per
share amounts):

|                                                    |                                              |   |                    |     |      |   |        |       | 
|--------------------------------------------------- | -------------------------------------------- | - | ------------------ | --- | ---- | - | ------ | ----- | 
|                                                    |                                              |   | Three months ended
|                                                    |                                              |   | September 30,     
|                                                    |                                              |   |                   
|                                                    |                                              |   | 2000               |     | 2001
|                                                    |                                              |   |                    |     |     
|Income applicable to common shares                  |                                              | $ | 3,365              |     |      | $ | 7,428  |      
|Wt. average common shares outstanding               |                                              |   | 20,504             |     |      |   | 21,825 |      
|                                                    | Effect of dilutive stock options outstanding |   |                    | 4   |      |   |        | 1,421 | 
|                                                    | Effect of dilutive Series E Special Stock    |   |                    | 450 |      |   |        | 1     | 
|                                                    |                                              |   |                    |     |      |   |        |      
|Wt. average common and potential shares
outstanding |                                              |   | 20,958             |     |      |   | 23,247 |      
|Basic earnings per share                            |                                              | $ | 0.17               |     |      | $ | 0.34   |      
|                                                    |                                              |   |                    |     |      |   |        |      
|Diluted earnings per share                          |                                              | $ | 0.16               |     |      | $ | 0.32   |      
|                                                    |                                              |   |                    |     |      |   |        |      

| |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stock options and warrants outstanding that were potentially convertible
into approximately 1.5 million common shares as of September 30, 2001, were
not included in the computation of Diluted EPS because either (i) the
exercise price was greater than the average market price of the common
shares during the period or (ii) the contingent issue price was greater that
the market price of the common shares at the end of the period.

|   |                                     
|-- | ------------------------------------
|7. | SEGMENT AND GEOGRAPHICAL INFORMATION

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company operates in four business segments: (i) Gaming Equipment and
Systems which designs, manufactures, operates 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 which owns and
operates two casinos.



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ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Three Months Ended September 30, 2000 and 2001

| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The tables below present information as to the Companys revenues, operating
income, identifiable assets, capital expenditures and depreciation and
amortization by segment (in 000s):

|                            |                                   |   |                                  |        |      |   |         |        |  
|--------------------------- | --------------------------------- | - | -------------------------------- | ------ | ---- | - | ------- | ------ | -
|                            |                                   |   | Three Months Ended September 30,
|                            |                                   |   |                                 
|                            |                                   |   | 2000                             |        | 2001
|                            |                                   |   |                                  |        |     
|Revenues:                   |                                   |   |                                  |        |      |   |         |       
|                            | Gaming equipment and systems      |   | $                                | 33,661 |      |   | $       | 45,161 |  
|                            | Wall machines and amusement games |   |                                  | 14,860 |      |   |         | 12,661 |  
|                            | Route operations                  |   |                                  | 52,903 |      |   |         | 53,800 |  
|                            | Casino operations                 |   |                                  | 17,882 |      |   |         | 18,179 |  
|                            |                                   |   |                                  |        |      |   |         |       
|Total revenues              |                                   | $ | 119,306                          |        |      | $ | 129,801 |       
|                            |                                   |   |                                  |        |      |   |         |       
|Intersegment revenues:      |                                   |   |                                  |        |      |   |         |       
|                            | Gaming equipment and systems      |   | $                                | 2,433  |      |   | $       | 3,534  |  
|                            | Wall machines and amusement games |   |                                  | 13     |      |   |         |       |  
|                            | Route operations                  |   |                                  |       |      |   |         |       |  
|                            | Casino operations                 |   |                                  |       |      |   |         |       |  
|                            |                                   |   |                                  |        |      |   |         |       
|Total intersegment revenues |                                   | $ | 2,446                            |        |      | $ | 3,534   |       
|                            |                                   |   |                                  |        |      |   |         |       
|Operating income (loss):    |                                   |   |                                  |        |      |   |         |       
|                            | Gaming equipment and systems      |   | $                                | 5,673  |      |   | $       | 9,930  |  
|                            | Wall machines and amusement games |   |                                  | 534    |      |   |         | (1,358 | )
|                            | Route operations                  |   |                                  | 3,743  |      |   |         | 3,120  |  
|                            | Casino operations                 |   |                                  | 6,155  |      |   |         | 5,867  |  
|                            | Corporate and unusual items       |   |                                  | (2,974 | )    |   |         | (2,698 | )
|                            |                                   |   |                                  |        |      |   |         |       
|Total operating income      |                                   | $ | 13,131                           |        |      | $ | 14,861  |       
|                            |                                   |   |                                  |        |      |   |         |       

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 September 30,
|                         |               |   |                                 
|                         |               |   | 2000                             |         | 2001
|                         |               |   |                                  |         |     
|Revenues:                |               |   |                                  |         |      |   |         |        
|                         | United States |   | $                                | 100,536 |      |   | $       | 112,728 |  
|                         | Germany       |   |                                  | 16,710  |      |   |         | 14,496  |  
|                         | Other foreign |   |                                  | 2,060   |      |   |         | 2,577   |  
|                         |               |   |                                  |         |      |   |         |        
|Total revenues           |               | $ | 119,306                          |         |      | $ | 129,801 |        
|                         |               |   |                                  |         |      |   |         |        
|Operating income (loss): |               |   |                                  |         |      |   |         |        
|                         | United States |   | $                                | 12,003  |      |   | $       | 15,289  |  
|                         | Germany       |   |                                  | 380     |      |   |         | (1,226  | )
|                         | Other foreign |   |                                  | 748     |      |   |         | 798     |  
|                         |               |   |                                  |         |      |   |         |        
|Total operating income   |               | $ | 13,131                           |         |      | $ | 14,861  |        
|                         |               |   |                                  |         |      |   |         |        



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ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Three Months Ended September 30, 2000 and 2001

|   |                                   
|-- | ----------------------------------
|8. | SUPPLEMENTAL CASH FLOW INFORMATION

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

|                                                         |  |                                  |       |      |  |   |        |  
|-------------------------------------------------------- |  | -------------------------------- | ----- | ---- |  | - | ------ | -
|                                                         |  | Three months ended September 30,
|                                                         |  |                                 
|                                                         |  | 2000                             |       | 2001
|                                                         |  |                                  |       |     
|Non-cash transactions:                                   |  |                                  |       |      |  |   |        |  
|Reclassify other assets to property, plant and equipment |  | $                                | 2,332 |      |  | $ | 1,154  |  
|Translation rate adjustment                              |  |                                  | 3,880 |      |  |   | (3,648 | )

|   |                            
|-- | ---------------------------
|9. | COMPREHENSIVE INCOME (LOSS)

| |                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (SFAS 130), which
requires the changes in the Companys cumulative translation adjustment
account (which is a component of stockholders deficiency) to be included as
a component of other comprehensive income (loss).

| |                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the three months ended September 30, 2000, and 2001, total
comprehensive income (loss) amounted to $(0.9) million and $11.3 million
respectively, which includes currency translation adjustments of $(4.3)
million and $3.8 million respectively.

|    |                  
|--- | -----------------
|10. | SUBSEQUENT EVENTS

| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 29, 2001, the Company announced
the acquisition of Casino Market Place Development Corporation, a
leading supplier of player marketing, bonusing and promotions
software. The purchase was accounted for pursuant to the provisions
of FAS 141.

|    |                                             
|--- | --------------------------------------------
|11. | 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 2). The financial information presented
includes Alliance Gaming Corporation (the Parent) and its wholly-owned
guaranteeing subsidiaries (together the Parent and Guaranteeing
Subsidiaries), and the non-guaranteeing subsidiaries Video Services, Inc.,
United Gaming Rainbow, BGI Australia Pty. Limited, Bally Gaming de Puerto
Rico, Inc., and Alliance Automaten GmbH & Co. KG (the subsidiary that holds
the Companys German interests) (together the Non-Guaranteeing
Subsidiaries). The notes to consolidating financial statements should be
read in conjunction with these consolidating financial statements.



