<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
                                    ---------

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                     FOR THE FISCAL YEAR ENDED JUNE 30, 2000

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
                               (NO FEE REQUIRED)
                               FOR THE TRANSITION
                           PERIOD FROM _____ TO _____

                          COMMISSION FILE NUMBER 0-4281
                           ALLIANCE GAMING CORPORATION
             (Exact name of registrant as specified in its charter)

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

                   6601 S. BERMUDA RD. LAS VEGAS, NEVADA 89119
                    (Address of principal executive offices)

                  REGISTRANT'S TELEPHONE NUMBER: (702) 270-7600

                    SECURITIES REGISTERED PURSUANT TO SECTION
                               12(b) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          COMMON STOCK, $0.10 PAR VALUE

                                (TITLE OF CLASS)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the common equity held by non-affiliates of the
registrant was approximately $18,457,983 as of September 1, 2000.

The number of shares of Common Stock, $0.10 par value, outstanding as of
September 1, 2000 according to the records of registrant's registrar and
transfer agent, was 10,253,296.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders will be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year and are incorporated by
reference into Part III of this Form 10-K.

                                       1


<PAGE>   2

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000

                                     PART I

ITEM 1.         BUSINESS

GENERAL

Alliance is a diversified, worldwide gaming company that (i) designs,
manufactures and distributes gaming machines and computerized monitoring systems
for gaming machines, (ii) owns and operates a significant installed base of
gaming machines, (iii) owns and operates two casinos and (iv) in Germany, is a
full-service supplier of wall-mounted gaming machines and amusement games.
Alliance is among the market leaders in each of its business units. Operating
under the name Bally Gaming and Systems, the Company is a worldwide leader in
designing, manufacturing and distributing gaming machines, having marketed over
75,000 gaming machines during the past five years; it also designs, integrates
and sells highly specialized computerized monitoring systems that provide
casinos with networked accounting and security services for their gaming
machines with over 130,000 game monitoring units ("GMUs") installed worldwide.
The Company also owns, operates and services an installed base of over 8,700
slot and video gaming machines that are located mostly in non-casino venues in
Nevada and Louisiana ("Route Operations"). Alliance is the largest route
operator in Nevada and the largest route operator of gaming machines in
Louisiana. Alliance also owns and operates what management believes is the most
profitable dockside casino in Vicksburg, Mississippi, and a locals casino in
Sparks, Nevada, which together have table games and 1,450 gaming machines
(collectively, "Casino Operations"). In addition, operating under the Bally
Wulff name, the Company believes that it is a leading supplier of wall-mounted
gaming machines and amusement games in Germany. In August 2000 the Company
signed a definitive agreement with UC Acquisitions Company, LLC, an independent
third-party gaming operator, for the sale of its Nevada-based route operations.
The gross selling price, which is based on a multiple of cash flows for the 12
month period prior to closing, is estimated to be approximately $118 million,
consisting of $6 million in preferred stock and $112 million is cash, which will
be utilized to pay down certain lease obligations, pay transactional fees and
expenses, with the remainder (estimated to be approximately $95 million) to be
used to reduce the Term Loans. This transaction is contingent on the buyer
obtaining suitable financing and obtaining approvals from various regulatory
bodies, a process which may take 12 months to complete.

The Company was incorporated in Nevada on September 30, 1968, under the name
Advanced Patent Technology. The Company changed its name to Gaming and
Technology, Inc., in 1983, to United Gaming, Inc., in 1988 and to Alliance
Gaming Corporation on December 19, 1994. The Company conducts its gaming
operations through directly and indirectly owned subsidiaries. On June 18, 1996,
the Company acquired Bally Gaming International, Inc. ("BGII"), which includes
the Bally Gaming and Systems and Wall Machines and Amusement Games business
units. The term "Company" as used herein refers to Alliance Gaming Corporation
and subsidiaries unless the context otherwise requires. The Company's principal
executive offices are located at 6601 South Bermuda Road, Las Vegas, Nevada
89119; telephone (702) 270-7600.

BUSINESS UNITS

BALLY GAMING AND SYSTEMS

Overview. The Company's primary markets for its gaming machine products are the
United States, Canada,Europe, and Latin America, and, to a lesser extent, the
Far East and the Caribbean. The following table sets forth the percentage of new
gaming machine unit sales by market segment during the periods indicated:

<TABLE>
<CAPTION>

NEW UNITS BY MARKET SEGMENT             PERCENTAGE OF NEW GAMING UNITS SOLD
                                                Years ended June 30,
                                           1998         1999         2000
                                         ------       ------       ------
<S>                                      <C>          <C>          <C>
Nevada and Atlantic City                     25%          22%          14%
International                                49           59           64
Riverboats                                   15            4            3
Indian Gaming                                10           11           12
Other domestic                                1            4            7
                                         ------       ------       ------
                                            100%         100%         100%
                                         ======       ======       ======
</TABLE>

                                        2
<PAGE>   3
                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000

Markets for Bally Gaming. Within the United States, Nevada represents the
largest installed base of gaming machines with an installed base of
approximately 200,000 machines as of June 30, 2000. The Company estimates that
Atlantic City, the third largest market, had an installed base of approximately
36,000 machines as of June 30, 2000. Product sales of the Company's casino-style
gaming equipment in these markets are primarily to established casino customers
either to replace existing machines or as part of an expansion or refurbishment
of the casino. Also, because gaming machine revenues have increased at a higher
rate than table game revenues over the past decade, casino operators have tended
to increase floor space dedicated to gaming machines. In addition, major casino
openings in Nevada, expansions of existing casinos, and the proliferation of
casinos in emerging markets have created additional floor space available for
new gaming products and are anticipated to further increase competitive
pressures on casino operators to replace existing equipment with new machines.

Riverboat and dockside casinos began operating in 1991 and, as of June 30, 2000,
riverboat and dockside casinos were operating in Indiana, Iowa, Illinois,
Mississippi, Missouri and Louisiana. The estimated installed base of gaming
machines on riverboats or dockside casinos was approximately 100,000 machines as
of June 30, 2000.

Casino-style gaming continues to expand on Native American lands. Native
American gaming is regulated under the Indian Gaming Regulatory Act of 1988
which permits specific types of gaming. The Company's machines are placed only
with Native American gaming operators who have negotiated a compact with the
state and received approval from the U.S. Department of the Interior. The
Company sells machines to casinos on Native American lands in Arizona,
California, Connecticut, Iowa, Michigan, Minnesota, Mississippi, Montana, New
Mexico, North Dakota, South Dakota, Washington and Wisconsin. Compacts have also
been approved in Oregon, Colorado, and Louisiana, although the Company has made
no deliveries in these jurisdictions. In addition to the approved states,
compacts are under consideration in several states, including Alabama, Maine,
Massachusetts, Rhode Island, and Texas. The installed estimated base of all
Native American gaming machines as of June 30, 2000, was approximately 100,000
units.

Currently casino gaming also is legal in Colorado, Michigan and South Dakota.
The estimated installed base of machines in these markets as of June 30, 2000
was approximately 20,000 machines.

In addition to the domestic markets, the gaming industry is also expanding in
international markets. The Company's primary international markets are Europe,
Canada and Latin America, and, to a lesser extent, the Far East and the
Caribbean. The Company conducts its business in Canada through its staff in the
United States. In July 1998, the Company's Australian subsidiary, BGI Australia
Pty, Ltd., was approved for licensing by the New South Wales Liquor
Administration Board which licenses gaming operators and suppliers in New South
Wales and in 1999 the Company's game platform and the first of its games were
approved for sale in New South Wales. In February 2000 the Company announced
plans to reduce its presence in Australia due primarily to difficulty in
establishing profitable operations there. The Company also distributes gaming
machines, manufactured by Bally Gaming, through its direct and indirect
subsidiaries: Bally Gaming International, GmbH ("GmbH"), from its sales office
in Hannover, Germany, principally to customers in Europe and Russia; Bally
Gaming de Puerto Rico, Inc., principally to customers in Puerto Rico; and Bally
Gaming and Systems, SA, in Montevideo, Uruguay, principally to customers in
South America. In February 2000 the Company also announced plans to reduce its
presence in South Africa and has since closed its sales office located in
Johannesburg.

Markets for computerized slot data systems.

The primary markets for computerized slot data systems (SDS) are the United
States and, to a lesser extent, Canada, New Zealand, Latin America, Europe and
the Caribbean. Markets for Systems within the United States include traditional
land-based casinos predominantly in Nevada and Atlantic City, New Jersey, Native
American casinos and riverboats and dockside casinos. Domestically, the
Company's market for computerized monitoring systems is new casinos and existing
or new customers who either (a) acquire casinos with a competitor's system which
is replaced with the Company's system, or (b) expand their casino floors or
upgrade their hardware to a new product release. Unlike the United States
market, where most jurisdictions require the implementation of systems, there
have been few international markets to do so. Management believes, however, that
the international market for such systems is increasing, and that Systems' sales
to such markets are likely to increase accordingly.