11



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ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CONSOLIDATING BALANCE SHEETS
June 30, 2001
(In 000s)

|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |        |          |          |         | 
|----------------------------------------------------------- | ------------------------------------ | --------------------------------------- | --------------------------------------- | ------------------------- | -------- | ------------ | ------- | ------------ | ------- | -------- | -------- | ------------ | ------- | ----------- | ------- | ------ | -------- | -------- | ------- | 
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |        |          | Alliance
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |        |          | Gaming  
|                                                            |                                      |                                         |                                         |                           |          | Parent and   |         | Non-         |         |          |          |              |         | Corporation
|                                                            |                                      |                                         |                                         |                           |          | Guaranteeing |         | Guaranteeing |         | Elimina- |          | and         
|                                                            |                                      |                                         |                                         |                           |          | Subsidiaries |         | Subsidiaries |         | tions    |          | Subsidiaries
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |             
|ASSETS                                                      |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|Current assets:                                             |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|                                                            |                                      | Cash and cash equivalents               |                                         | $                         | 41,502   |              |         | $            | 13,343  |          |          | $            |        |             |         | $      | 54,845   |         
|                                                            |                                      | Accounts and notes receivable, net      |                                         |                           | 58,769   |              |         |              | 37,769  |          |          |              | (17,169 | )           |         |        | 79,369   |         
|                                                            |                                      | Inventories, net                        |                                         |                           | 24,555   |              |         |              | 10,527  |          |          |              |        |             |         |        | 35,082   |         
|                                                            |                                      | Other current assets                    |                                         |                           | 8,178    |              |         |              | 2,636   |          |          |              |        |             |         |        | 10,814   |         
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|                                                            |                                      |                                         |                                         | Total current assets      |          |              | 133,004 |              |         |          | 64,275   |              |         |             | (17,169 | )      |          |          | 180,110 | 
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|Long-term notes receivable, net                             |                                      |                                         | 53,162                                  |                           |          |              | 433     |              |         |          | (52,162  | )            |         |             | 1,433   |       
|Leased equipment, net                                       |                                      |                                         | 16,374                                  |                           |          |              | 6,303   |              |         |          |         |              |         |             | 22,677  |       
|Property, plant and equipment, net                          |                                      |                                         | 54,399                                  |                           |          |              | 34,013  |              |         |          |         |              |         |             | 88,412  |       
|Excess of costs over net assets of acquired
businesses, net |                                      |                                         | 35,547                                  |                           |          |              | 13,967  |              |         |          |         |              |         |             | 49,514  |       
|Intangible assets, net                                      |                                      |                                         | 22,096                                  |                           |          |              | 116     |              |         |          |         |              |         |             | 22,212  |       
|Investments in subsidiaries                                 |                                      |                                         | 84,228                                  |                           |          |              |        |              |         |          | (84,228  | )            |         |             |        |       
|Deferred tax assets, net                                    |                                      |                                         | 10,137                                  |                           |          |              | 1,807   |              |         |          |         |              |         |             | 11,944  |       
|Other assets, net                                           |                                      |                                         | 10,167                                  |                           |          |              | (6,638  | )            |         |          | 366      |              |         |             | 3,895   |       
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|                                                            |                                      | $                                       | 419,114                                 |                           |          | $            | 114,276 |              |         | $        | (153,193 | )            |         | $           | 380,197 |       
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)           |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|Current liabilities:                                        |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|                                                            | Accounts payable                     |                                         | $                                       | 17,118                    |          |              | $       | 2,413        |         |          | $        |             |         |             | $       | 19,531 |         
|                                                            | Accrued liabilities                  |                                         |                                         | 37,648                    |          |              |         | 9,999        |         |          |          | (669         | )       |             |         | 46,978 |         
|                                                            | Current maturities of long-term debt |                                         |                                         | 488                       |          |              |         | 16,955       |         |          |          | (16,511      | )       |             |         | 932    |         
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|                                                            |                                      |                                         |                                         | Total current liabilities |          |              | 55,254  |              |         |          | 29,367   |              |         |             | (17,180 | )      |          |          | 67,441  | 
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|Long term debt                                              |                                      |                                         | 391,032                                 |                           |          |              | 132     |              |         |          | (51,996  | )            |         |             | 339,168 |       
|Other liabilities                                           |                                      |                                         | 10,733                                  |                           |          |              | 760     |              |         |          |         |              |         |             | 11,493  |       
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|                                                            |                                      |                                         |                                         | Total liabilities         |          |              | 457,019 |              |         |          | 30,259   |              |         |             | (69,176 | )      |          |          | 418,102 | 
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|Minority interest                                           |                                      |                                         | 1,300                                   |                           |          |              |        |              |         |          |         |              |         |             | 1,300   |       
|Commitments and contingencies                               |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|Stockholders equity (deficiency):                          |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|                                                            |                                      | Series E Special Stock                  |                                         |                           | 12       |              |         |              |        |          |          |              |        |             |         |        | 12       |         
|                                                            |                                      | Common Stock                            |                                         |                           | 2,178    |              |         |              | 17,832  |          |          |              | (17,832 | )           |         |        | 2,178    |         
|                                                            |                                      | Treasury stock                          |                                         |                           | (501     | )            |         |              |        |          |          |              |        |             |         |        | (501     | )       
|                                                            |                                      | Additional paid-in capital              |                                         |                           | 147,828  |              |         |              | 7,862   |          |          |              | (7,862  | )           |         |        | 147,828  |         
|                                                            |                                      | Accumulated other comprehensive loss    |                                         |                           | (27,919  | )            |         |              | (27,939 | )        |          |              | 27,939  |             |         |        | (27,919  | )       
|                                                            |                                      | Retained earnings (accumulated deficit) |                                         |                           | (160,803 | )            |         |              | 86,262  |          |          |              | (86,262 | )           |         |        | (160,803 | )       
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|                                                            |                                      |                                         | Total stockholders equity (deficiency) |                           |          | (39,205      | )       |              |         | 84,017   |          |              |         | (84,017     | )       |        |          | (39,205  | )      
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       
|                                                            |                                      | $                                       | 419,114                                 |                           |          | $            | 114,276 |              |         | $        | (153,193 | )            |         | $           | 380,197 |       
|                                                            |                                      |                                         |                                         |                           |          |              |         |              |         |          |          |              |         |             |         |       

See accompanying unaudited note.