The following table sets forth the percentages of revenues provided by each of
the Company's major product lines for the periods indicated:


                                       3
<PAGE>   4

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000

<TABLE>
<CAPTION>

PRODUCT LINE                                                                   PERCENTAGE OF REVENUES
                                                                                  Years ended June 30,
                                                                           1998         1999         2000
                                                                          ------       ------       ------
<S>                                                                       <C>          <C>          <C>
Slot machines                                                                 42%          41%          26%
Video gaming machines                                                         23           18           31
Computerized slot data systems                                                21           26           39
Other (primarily used machines, recurring revenue
  products, parts and services)                                               14           15            4
                                                                          ------       ------       ------
                                                                             100%         100%         100%
                                                                          ======       ======       ======
</TABLE>


Gaming Machine Products. The Company designs, manufactures and distributes a
variety of electronic slot and video gaming machines. Gaming machines are
differentiated from one another by graphic design and theme, cabinet style and
size, pay table, reel-type design, betting denomination and minimum/maximum
betting amount. Slot machines are normally produced to specific order, with
design and configuration customized to a customer's particular requirements.
Customers may also change from one gaming model to another gaming model by
ordering a "conversion kit" consisting of artwork, reel strips, and a computer
chip. The Company's video gaming machines are designed to simulate various live
card games, video reel-spinning games and keno through a video display and can
offer the player the chance to play up to ten different games. New games and
themes are introduced periodically to satisfy customer demand and to compete
with product designs introduced by competitors. The Company introduced its
ProSeries(TM) reel-type slot machines in late 1993 and its multi-game touch
screen machine, the GameMaker(R), in late 1994. In March 1998 the Company
introduced the first major upgrade to both the ProSeries and GameMaker product
lines.

The ProSeries was the result of a comprehensive product development effort. The
development process included extensive testing of the new products in-house and
on casino floors for reliability and player appeal. Revenues from sales of
ProSeries machines were approximately $45.8 million, $44.6 million and $23.6
million for the years ended June 30, 1998, 1999 and 2000, respectively.

The GameMaker can offer up to ten different video games within one gaming
device. The ten games can be selected by the casino from a game library that has
over 600 games. The games simulate various card games, keno and popular
reel-spinning games. The GameMaker machines contain bill acceptors and many
other features believed to be popular with casinos and their customers. The
GameMaker machines are available in upright, bar top, slim-line and slant top
cabinets. Revenues from sales of GameMaker machines were approximately $22.7
million, $17.7 million and $23.6 million for the years ended June 30, 1998, 1999
and 2000, respectively.

During the year ended June 30, 1998, the Company introduced a new gaming machine
platform, GameMagic (R), a high resolution graphics multi-game, video gaming
machine offering up to ten different games. The product has been approved and
deployed in Nevada, New Jersey, Iowa, and in several Native American
jurisdictions and also deployed outside the United States in jurisdictions that
do not require regulatory approval. Revenues from the sale of GameMagic machines
were approximately $3.1 million and $5.0 million for the year ended June 30,
1999 and 2000, respectively.

During the past two years, the proprietary gaming operations division of Bally
Gaming and Systems has moved to become a full service provider of gaming
products by adding to its product line wide-area progressive systems and second
feature niche games, which are gaming machines that provide bonus features. Many
of these gaming machines are placed in casinos and earn recurring revenues and
cash flows for the Company rather than being sold on a one time basis. These
gaming machines provide a higher level of profitability than the games that are
sold outright, but they require the Company to invest capital in the cost of
manufacturing the gaming machines and in purchasing signs and seating. The
proprietary gaming operations generated recurring revenues of approximately $1.5
million and $20.1 million for the fiscal years ended June 30, 1999 and 2000,
respectively.

The Company received regulatory approval from the Nevada Gaming Control Board of
its wide-area progressive jackpot system named "Thrillions(TM)" in November
1998. The Thrillions system has been designed to allow patrons playing nickel,
quarter and dollar machines to compete for the same progressive jackpot with the
odds of winning the jackpot adjusted based on the amount wagered. The Thrillions
system has been designed to allow casinos to use their own branding for the
product. The first products deployed on the Thrillions system were Betty Boop's
Big Hit (TM), Pay Day, and Blazing 7's, however the Pay Day and Blazing 7's are
proprietary products for Park Place Entertainment for the Nevada and Mississippi
markets,



                                       4
<PAGE>   5

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000


respectively. The Company began deployment of the Betty Boop's Big Hit product
in Nevada in March 1999, in Mississippi in July 1999, in Native American
jurisdictions in September 1999 and in Atlantic City in May 2000.

The Company has introduced three second feature niche games, Roll the Dice (R),
Bell Ringer (R), and Love Meter (R) all of which are approved in most major
gaming markets. In addition, in conjunction with Shuffle Master, Inc., the
Company has designed and deployed the Let's Make a Deal (TM) game on a GameMagic
platform. The Company believes that video gaming products and second feature
bonus games will continue to gain floor space in casinos. The Company also earns
recurring revenues from games deployed with the Delaware State Lottery
Commission, and starting in August 1999, games developed under a manufacturing
and distribution agreement with Oasis Technologies, Inc. and deployed in
Washington compacted Native American tribes.