12



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##### Table of Contents



ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CONSOLIDATING BALANCE SHEETS
September 30, 2001
(In 000s)

|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |   |          |         | 
|----------------------------------------------------------- | --------------------------------------- | - | --------------------------------------- | -------------------- | - | ------------ | ------- | ------------ | - | ------- | -------- | ------------ | - | ----------- | ------- | -------- | - | -------- | ------- | 
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |   | Alliance
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |   | Gaming  
|                                                            |                                         |   |                                         |                      |   | Parent and   |         | Non-         |   |         |          |              |   | Corporation
|                                                            |                                         |   |                                         |                      |   | Guaranteeing |         | Guaranteeing |   | Adjust- |          | and         
|                                                            |                                         |   |                                         |                      |   | Subsidiaries |         | Subsidiaries |   | ments   |          | Subsidiaries
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |             
|ASSETS                                                      |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |         
|Current assets:                                             |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |         
|                                                            | Cash and cash equivalents               |   | $                                       | 41,580               |   |              | $       | 15,959       |   |         | $        |             |   |             | $       | 57,539   |  
|                                                            | Accounts and notes receivable, net      |   |                                         | 54,803               |   |              |         | 35,236       |   |         |          | (16,033      | ) |             |         | 74,006   |  
|                                                            | Inventories, net                        |   |                                         | 29,413               |   |              |         | 12,015       |   |         |          |             |   |             |         | 41,428   |  
|                                                            | Other current assets                    |   |                                         | 7,830                |   |              |         | 1,414        |   |         |          |             |   |             |         | 9,244    |  
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |  
|                                                            |                                         |   |                                         | Total current assets |   |              | 133,626 |              |   |         | 64,624   |              |   |             | (16,033 | )        |   |          | 182,217 | 
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |  
|Long-term notes receivable, net                             |                                         |   | 54,875                                  |                      |   |              | 373     |              |   |         | (53,599  | )            |   |             | 1,649   |         
|Leased equipment, net                                       |                                         |   | 14,405                                  |                      |   |              | 6,786   |              |   |         |         |              |   |             | 21,191  |         
|Property, plant and equipment, net                          |                                         |   | 57,391                                  |                      |   |              | 34,010  |              |   |         |         |              |   |             | 91,401  |         
|Excess of costs over net assets of acquired
businesses, net |                                         |   | 35,547                                  |                      |   |              | 14,873  |              |   |         |         |              |   |             | 50,420  |         
|Intangible assets, net                                      |                                         |   | 22,128                                  |                      |   |              | 104     |              |   |         |         |              |   |             | 22,232  |         
|Investment in subsidiaries                                  |                                         |   | 89,391                                  |                      |   |              |        |              |   |         | (89,391  | )            |   |             |        |         
|Other assets, net                                           |                                         |   | 17,585                                  |                      |   |              | (2,081  | )            |   |         | 360      |              |   |             | 15,864  |         
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |  
|                                                            |                                         | $ | 424,948                                 |                      |   | $            | 118,689 |              |   | $       | (158,663 | )            |   | $           | 384,974 |         
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)           |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |         
|Current liabilities:                                        |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |         
|                                                            | Accounts payable                        |   | $                                       | 14,122               |   |              | $       | 1,797        |   |         | $        |             |   |             | $       | 15,919   |  
|                                                            | Accrued liabilities                     |   |                                         | 32,475               |   |              |         | 11,595       |   |         |          | (1,246       | ) |             |         | 42,824   |  
|                                                            | Current maturities of long-term debt    |   |                                         | 963                  |   |              |         | 15,280       |   |         |          | (14,804      | ) |             |         | 1,439    |  
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |  
|                                                            |                                         |   | Total current liabilities               |                      |   | 47,560       |         |              |   | 28,672  |          |              |   | (16,050     | )       |          |   | 60,182   |        
|Long term debt                                              |                                         |   | 392,010                                 |                      |   |              | 21      |              |   |         | (53,433  | )            |   |             | 338,598 |         
|Other liabilities                                           |                                         |   | 10,805                                  |                      |   |              | 816     |              |   |         |         |              |   |             | 11,621  |         
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |  
|                                                            |                                         |   | Total liabilities                       |                      |   | 450,375      |         |              |   | 29,509  |          |              |   | (69,483     | )       |          |   | 410,401  |        
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |  
|Minority interest                                           |                                         |   | 1,343                                   |                      |   |              |        |              |   |         |         |              |   |             | 1,343   |         
|Commitments and contingencies                               |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |         
|Stockholders equity (deficiency):                          |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |         
|                                                            | Series E Special Stock                  |   |                                         | 12                   |   |              |         |             |   |         |          |             |   |             |         | 12       |  
|                                                            | Common Stock                            |   |                                         | 2,214                |   |              |         | 17,832       |   |         |          | (17,832      | ) |             |         | 2,214    |  
|                                                            | Treasury stock                          |   |                                         | (501                 | ) |              |         |             |   |         |          |             |   |             |         | (501     | )
|                                                            | Additional paid-in capital              |   |                                         | 148,958              |   |              |         | 7,862        |   |         |          | (7,862       | ) |             |         | 148,958  |  
|                                                            | Accumulated other comprehensive income  |   |                                         | (24,078              | ) |              |         | (24,098      | ) |         |          | 24,098       |   |             |         | (24,078  | )
|                                                            | Retained earnings (accumulated deficit) |   |                                         | (153,375             | ) |              |         | 87,584       |   |         |          | (87,584      | ) |             |         | (153,375 | )
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |  
|                                                            |                                         |   | Total stockholders equity (deficiency) |                      |   | (26,770      | )       |              |   | 89,180  |          |              |   | (89,180     | )       |          |   | (26,770  | )      
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |  
|                                                            |                                         | $ | 424,948                                 |                      |   | $            | 118,689 |              |   | $       | (158,663 | )            |   | $           | 384,974 |         
|                                                            |                                         |   |                                         |                      |   |              |         |              |   |         |          |              |   |             |         |          |  

See accompanying unaudited note.