The Company has also developed several other gaming products. In fiscal year
1998, Bally Gaming announced its product called Cash Cage(r) that dispenses
paper tokens (currency or casino customized scrip) from a patented bill hopper
in partial substitution for complete coin payouts. Pursuant to a long term
agreement, the Company has agreed to license JCM American, a U.S. subsidiary of
Japan Coin Machine Company, a leading supplier of bill acceptors to the gaming
industry, to be its worldwide exclusive manufacturer and distributor of the Cash
Cage technology, for which the Company will receive a royalty for each Cash Cage
unit shipped. However, this product has not yet been commercialized and there
can be no assurance that commercialization of this technology will occur in the
future.

In fiscal year 1999, the Company received final regulatory approval from the
Nevada Gaming Control Board for its patented Remote Access Verification
Environment ("RAVE") technology, a system and method that provides regulators
assurance that the on-line gaming activity originates from within a particular
jurisdiction. In December 1998, the Company signed an exclusive agreement to
license a third party to use the RAVE technology in Nevada for sportswagering
applications. However this third party has yet to commercialize the product and
there can be no assurance that commercialization of this technology will occur
in the future.

The Company typically offers a 90-day labor and up to a one-year parts warranty
for new gaming machines sold and is actively involved in customer service after
the original installation. The Company provides several after-sale, value-added
services to its customers including customer education programs, a 24-hour
customer service telephone hot-line, an Internet web site for technical support,
field service support programs, and spare parts programs. The Company's
historical warranty expense as a percentage of revenues has been less than 1%.

In addition, the Company sells and services used gaming machines and sells parts
for existing machines. The Company often accepts used machines as trade-ins
toward the purchase of new gaming equipment. While a small secondary market
exists in the United States, used machines are typically resold into the
international market. Some used equipment is reconditioned for direct sale, but
much is sold in container lots on an "as is" basis through independent brokers.
Sale of used equipment were approximately $3.6 million, $5.6 million and $3.7
million for the years ended June 30, 1998, 1999 and 2000, respectively.

Gaming machines have a mechanical life that can exceed ten years. However, in
the established markets, the Company's experience is that casino operators
usually replace gaming machines after three to seven years. The factors which
result in replacement of gaming machines sooner than their mechanical life
include technological advances, development of new entertaining games, new sound
and visual features and changing preferences of casino patrons. Casinos
typically recoup the purchase cost of their electronic gaming machines in a few
months, which allows casinos to replace machines with new models that are
popular with casino patrons.

System Products. The Company designs, integrates, and sells computerized slot
data systems ("SDS") for slot and video gaming machines which provide casino
operators with on-line, real time data relative to a machine's accounting,
security and cash monitoring functions. When purchased along with other third
party player tracking applications, SDS also provides data to and receives data
from casinos to track their players to establish and compile individual player
profitability and other demographic information. SDS is comprised primarily of
(1) hardware consisting of microcontroller-based printed circuit boards
installed within the slot and video machines as well as card readers, displays
and keypads which provide casinos with the ability to track player gaming
activity and monitor access to slot and video machines by the casino's
employees, (2) firmware developed by the Company which provides access to the
slot machine's and player's activity data gathered by the microcontroller
hardware, and (3) business applications software developed by the Company which
manages the slot machines' and players' activity information. This



                                       5
<PAGE>   6

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000

software resides on Unix or PC based servers. Systems also provides software and
hardware support services, including maintenance, repair and training for
purchasers of its monitoring systems.

Product Development. The Company believes that providing games and systems with
high entertainment value that are preferred by the casino patron is a key to
meeting the demands of casinos. The Company believes that the use of existing
computer technology is accelerating which can give newer gaming machines and
systems that incorporate this technology a competitive advantage over older
gaming machines and systems. Total spending on product research and development
by Bally Gaming and Systems was approximately $12.7 million, $13.9 million and
$12.6 million during the years ended June 30, 1998, 1999 and 2000, respectively.
The decrease in research and development spending in the year ended June 30,
2000, is a result of the comparison to the prior year which included incremental
development costs related to the launch of the wide-area progressive product.

The Company develops its products for both the domestic and international
market. The Company's product development process is divided into two areas:
hardware and software. Major areas of hardware development include cabinet
style, electronic capability, printer capability, and coin and currency
handling. Hardware development efforts are focused on player appeal, product
reliability and ease of maintenance. Development cycles for hardware can range
from a few days for simple enhancements to more than a year for new electronics
or new mechanical packages.

The software development process for new games, which includes graphics
development, involves a continuous effort requiring relatively significant human
resource allocations. Creativity in software development is an important element
in product differentiation as the major manufacturers tend to deploy similar
hardware and related technology. Ideas for new models are generated internally,
from customers and from other third parties, many of whom have entered into
strategic relationships with the Company. On an annual basis, the Company
expects to introduce approximately 25 new models to the market. However, no
assurance can be made with respect to the rate of new model introductions or
obtaining of regulatory approvals for them.

The Company also focuses on hardware modifications and second feature niche game
platforms. Key members from the marketing and design groups meet to analyze
machines currently being marketed by the Company and its competitors to assess
their strengths and weaknesses and suggest ideas for modifications and new
machines. These ideas are reviewed to determine what should be further
developed. The Company typically pursues 15 to 20 projects at any given time,
and approximately two to three second feature niche gaming machines are
submitted for licensing each year. These new machines are built in limited
quantities and then test marketed in various locations throughout the U.S. for
three to six months. Many of the new machines tested are put into full scale
production. Management believes this process of generating new ideas and then
turning only a limited number of the ideas into machines which will reach the
mass market is responsible for the high quality of the Company's machines and
their continued acceptance and success in the marketplace.

All new or modified hardware and software are designed to satisfy all applicable
testing standards. Typically, new products require regulatory approval for most
North American, but generally no approval is needed for other jurisdictions. For
Nevada, new gaming machine platforms must be filed with the state gaming
laboratory which tests the products for from two to three months or more before
a mandatory 30 to 60 day field test is conducted in a casino. For new product
platforms, the Nevada State Gaming Control Board and the Nevada Gaming
Commission must each approve these products at their monthly, public meetings.
For modifications of existing products or casino associated equipment, the
process in Nevada is similar to new platforms, except a field test is usually
not required and the product can be approved administratively by the Nevada
State Gaming Control Board staff. Each jurisdiction that requires regulatory
approval of new products has its own filing requirements and process. Once
products are approved by the gaming regulators, customers will typically require
a 30 to 90 day field trial of the product in their casinos with the right to
return the product at any time during the field trial period. The Company does
not recognize revenue until the customer ends the field trial and accepts the
gaming machines.

Product development for the SDS product is also divided into hardware and
software. The major areas of hardware development include microcontroller
circuit board design and programming as well as user interface devices such as
card readers, keypads, and displays. Systems has developed a modular and
extendible hardware and software architecture, that allows development to be
focused on achieving greater functionality, product reliability, and ease of
maintenance for the casino operator and achieving greater visual appeal and ease
of use for the slot player. In addition, the architecture allows customers to
upgrade existing components or add new components with minimal impact.
Development cycles for hardware can vary between a few months for minor
revisions to more than a year for major



                                       6
<PAGE>   7

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000


design changes or for changes made by various slot manufacturers with which
Systems' product must communicate and be physically integrated. Software
development results in (1) periodic product releases that include new features
that extend and enhance the SDS product, (2) periodic maintenance releases that
enable casino operators to correct problems or improve the usability of the
system and (3) documentation needed to install and use the system.

The Company developed a form of cashless wagering that uses bar-coded coupons,
which can be read by the bill validators in slot machines connected to the SDS
system. The Company continues to direct development efforts towards other forms
of cashless wagering for use on slot machines and the SDS system. The bar-coded
coupon product is currently in regulatory field test in New Jersey and Nevada.

Sales and Marketing. Bally Gaming and Systems uses a direct sales force and, to
a lessor extent, an independent distributor network to distribute its products.
Bally Gaming and Systems' North America sales staff consists of approximately 19
people in offices in Nevada, New Jersey, Mississippi, Illinois, California,
Missouri and Florida.

Bally Gaming and Systems' direct sales force, other than personnel at GmbH,
Australia and South Africa generated approximately 80%, 77% and 53% of new unit
machine sales for the years ended June 30, 1998, 1999 and 2000, respectively. On
a limited basis, Bally Gaming and Systems uses distributors for sales to certain
international jurisdictions. The agreements with distributors do not specify
minimum purchases but generally provide that the Company may terminate such
agreements if certain performance standards are not met. These independent
distributors generated approximately 6%, 7% and 7% of new gaming machine unit
sales for the years ended June 30, 1998, 1999 and 2000, respectively. GmbH
generated approximately 13%, 13% and 18% of new gaming machine unit sales for
the years ended June 30, 1998, 1999 and 2000, respectively.

The Company has over 130,000 game monitoring units installed, of which
approximately 95% are in the United States. At June 30, 2000, the Company had
123 installed locations. Substantially all System's revenues are generate by its
direct sales force.

For the year ended June 30, 2000, approximately 87% of the Company's slot and
video gaming machine sales were on terms of 90 days or less. Approximately 13%
of the Company's sales, primarily in certain emerging markets such as riverboat
and Native American gaming casinos, are financed over extended periods as long
as 36 months and bear interest at rates ranging from 9% to 14%. International
sales are generally consummated on a cash basis backed by a letter of credit or
financed over three years or less. In addition, in certain situations the
Company has participated in the financing of other gaming-related equipment
manufactured by third parties in the emerging markets. For SDS sales, the
Company generally offers limited financing terms, normally less than one year,
for sales to new installations. Most sales, however, are invoiced on a net
30-day basis. Management believes that financing of customer sales is an
important factor in certain emerging markets.