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##### Table of Contents



ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CONSOLIDATING STATEMENTS OF OPERATIONS
 
Three Months Ended September 30, 2000
(In 000s)

|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |        |  
|------------------------------------- | ----------------------------------------- | - | ------------ | ------ | ------------ | - | ------- | ------ | ------------ | - | ----------- | ------ | - | - | -------- | ------ | -
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   | Alliance
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   | Gaming  
|                                      |                                           |   | Parent and   |        | Non-         |   |         |        |              |   | Corporation
|                                      |                                           |   | Guaranteeing |        | Guaranteeing |   | Adjust- |        | and         
|                                      |                                           |   | Subsidiaries |        | Subsidiaries |   | ments   |        | Subsidiaries
|                                      |                                           |   |              |        |              |   |         |        |             
|Revenues:                             |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|                                      | Gaming equipment and systems              |   | $            | 32,102 |              |   | $       | 3,911  |              |   | $           | (2,352 | ) |   | $        | 33,661 |  
|                                      | Wall machines and amusement games         |   |              |       |              |   |         | 14,860 |              |   |             |       |   |   |          | 14,860 |  
|                                      | Route operations                          |   |              | 48,553 |              |   |         | 4,350  |              |   |             |       |   |   |          | 52,903 |  
|                                      | Casino operations                         |   |              | 4,405  |              |   |         | 13,477 |              |   |             |       |   |   |          | 17,882 |  
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|                                      |                                           |   | 85,060       |        |              |   | 36,598  |        |              |   | (2,352      | )      |   |   | 119,306  |       
|Costs and expenses:                   |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|                                      | Cost of gaming equipment and systems      |   |              | 15,312 |              |   |         | 2,408  |              |   |             | (2,352 | ) |   |          | 15,368 |  
|                                      | Cost of wall machines and amusement games |   |              |       |              |   |         | 8,295  |              |   |             |       |   |   |          | 8,295  |  
|                                      | Cost of route operations                  |   |              | 39,829 |              |   |         | 2,787  |              |   |             |       |   |   |          | 42,616 |  
|                                      | Cost of casino operations                 |   |              | 2,343  |              |   |         | 5,138  |              |   |             |       |   |   |          | 7,481  |  
|                                      | Selling, general and administrative       |   |              | 14,445 |              |   |         | 8,280  |              |   |             |       |   |   |          | 22,725 |  
|                                      | Research and development                  |   |              | 2,580  |              |   |         | 603    |              |   |             |       |   |   |          | 3,183  |  
|                                      | Depreciation and amortization             |   |              | 4,554  |              |   |         | 1,953  |              |   |             |       |   |   |          | 6,507  |  
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|                                      |                                           |   | 79,063       |        |              |   | 29,464  |        |              |   | (2,352      | )      |   |   | 106,175  |       
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|Operating income                      |                                           |   | 5,997        |        |              |   | 7,134   |        |              |   |            |        |   |   | 13,131   |       
|Earnings in consolidated subsidiaries |                                           |   | 3,926        |        |              |   |        |        |              |   | (3,926      | )      |   |   |         |       
|Other income (expense):               |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|                                      | Interest income                           |   |              | 154    |              |   |         | 77     |              |   |             | (76    | ) |   |          | 155    |  
|                                      | Interest expense                          |   |              | (8,599 | )            |   |         | (516   | )            |   |             | 76     |   |   |          | (9,039 | )
|                                      | Rainbow royalty                           |   |              | 1,703  |              |   |         | (1,703 | )            |   |             |       |   |   |          |       |  
|                                      | Minority interest                         |   |              | (543   | )            |   |         |       |              |   |             |       |   |   |          | (543   | )
|                                      | Other, net                                |   |              | 482    |              |   |         | (361   | )            |   |             |       |   |   |          | 121    |  
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|Income before income taxes            |                                           |   | 3,120        |        |              |   | 4,631   |        |              |   | (3,926      | )      |   |   | 3,825    |       
|Income tax benefit (provision)        |                                           |   | 245          |        |              |   | (705    | )      |              |   |            |        |   |   | (460     | )     
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|Net income                            |                                           | $ | 3,365        |        |              | $ | 3,926   |        |              | $ | (3,926      | )      |   | $ | 3,365    |       
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       

See accompanying unaudited note.



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##### Table of Contents



ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CONSOLIDATING STATEMENTS OF OPERATIONS
 
Three Months Ended September 30, 2001
(In 000s)

|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |        |  
|------------------------------------- | ----------------------------------------- | - | ------------ | ------ | ------------ | - | ------- | ------ | ------------ | - | ----------- | ------ | - | - | -------- | ------ | -
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   | Alliance
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   | Gaming  
|                                      |                                           |   | Parent and   |        | Non-         |   |         |        |              |   | Corporation
|                                      |                                           |   | Guaranteeing |        | Guaranteeing |   | Adjust- |        | and         
|                                      |                                           |   | Subsidiaries |        | Subsidiaries |   | ments   |        | Subsidiaries
|                                      |                                           |   |              |        |              |   |         |        |             
|Revenues:                             |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|                                      | Gaming equipment and systems              |   | $            | 43,671 |              |   | $       | 4,412  |              |   | $           | (2,922 | ) |   | $        | 45,161 |  
|                                      | Wall machines and amusement games         |   |              |       |              |   |         | 12,661 |              |   |             |       |   |   |          | 12,661 |  
|                                      | Route operations                          |   |              | 50,271 |              |   |         | 3,529  |              |   |             |       |   |   |          | 53,800 |  
|                                      | Casino operations                         |   |              | 4,977  |              |   |         | 13,202 |              |   |             |       |   |   |          | 18,179 |  
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|                                      |                                           |   | 98,919       |        |              |   | 33,804  |        |              |   | (2,922      | )      |   |   | 129,801  |       
|Costs and expenses:                   |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|                                      | Cost of gaming equipment and systems      |   |              | 19,723 |              |   |         | 2,750  |              |   |             | (2,922 | ) |   |          | 19,551 |  
|                                      | Cost of wall machines and amusement games |   |              |       |              |   |         | 7,505  |              |   |             |       |   |   |          | 7,505  |  
|                                      | Cost of route operations                  |   |              | 40,291 |              |   |         | 2,287  |              |   |             |       |   |   |          | 42,578 |  
|                                      | Cost of casino operations                 |   |              | 2,770  |              |   |         | 5,565  |              |   |             |       |   |   |          | 8,335  |  
|                                      | Selling, general and administrative       |   |              | 16,952 |              |   |         | 8,603  |              |   |             |       |   |   |          | 25,555 |  
|                                      | Research and development                  |   |              | 3,070  |              |   |         | 622    |              |   |             |       |   |   |          | 3,692  |  
|                                      | Depreciation and amortization             |   |              | 6,040  |              |   |         | 1,684  |              |   |             |       |   |   |          | 7,724  |  
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|                                      |                                           |   | 88,846       |        |              |   | 29,016  |        |              |   | (2,922      | )      |   |   | 114,940  |       
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|Operating income                      |                                           |   | 10,073       |        |              |   | 4,788   |        |              |   |            |        |   |   | 14,861   |       
|Earnings in consolidated subsidiaries |                                           |   | 2,233        |        |              |   |        |        |              |   | (2,233      | )      |   |   |         |       
|Other income (expense):               |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|                                      | Interest income                           |   |              | 516    |              |   |         | 217    |              |   |             | (338   | ) |   |          | 395    |  
|                                      | Interest expense                          |   |              | (7,627 | )            |   |         | (358   | )            |   |             | 338    |   |   |          | (7,647 | )
|                                      | Rainbow royalty                           |   |              | 1,646  |              |   |         | (1,646 | )            |   |             |       |   |   |          |       |  
|                                      | Minority interest                         |   |              | (463   | )            |   |         |       |              |   |             |       |   |   |          | (463   | )
|                                      | Other, net                                |   |              | 997    |              |   |         | (577   | )            |   |             |       |   |   |          | 420    |  
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|Income before income taxes            |                                           |   | 7,375        |        |              |   | 2,424   |        |              |   | (2,233      | )      |   |   | 7,566    |       
|Income tax benefit (provision)        |                                           |   | 53           |        |              |   | (191    | )      |              |   |            |        |   |   | (138     | )     
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       
|Net income                            |                                           | $ | 7,428        |        |              | $ | 2,233   |        |              | $ | (2,233      | )      |   | $ | 7,428    |       
|                                      |                                           |   |              |        |              |   |         |        |              |   |             |        |   |   |          |       

See accompanying unaudited note.