For SDS sales, the Company offers its customers the option of signing separate
hardware and software maintenance agreements at the time of sale. These
agreements are for periods of one year and automatically renew unless otherwise
canceled in writing by the customer or the Company. After an initial warranty
period, typically 90 days, the customer is invoiced a monthly hardware and
software maintenance fee which provides essentially for repair or replacement of
malfunctioning hardware and software, software version upgrades, and on-call
support for software.

Customers. The demand for slot machines and video gaming machines varies
depending on new construction and renovation of casinos and other facilities
with needs for new equipment as well as the replacement of existing machines
(which have an average replacement cycle of three to seven years). For the years
ended June 30, 1998, 1999, and 2000, Bally Gaming and System's largest single
customer for gaming machines accounted for approximately 7%, 21% and 6%,
respectively, of the Bally Gaming and Systems' revenues, while its ten largest
gaming machine customers accounted for approximately 48%, 46%, and 31% of the
Bally Gaming and Systems' revenues during such periods, respectively.

The demand for computerized slot monitoring systems is driven by regulatory
requirements in a given jurisdiction and by a casino operators' competitive need
to properly track machine and player activity and establish and compile
individual machine and player profitability and other demographic information,
all of which is of particular importance to casinos in developing marketing
strategies. Revenues for computerized monitoring systems are derived from
selling to new installations and to new or existing customers who either (a)
acquire casinos with a competitor's system which is replaced with the Company's
system or (b) expand their casino floors or upgrade their hardware to a new
product


                                       7
<PAGE>   8

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000


release. For the years ended June 30, 1998, 1999 and 2000, the ten largest
computerized monitoring system customers (which include certain multi-site
casino operators that have corporate agreements) accounted for approximately
53%, 68% and 90% of game monitoring unit revenues, respectively. Due to the high
initial costs of installing a computerized monitoring system, customers for such
systems generally have tended not to change suppliers once they have installed
such a system.

Future growth of Bally Gaming and Systems will be based on continued penetration
of the international markets, further expansion in the established and emerging
markets, as well as continued development efforts to provide customers with new
and innovative hardware and software product offerings.

Assembly Operations. Bally Gaming and Systems' Las Vegas facility was completed
in 1990 specifically for the design, assembly and distribution of gaming
equipment. The 150,000-square foot facility was designed to meet fluctuating
product design demands and volume requirements, and management believes the
facility enables Bally Gaming and Systems to increase production without
significant capital expenditures. Since July 1998 all assembly of game
monitoring unit products has also been performed in the Las Vegas facility.

In April 1999, the Company entered into a five-year exclusive original equipment
manufacturing agreement with Dreamport, Inc., a wholly owned subsidiary of GTECH
Corporation. Under the agreement, the Company will manufacture gaming machines,
including its GameMaker and Game Magic product lines, for certain lottery
markets exclusively for Dreamport.

In April 1999, the Company entered into a manufacturing and distribution
agreement with Oasis Technologies, Inc. to serve compacted Native American
gaming venues in Washington. Oasis Technologies, Inc. owns patented technology
for the types of gaming machines required by gaming regulators in Washington.
Under the agreement, the Company and Oasis Technologies have jointly developed
gaming devices that deploy the Oasis technology in a Bally Gaming device. Oasis
Technologies provides the gaming system and a continuing series of games to
deploy in the gaming devices. The Company manufactures and distributes the
games, gaming devices and the system.

Management believes its assembly operations allow for rapid generation of
different models to fill orders quickly and efficiently. Another major advantage
of the existing plant operation is the system by which machines can be altered
in many ways including the size, type and color of glass, sound and payoff
patterns to produce a "customized" product for each customer. Bally Gaming and
Systems keeps an inventory of parts that allow machines to be altered quickly to
conform with a particular customer's design/feature request. Bally Gaming and
Systems produces products for individual customer orders, thereby reducing
exposure to finished goods inventories. Bally Gaming and Systems designs all of
the major assemblies that are incorporated into the final machine configuration.

Competition. The market for gaming machines and progressive systems in North
America is dominated by a single competitor, International Game Technology, Inc.
("IGT"). Worldwide there are a number of other well-established, well-financed
and well-known companies producing gaming machines that compete with each of the
Company's lines in each of the Company's markets. The other major competitors
are AC Slot and Coin, Anchor Gaming, Casino Data Systems, ("CDS"), Innovative
Gaming Corporation of America, Mikohn Gaming Corporation ("Mikohn"), Shuffle
Master, Inc., Sigma Games, Inc., Silicon Gaming, Universal Distributing of
Nevada, Inc. WMS Industries, Inc. ("WMS"), and companies that market gaming
machines under the brand names of Aristocrat, Atronic, Cirsa, Konami, Novomatic
and Sega Enterprises Ltd. Many of these companies look to expand their market
share by decreasing the Company's current market share. Other companies may
enter the gaming machine business and several of these companies offer or plan
to offer second feature bonus games. Only IGT, CDS and Mikohn currently offer
wide-area progressive systems, although others may enter this area. Competition
among gaming product manufacturers, particularly with respect to sales of gaming
machines into new and emerging markets, is vigorous and is based on which
machines generate the most net win to the casinos, competitive customer pricing
and financing terms, quality of the product and having an extensive
distribution, sales and support network.

The main competition in game monitoring units currently consists of IGT, CDS,
and to a lesser extent Gaming Systems International, Mikohn Gaming Corporation,
Acres Gaming, Inc. Logical Solutions International, and companies marketing
systems under the brand names of Aristocrat and Grips. Competition is keen in
this market due to the number of providers and the limited number of casinos and
jurisdictions in which they operate. Pricing, product feature and function,
accuracy, and reliability are all key factors in determining a provider's
success in selling its system.



                                       8
<PAGE>   9

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000


Management believes the future success of its operations will be determined by
its ability to bring new and innovative products to the market while maintaining
its base of loyal existing customers.

WALL MACHINES AND AMUSEMENT GAMES

 Industry Overview

Management believes the German wall machine market consists of approximately
200,000 wall machine units. German regulations currently limit the useful life
of wall machines to four years. As a result, annual market demand for wall
machines in Germany approximates 35,000 to 55,000 units with fluctuations
resulting primarily from economic conditions, regulatory changes, and new
product development. Management believes that the size of the wall machine
market has declined from prior years due to changes in the arcade and tavern
markets and an increase in non-payout entertainment games, as well as the impact
from the overall slowdown in the German economy. A portion of this annual demand
is not available to the Company as it relates to machines in arcades operated by
the Company's two main German competitors.

Wall machine sales into the arcade market account for approximately 30% of the
total wall machine sales in Germany. A significant number of arcades
(approximately 10%) are owned by the two largest competitors, Gauselmann AG and
NSM AG. Generally these competitors do not purchase wall machines from Bally
Wulff for their arcades. Management believes Bally Wulff's share of the German
wall machine market was approximately 30%, 22% and 21% for the years ended June
30, 1998, 1999 and 2000, respectively. Market share is impacted by the
popularity of the machines in the locations and can fluctuate between periods
based on this and a wide range of other factors. The German legislative
authorities regulate and monitor the wall machine industry on an ongoing basis
to ensure conformance with certain manufacturing standards and the fairness of
each machine to users. Existing legislation covers prescribed licensing
procedures, the use, installation and operation of wall machines and the
taxation of wall machines.

Operations of Bally Wulff

Products. Bally Wulff's manufacturing operations were founded in Berlin in 1950.
Bally Wulff produces and distributes a variety of models of wall machines under
the trade name "Bally Wulff" for operation in arcades, hotels, restaurants and
taverns primarily in Germany. These wall machines are coin-operated, armless
gaming devices similar to slot machines that award winnings for matching numbers
or symbols on three to five wheels or drums and differ primarily in appearance,
graphic design, theme, pay-table and customer appeal. Each game costs up to 40
pfennigs (approximately $0.20 at the exchange rate of $1.00=DM 2.05 prevailing
as of June 30, 2000, which rate is used hereinafter) to play, although the
player may deposit larger amounts to provide continuous play but not to increase
payoffs. German regulations limit the maximum payout to ten times the player's
stake (DM 4.00 or approximately $1.94 per game). Current models of wall machines
provide the player the opportunity to win 100 special games on one play, which
increases the potential amount that can be won on the minimum wager. German
regulations require a minimum payback of 60% for wall machines, although many
machines are generally programmed to pay back at somewhat higher rates to
encourage play. Bally Wulff has also manufactured non-payout entertainment
machines for operation in arcades, hotels, restaurants and taverns in Germany
and may continue to do so in the future on a selective basis.

In February 1999, Bally Wulff began selling a single-site progressive linked
jackpot system under the name Magic Jackpot. Initially, up to ten wall machines
could be linked to one system. The average selling price for the system was
approximately DM 15,500 (approximately $7,530). Although there were initially
strong sales of this product in fiscal year 1999, sales slowed substantially in
fiscal year 2000, and virtually no sales of this product are expected in fiscal
year 2001.

In addition to manufacturing wall machines, Bally Wulff distributes wall
machines and other recreational and coin-operated amusement machines
manufactured by third parties in order to be a full service provider to its
customers. These machines include entertainment games, pool tables, dart games,
pinball machines, jukeboxes and arcade games, and are distributed primarily for
use in arcades, restaurants, hotels and taverns.