15



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##### Table of Contents



ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CONSOLIDATING STATEMENTS OF CASH FLOWS
 
Three Months Ended September 30, 2000
(In 000s)

|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |          |        |  
|--------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------------- | ------ | ------------ | ------ | ------------ | ----- | ------- | ------ | ------------ | ---- | ----------- | --- | - | ------ | -------- | ------ | -
|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        | Alliance
|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        | Gaming  
|                                                    |                                                                   |                                                     |        | Parent and   |        | Non-         |       |         |        |              |      | Corporation
|                                                    |                                                                   |                                                     |        | Guaranteeing |        | Guaranteeing |       | Adjust- |        | and         
|                                                    |                                                                   |                                                     |        | Subsidiaries |        | Subsidiaries |       | ments   |        | Subsidiaries
|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |             
|Net cash provided by (used in)
operating activities |                                                                   | $                                                   | 15,330 |              |        | $            | 6,895 |         |        | $            | (727 | )           |     | $ | 21,498 |         
|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |         
|Cash flows from investing activities:               |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |         
|                                                    | Additions to property and equipment                               |                                                     |        | (1,599       | )      |              |       | (520    | )      |              |      |            |     |   |        | (2,119   | )     
|                                                    | Additions to participation gaming devices                         |                                                     |        | (2,968       | )      |              |       |        |        |              |      |            |     |   |        | (2,968   | )     
|                                                    | Proceeds from disposal of property and equipment
and other assets |                                                     |        |             |        |              |       |        |        |              |      |            |     |   |        |         |       
|                                                    | Additions to other long term assets                               |                                                     |        | (228         | )      |              |       | (3      | )      |              |      |            |     |   |        | (231     | )     
|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |         
|                                                    |                                                                   | Net cash used in investing activities               |        |              | (4,795 | )            |       |         | (523   | )            |      |             |    |   |        |          | (5,318 | )
|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |         
|Cash flows from financing activities:               |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |         
|                                                    | Reduction of long-term debt                                       |                                                     |        | (1,330       | )      |              |       | (841    | )      |              |      | 727         |     |   |        | (1,444   | )     
|                                                    | Net decrease in revolving credit facility                         |                                                     |        | (3,002       | )      |              |       | (2,094  | )      |              |      |            |     |   |        | (5,096   | )     
|                                                    | Dividends received (paid)                                         |                                                     |        | 915          |        |              |       | (915    | )      |              |      |            |     |   |        |         |       
|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |         
|                                                    |                                                                   | Net cash provided by (used in) financing
activities |        |              | (3,417 | )            |       |         | (3,850 | )            |      |             | 727 |   |        |          | (6,540 | )
|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |         
|Effect of exchange rate changes on cash             |                                                                   |                                                     | (4     | )            |        |              | (401  | )       |        |              |     |             |     |   | (405   | )       
|Cash and cash equivalents:                          |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |         
|                                                    | Increase for period                                               |                                                     |        | 7,114        |        |              |       | 2,121   |        |              |      |            |     |   |        | 9,235    |       
|                                                    | Balance, beginning of period                                      |                                                     |        | 19,528       |        |              |       | 12,516  |        |              |      |            |     |   |        | 32,044   |       
|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |         
|                                                    | Balance, end of period                                            |                                                     | $      | 26,642       |        |              | $     | 14,637  |        |              | $    |            |     |   | $      | 41,279   |       
|                                                    |                                                                   |                                                     |        |              |        |              |       |         |        |              |      |             |     |   |        |         

See accompanying unaudited note.



16



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##### Table of Contents



ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2001
(In 000s)

|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |          |        |  
|--------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------------- | ----- | ------------ | ------ | ------------ | ----- | ------- | ------ | ------------ | ------ | ----------- | ----- | - | ----- | -------- | ------ | -
|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       | Alliance
|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       | Gaming  
|                                                    |                                                                   |                                                     |       | Parent and   |        | Non-         |       |         |        |              |        | Corporation
|                                                    |                                                                   |                                                     |       | Guaranteeing |        | Guaranteeing |       | Adjust- |        | and         
|                                                    |                                                                   |                                                     |       | Subsidiaries |        | Subsidiaries |       | ments   |        | Subsidiaries
|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |             
|Net cash provided by (used in)
operating activities |                                                                   | $                                                   | 5,343 |              |        | $            | 6,633 |         |        | $            | (2,893 | )           |       | $ | 9,083 |         
|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |         
|Cash flows from investing activities:               |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |         
|                                                    | Additions to property and equipment                               |                                                     |       | (3,158       | )      |              |       | (292    | )      |              |        |            |       |   |       | (3,450   | )     
|                                                    | Additions to participation gaming devices                         |                                                     |       | (2,887       | )      |              |       |        |        |              |        |            |       |   |       | (2,887   | )     
|                                                    | Proceeds from disposal of property and equipment
and other assets |                                                     |       | 12           |        |              |       | 4       |        |              |        |            |       |   |       | 16       |       
|                                                    | Additions to other long term assets                               |                                                     |       | (1,305       | )      |              |       |        |        |              |        |            |       |   |       | (1,305   | )     
|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |         
|                                                    |                                                                   | Net cash used in investing activities               |       |              | (7,338 | )            |       |         | (288   | )            |        |             |      |   |       |          | (7,626 | )
|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |         
|Cash flows from financing activities:               |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |         
|                                                    | Reduction of long-term debt                                       |                                                     |       | (4           | )      |              |       | (3,012  | )      |              |        | 2,893       |       |   |       | (123     | )     
|                                                    | Net decrease in revolving credit facility                         |                                                     |       |             |        |              |       |        |        |              |        |            |       |   |       |         |       
|                                                    | Proceeds from exercise of stock options                           |                                                     |       | 1,166        |        |              |       |        |        |              |        |            |       |   |       | 1,166    |       
|                                                    | Dividends received (paid)                                         |                                                     |       | 911          |        |              |       | (911    | )      |              |        |            |       |   |       |         |       
|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |         
|                                                    |                                                                   | Net cash provided by (used in) financing
activities |       |              | 2,073  |              |       |         | (3,923 | )            |        |             | 2,893 |   |       |          | 1,043  |  
|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |         
|Effect of exchange rate changes on cash             |                                                                   |                                                     |      |              |        |              | 194   |         |        |              |       |             |       |   | 194   |         
|Cash and cash equivalents:                          |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |         
|                                                    | Increase for period                                               |                                                     |       | 78           |        |              |       | 2,616   |        |              |        |            |       |   |       | 2,694    |       
|                                                    | Balance, beginning of period                                      |                                                     |       | 41,502       |        |              |       | 13,343  |        |              |        |            |       |   |       | 54,845   |       
|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |         
|                                                    | Balance, end of period                                            |                                                     | $     | 41,580       |        |              | $     | 15,959  |        |              | $      |            |       |   | $     | 57,539   |       
|                                                    |                                                                   |                                                     |       |              |        |              |       |         |        |              |        |             |       |   |       |         

See accompanying unaudited note.



17



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##### Table of Contents



ALLIANCE GAMING CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Debt and Revolving Credit Facility



| |  | Long-term debt and lines of credit at June 30, 2001 consisted of the following (in 000s):
| |  | ------------------------------------------------------------------------------------------

|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  |          |         | 
|------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | -------- | ------ | ------------ |  | ----------- | -------- | - |  | -------- | ------- | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  | Alliance
|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  | Gaming  
|                                                                    |  | Parent and   |         | Non-         |  |          |        |              |  | Corporation
|                                                                    |  | Guaranteeing |         | Guaranteeing |  | Elimina- |        | and         
|                                                                    |  | Subsidiaries |         | Subsidiaries |  | tions    |        | Subsidiaries
|                                                                    |  |              |         |              |  |          |        |             
|10% Senior Subordinated Notes due
2007, net of unamortized discount |  | $            | 149,505 |              |  | $        |       |              |  | $           |         |   |  | $        | 149,505 | 
|Term loan facilities                                                |  |              | 190,000 |              |  |          |       |              |  |             |         |   |  |          | 190,000 | 
|Revolving Credit Facility                                           |  |              |        |              |  |          |       |              |  |             |         |   |  |          |        | 
|Intercompany notes payable                                          |  |              | 161,996 |              |  |          | 16,511 |              |  |             | (178,507 | ) |  |          |        | 
|Other                                                               |  |              | 20      |              |  |          | 575    |              |  |             |         |   |  |          | 595     | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  |          |         | 
|                                                                    |  |              | 501,521 |              |  |          | 17,086 |              |  |             | (178,507 | ) |  |          | 340,100 | 
|Less current maturities                                             |  |              | 489     |              |  |          | 16,954 |              |  |             | (16,511  | ) |  |          | 932     | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  |          |         | 
|Long-term debt, less current
maturities                             |  | $            | 501,032 |              |  | $        | 132    |              |  | $           | (161,996 | ) |  | $        | 339,168 | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  |          |         | 

Long-term debt and lines of credit at September 30, 2001 consisted of the following (in 000s):

|                                                                    |  |              |         |              |  |         |        |              |  |             |          |   |  |          |         | 
|------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | ------- | ------ | ------------ |  | ----------- | -------- | - |  | -------- | ------- | 
|                                                                    |  |              |         |              |  |         |        |              |  |             |          |   |  | Alliance
|                                                                    |  |              |         |              |  |         |        |              |  |             |          |   |  | Gaming  
|                                                                    |  | Parent and   |         | Non-         |  |         |        |              |  | Corporation
|                                                                    |  | Guaranteeing |         | Guaranteeing |  | Adjust- |        | and         
|                                                                    |  | Subsidiaries |         | Subsidiaries |  | ments   |        | Subsidiaries
|                                                                    |  |              |         |              |  |         |        |             
|10% Senior Subordinated Notes due
2007, net of unamortized discount |  | $            | 149,525 |              |  | $       |       |              |  | $           |         |   |  | $        | 149,525 | 
|Term loan facilities                                                |  |              | 190,000 |              |  |         |       |              |  |             |         |   |  |          | 190,000 | 
|Revolving Credit Facility                                           |  |              |        |              |  |         |       |              |  |             |         |   |  |          |        | 
|Intercompany notes payable                                          |  |              | 165,933 |              |  |         | 14,804 |              |  |             | (180,737 | ) |  |          |        | 
|Other                                                               |  |              | 15      |              |  |         | 497    |              |  |             |         |   |  |          | 512     | 
|                                                                    |  |              |         |              |  |         |        |              |  |             |          |   |  |          |         | 
|                                                                    |  |              | 505,473 |              |  |         | 15,301 |              |  |             | (180,737 | ) |  |          | 340,037 | 
|Less current maturities                                             |  |              | 963     |              |  |         | 15,280 |              |  |             | (14,804  | ) |  |          | 1,439   | 
|                                                                    |  |              |         |              |  |         |        |              |  |             |          |   |  |          |         | 
|Long-term debt, less current
maturities                             |  | $            | 504,510 |              |  | $       | 21     |              |  | $           | (165,933 | ) |  | $        | 338,598 | 
|                                                                    |  |              |         |              |  |         |        |              |  |             |          |   |  |          |         | 



18



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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-Q
 For the Quarter Ended September 30, 2001




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

Liquidity and Capital Resources

As of September 30, 2001, the Company had $57.5 million in cash and cash
equivalents, and $25.0 million in unborrowed availability on its revolving
credit facility. In addition the Company had net working capital of
approximately $122.0 million, an increase of approximately $9.4 million from
June 30, 2001, which is explained in the working capital section below.
Consolidated cash and cash equivalents at September 30, 2001 includes
approximately $23.4 million of cash which is utilized in Casino and Route
Operations which is held in vaults, cages or change banks. The Company
maintains restricted cash accounts to ensure availability of funds to pay
progressive jackpot liabilities, which totaled approximately $5.4 million at
September 30, 2001.

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 September 30, 2001, the Company had no material commitments for
capital expenditures.

Working Capital

The following table presents the components of consolidated working
capital balance at (in $000s):

|                                                   |  |          |         |          |  |        |         |  |  |   |        |  
|-------------------------------------------------- |  | -------- | ------- | -------- |  | ------ | ------- |  |  | - | ------ | -
|                                                   |  | June 30, |         | Sept 30, |  |        |         | 
|                                                   |  | 2001     |         | 2001     |  | Change
|                                                   |  |          |         |          |  |       
|Cash, cash equivalents, and short term investments |  | $        | 54,845  |          |  | $      | 57,539  |  |  | $ | 2,694  |  
|Accounts and notes receivable, net                 |  |          | 79,369  |          |  |        | 74,006  |  |  |   | (5,363 | )
|Inventories, net                                   |  |          | 35,082  |          |  |        | 41,428  |  |  |   | 6,346  |  
|Other current assets                               |  |          | 10,814  |          |  |        | 9,244   |  |  |   | (1,570 | )
|                                                   |  |          |         |          |  |        |         |  |  |   |        |  
|Total current assets                               |  |          | 180,110 |          |  |        | 182,217 |  |  |   | 2,107  |  
|Accounts payable                                   |  |          | 19,531  |          |  |        | 15,919  |  |  |   | (3,612 | )
|Accrued liabilities                                |  |          | 46,978  |          |  |        | 42,824  |  |  |   | (4,154 | )
|Current maturities of long-term debt               |  |          | 932     |          |  |        | 1,439   |  |  |   | 507    |  
|                                                   |  |          |         |          |  |        |         |  |  |   |        |  
|Total current liabilities                          |  |          | 67,441  |          |  |        | 60,182  |  |  |   | (7,259 | )
|                                                   |  |          |         |          |  |        |         |  |  |   |        |  
|Net working capital                                |  | $        | 112,669 |          |  | $      | 122,035 |  |  | $ | 9,366  |  
|                                                   |  |          |         |          |  |        |         |  |  |   |        |  

The primary fluctuations contributing to the increase in working capital were:
(i) a decrease in accounts payable resulting from timing of payments, (ii) a
decrease in accrued liabilities resulting from timing of payments relating to
the refinancing, (iii) a net decrease in accounts receivable resulting from
cash collections (iv) the impact of foreign exchange fluctuations between the
dollar and the deutschemark on all working capital categories, and (v) the
corresponding impact of the above listed items on cash and cash equivalents.



19



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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-Q
 For the Quarter Ended September 30, 2001

Cash Flows

During the three months ended September 30, 2001, cash provided from operating
activities totaled $9.1 million, a decrease of $12.4 million compared to the
cash flows from operations in the prior year quarter. This change is a result
of an increase in inventories and reductions in accrued liabilities and
accounts payable, partially offset by a net decrease in accounts receivable.

During the three months ended September 30, 2001, the Company used $7.6 million
of cash in investing activities resulting primarily from capital expenditures
totaling $3.4 million, cost incurred to produce participation games totaling
$2.9 million, payments for gaming rights for route locations totaling $0.7
million, and payments made to acquire other long term assets totaling $0.6
million.

During the three months ended September 30, 2001, financing activities included
$1.2 million of cash provided from stock option and warrants exercises, offset
by principal payments on other long term debt totaling $0.1 million.

Customer Financing

Management believes that customer financing terms and leasing have become an
increasingly important competitive factor for the Bally Gaming and Systems and
Wall Machine and Amusement Games business units. Competitive conditions
sometimes require Bally Gaming and Systems to grant extended payment terms on
gaming machines, systems and other gaming equipment, especially for sales in
emerging markets. While these financing are normally collateralized by such
equipment, the resale value of the collateral in the event of default may be
less than the amount financed. Accordingly, the Company has greater exposure to
the financial condition of its customers in emerging markets than had
historically been the case in established markets like Nevada and Atlantic
City. Bally Wulff provides customer financing for approximately 20% of its
sales and also provides lease financing to its customers. Lease terms are
generally for six months, but are also available for terms up to 43 months.

Euro Currency Conversion

The Companys Bally Wulff subsidiary uses the German deutschemark as its
functional currency. The new Euro currency will replace the deutschemark as
well as most other European currencies after a phase in period, which began
January 1, 1999. As most of Bally Wulffs transactions are within Germany, the
switch to the Euro is not expected to have a material impact on revenues,
expenses or income. Regulations regarding the transition to the Euro currency
are not yet finalized in the area of wall machines. It is currently believed
that conversion kits will be allowed for games in the wall machine that
currently accepts only deutschemark. The Company also intends to pre-sell Euro
denominated wall machines, which will be available for shipment and
installation in the days immediately after the first of the calendar year.



20



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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-Q
 For the Quarter Ended September 30, 2001

Results of Operations:

General

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

|                                  |  |                                   |        |      |  |   |        |  
|--------------------------------- |  | --------------------------------- | ------ | ---- |  | - | ------ | -
|                                  |  | Three Months Ending September 30,
|                                  |  |                                  
|                                  |  | 2000                              |        | 2001
|                                  |  |                                   |        |     
|EBITDA by Business Unit:          |  |                                   |        |      |  |   |        |  
|Bally Gaming and Systems          |  | $                                 | 7,668  |      |  | $ | 11,884 |  
|Wall Machines and Amusement Games |  |                                   | 1,907  |      |  |   | (89    | )
|Route Operations                  |  |                                   | 5,930  |      |  |   | 6,640  |  
|Casino Operations                 |  |                                   | 6,703  |      |  |   | 6,326  |  
|Corporate Administrative Expenses |  |                                   | (2,570 | )    |  |   | (2,176 | )
|                                  |  |                                   |        |      |  |   |        |  
|EBITDA                            |  | $                                 | 19,638 |      |  | $ | 22,585 |  
|                                  |  |                                   |        |      |  |   |        |  
|Operating Income (Loss):          |  |                                   |        |      |  |   |        |  
|Bally Gaming and Systems          |  | $                                 | 5,673  |      |  | $ | 9,930  |  
|Wall Machines and Amusement Games |  |                                   | 534    |      |  |   | (1,358 | )
|Route Operations                  |  |                                   | 3,743  |      |  |   | 3,120  |  
|Casino Operations                 |  |                                   | 6,155  |      |  |   | 5,867  |  
|Corporate Administrative Expenses |  |                                   | (2,974 | )    |  |   | (2,698 | )
|                                  |  |                                   |        |      |  |   |        |  
|Total Operating Income            |  | $                                 | 13,131 |      |  | $ | 14,861 |  
|                                  |  |                                   |        |      |  |   |        |  

The Company believes that the analysis of EBITDA is a useful tool; however,
this information should not be construed as an alternative to net income or any
other GAAP measure of performance as an indicator of the Companys performance
or GAAP-defined cash flows generated by 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.

Three Months Ended September 30, 2000 and 2001

Bally Gaming and Systems

For the quarter ended September 30, 2001, the Bally Gaming and Systems business
unit reported revenues of $45.2 million, an increase of 34% compared to
revenues of $33.7 million in the prior year quarter. Gaming Products sales
totaled $20.9 million, an increase of 22% compared to $17.1 million in the
prior year quarter. New unit sales totaled 2,500 units, a 19% increase compared
to 2,100 in the prior year quarter. The average new unit selling price
increased 1% from the prior year quarter to $6,200. By market segment, unit
sales for the current year consisted of approximately 620 units to the Nevada
and Atlantic City markets, 500 units to international markets, 90 units in
California and 1,290 units to other Native American, riverboats and other
domestic markets. Bally Systems reported revenues of $12.9 million, an increase
of 34% compared to $9.6 million in the prior year quarter. Bally Systems
reported shipments of 9,200 game monitoring units, a 52% increase compared to
6,000 units in the prior year quarter. The Bally Systems revenue growth was
primarily a result of continued strength in new system installations and higher
levels of recurring hardware and software support revenues resulting from the
larger base of installed


21Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-Q
 For the Quarter Ended September 30, 2001

systems. Gaming Operations reported revenues of $11.4 million, an increase
of 64% compared to $7.0 million in the prior year quarter. The increased
revenues were driven by an increase in the installed base of recurring revenue
units, which total approximately 3,460 units as of September 30, 2001, compared
to approximately 2,700 units at September 30, 2000, and an increase in the
revenue per unit as a result of a 103% increase in the base of higher revenue
wide-area progressive games deployed.

For the quarter ended September 30, 2001, the overall gross margin percentage
for Bally Gaming and Systems improved to 57% compared to 54% in the prior year
quarter. The improvement was due to improved margin contribution for gaming
machines sales as a result of the improved fixed cost absorption rate resulting
from the increased volume of new unit sales.

The Bally Gaming and Systems business unit reported operating income of $9.9
million, compared to an operating income of $5.7 million in the prior year
quarter. The increase in operating income resulted primarily from increases in
revenues and improved margins, as well as the reduced overhead cost structure.
Research and development costs totaled $3.1 million, an increase of 19%
compared to the prior year quarter.

Wall Machines and Amusement Games

For the quarter ended September 30, 2001, Wall Machines and Amusement Games
reported revenues of $12.7 million, an decrease of 15% compared to revenues of
$14.9 million in the prior year quarter. The decrease in revenues resulted
primarily from a 14% decrease in the number of new wall machine units sold, a
9% decrease in the selling price of new wall machines, and offset by a 43%
increase in the number of leased wall machines. There have been several recent
regulatory changes, which had a significant impact on the wall machine market.
First, in order to assist arcade operators with the transition to the Euro
currency, the normal 48 month life for a wall machine was allowed to be
extended for the period from October 1, 2001 to February 2002. Secondly, the
regulations regarding play parameters have been amended to increase the speed
of play of wall machines by 25%. Both of these regulatory changes caused
customers to delay new unit purchases, which the Company expects will lead to
increased unit placements in both the December 2001 and March 2002 quarters.

The Wall Machines and Amusement Games business unit continued its leasing
program whereby new wall machines and certain amusement games are leased to
customers pursuant to operating leases which provide a stream of revenues and
cash flows over the term of the leases which range from six months to three and
one half years. As of September 30, 2001, a total of 6,480 machines were
deployed in the leasing program compared to 5,150 at September 30, 2000, an
increase of 26%.

For the quarter ended September 30, 2001, gross profit margin decreased to 41%
from 44% in the prior year quarter. The gross margin decrease resulted
primarily from a decrease in the number of units sold which impacted the fixed
cost absorption rate, as well as a decline in the average new unit selling
price. Wall Machines and Amusement Games reported an operating loss of $(1.4)
million, compared to operating income of $0.5 million in the prior year
quarter.

Route Operations

For the quarter ended September 30, 2001, the Route Operations business unit
reported total revenues of approximately $53.8 million, an increase of 2%
compared to revenues of $52.9 million in the prior year quarter. Revenues from
the Nevada route operations increased to approximately $50.3 million or 4% over
the prior year quarter. This improvement was attributable to an increase in
the average net win per gaming machine per day of 1% to $66.30 from $65.40 in
the


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ALLIANCE GAMING CORPORATION
FORM 10-Q
 For the Quarter Ended September 30, 2001

prior year quarter and a 2% increase in the weighted average number of
gaming machines during the current quarter to 8,170 units as compared to 7,980
units in the prior year quarter. Gamblers Bonus, a cardless players club and
player tracking system continued to have a favorable impact on the net win per
day. As of September 30, 2001, the Gamblers Bonus product was installed in
over 3,964 gaming machines at approximately 384 locations statewide or 48% of
the installed base of gaming machines. Revenues from route operations in
Louisiana totaled $3.5 million, a decrease of 19% compared to the prior year
quarter. This decrease was primarily the result of a decline in the net win
per gaming machine per day of 16% to $59.70 from $70.70 in the prior year
quarter and slightly lower average number of gaming units deployed. The Fair
Grounds facility at which we operate gaming devices was closed for three days
following the events of September 11, 2001, and then reopened with play levels
below historical levels. Additionally, these declines are reflective of the
competitive market resulting from the significant increase in the number of
truck stop casinos in the metro New Orleans area.

For the quarter ended September 30, 2001, cost of revenues for Route Operations
totaled as a percentage of revenues, decreased to 79% from 81% in the prior
year quarter. This improvement is the result of reduced game rental costs,
which resulted from the payoff of high cost game leases in June 2001.

For the quarter ended September 30, 2001, the Route Operations business unit
reported operating income of $3.1 million, a decrease of 17% compared to
operating income of $3.7 million in the prior year quarter. The decrease in
operating income resulted from the lower results from the route in Louisiana
and slight margin compression in Southern Nevada, primarily from higher
marketing and promotion costs.

Casino Operations

For the quarter ended September 30, 2001, the Casino Operations business unit
reported revenues of $18.2 million, an increase of 2% compared to revenues of
$17.9 million in the prior year quarter. This improvement is due to a 13%
increase in revenues at the Rail City Casino and a 2% decrease in revenues at
the Rainbow Casino. The decline in revenue at the Rainbow Casino was
attributable to a 5% decrease in the average number of gaming machines, and
offset by a 2% increase in the net win per day to $145. Since the September
11th, weekday play has been below historical norms. The revenue improvement at
the Rail City Casino was attributable to an increase in the average gaming
machine net win per day of 7% to $85 from $80 in the prior year quarter and a
7% increase in the average number of gaming machines.

For the quarter ended September 30, 2001, the cost of revenues for Casino
Operations as a percentage of revenues, improved to 46% compared to 42% for the
prior year quarter. This improvement was a result of the increase in revenues,
which were achieved without incremental increases in certain operating costs.
Cost of casino revenues include, gaming taxes, rental costs and direct labor
including payroll taxes and benefits.

Net Interest Expense and Income Taxes

Interest expense (net of interest income) for the quarter ended September 30,
2001, totaled $7.3 million, and compared to the net interest expense of $8.9
million in the prior year quarter. The decrease is a result of a lower average
debt balance outstanding and lower interest rates on the bank credit facility.

The Company recorded an income tax provision of $0.1 million in the quarter
ended September 30, 2001, compared to a provision of $0.5 million in the prior
year quarter. The current year quarter tax provision represents primarily
estimated state income and franchise taxes.



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ALLIANCE GAMING CORPORATION
FORM 10-Q
 For the Quarter Ended September 30, 2001




* * * * *



| |  | 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
 For the Quarter Ended September 30, 2001




ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Part 1, Item 7A, of the Companys annual report on Form 10-K, for the
fiscal year ended June 30, 2001. There have been no material changes in market
risks since the prior fiscal year end.







PART II




Item 1.    Legal Proceedings

| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Refer to Part 1, Item 3, of the Companys annual report on Form 10-K
for the fiscal year ended June 30, 2001. There have been no material
changes in any legal proceedings since the prior fiscal year end.




Item 6.    Exhibits and Reports on Form 8-K

a.       Exhibits

b.       Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended September 30,
2001.



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ALLIANCE GAMING CORPORATION
FORM 10-Q
 For the Quarter Ended September 30, 2001




SIGNATURES

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

| |                                                                     |                     
| | ------------------------------------------------------------------- | --------------------
| | ALLIANCE GAMING CORPORATION
(Registrant)                           
|
| | By                                                                  | /s/ Robert Miodunski
| |                                                                    
| | President and Chief Operating Officer
(Principal Executive Officer)

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



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