The following table sets forth the percentage of Bally Wulff's revenues by
product line for the periods indicated:



                                       9
<PAGE>   10

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>

PRODUCT LINE                                                   PERCENTAGE OF REVENUES
                                                                 Years ended June 30,
                                                           1998         1999         2000
                                                          ------       ------       ------
<S>                                                       <C>          <C>          <C>
Sale of wall machines manufactured by Wulff                   44%          43%          40%
Leasing of wall machines manufactured by Wulff                10           10           14
Entertainment and amusement machines and third party
  wall machines distributed                                   26           25           42
Other (primarily used machines, parts and service)            20           22            4
                                                          ------       ------       ------
                                                             100%         100%         100%
                                                          ======       ======       ======
</TABLE>


Product Development. Management believes that Bally Wulff's wall machines are
viewed as premium products because of their quality, dependability, ease of
service and proven ability to attract players and generate revenue. Bally Wulff
designs its machines to appeal to each of the three categories of participants
in the distribution process: Bally Wulff's sales representatives and independent
distributors, the owner/operator of the machines, and the players. The sales
representatives and distributors require machines with broad appeal that are
easy to demonstrate and sell. The owner/operators desire reasonably priced
machines that are easy to collect from and service and that are proven revenue
generators. The players prefer entertaining machines that are simple to play and
have unique features.

Bally Wulff's management has formed design teams that are responsible for
generating ideas for creative new machines. These teams are comprised of
representatives of each department involved in the production and distribution
of machines, such as art design, engineering, manufacturing, marketing and
sales. The design teams meet for three days each calendar quarter at a site away
from Bally Wulff's headquarters. The teams analyze machines currently being
marketed by Bally Wulff and its competitors to assess their strengths and
weaknesses and then suggest ideas for new machines. These ideas are reviewed to
determine which machines should be produced on a trial basis. Bally Wulff
typically pursues 15 to 20 projects at any given time, and approximately 12 to
15 machines are submitted for licensing each year. These new machines are built
in limited quantities and then test marketed for three to six months. Generally,
fewer than half of the new machines tested are put into full scale production.
Management believes this process of generating new ideas and then turning only a
limited number of the ideas into machines which will reach the mass market is
responsible for the high quality of Bally Wulff's machines and their continued
acceptance and success in the marketplace.

Total spending on product research and development by Bally Wulff was $3.0
million, $3.2 million and $2.7 million during the years ended June 30, 1998,
1999 and 2000, respectively.

Sales and Marketing. Bally Wulff sells virtually all of its products through its
direct sales force of approximately 55 individuals located in 20 regional sales
offices. Independent German distributors account for approximately 3% of sales.
Virtually all of Wulff's sales of new wall machines are in the German market.
The sales offices are operated as independent profit centers and are assigned
geographic areas in which the offices are responsible for sales, servicing the
machines and assisting in collecting customers' accounts receivable balances.

The wall machines manufactured and sold by Bally Wulff generally sell for prices
ranging from DM 4,000 to DM 7,500 (approximately $1,945 to $3,645). Due to price
competition among the three largest manufacturers, selling prices have declined
since 1997. Management believes that such declines in prices may continue in the
future. For the year ended June 30, 2000 approximately 80% of Bally Wulff
machine sales were on terms of 90 days or less. Remaining sales of machines are
financed by Bally Wulff generally over a 12-month period, with interest rates
between 18% and 24%. For this reason, Bally Wulff establishes an internal credit
rating and credit limit for each customer. Under Bally Wulff's conditions of
sale, a security interest in a machine is retained by Bally Wulff until the
machine has been paid for in full. In addition, Bally Wulff requires security
beyond the wall machine itself. Currently, Bally Wulff provides customer
financing for approximately 20% of its sales, and management expects this
practice to increase during fiscal 2000. Leasing machines to customers accounted
for 10%, 10% and 14% of total revenues for the years ended June 30, 1998, 1999
and 2000, respectively. In approximately 95% of its unit sales, Bally Wulff
accepts wall machines as trade-ins toward the purchase of new wall machines. To
the extent possible, the used machines are then resold.

Customers. Each of Bally Wulff's top ten customers in 2000 has maintained its
relationship with Bally Wulff for over five years. For the years ended June 30,
1998, 1999 and 2000, Bally Wulff's top ten customers accounted for approximately
12%, 9% and 9% of Bally Wulff's revenues, respectively, while no single customer
accounted for more than 3%, 2%, and 2% of Bally Wulff's revenues for such
periods, respectively.



                                       10
<PAGE>   11

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000


Bally Wulff's customer base for wall machines may be divided into two categories
based on the preferences of their clientele. Operators who place wall machines
in arcades are generally interested in purchasing the newest products in the
hopes that an innovation will result in a high level of public demand to play
the new "hot" product. Street location operators serving hotels, restaurants and
taverns, on the other hand, are generally more inclined to purchase lower-priced
existing models with proven earnings records to provide as an amenity to
customers.

Assembly Operations. Bally Wulff's manufacturing process is primarily an
assembly operation. Its manufacturing facility consists of a four-story,
100,000-square foot building in Berlin, Germany. Bally Wulff purchases its key
raw materials, sub-assemblies and fabricated parts from a variety of suppliers,
and most parts are purchased from multiple suppliers. While there exists no
formal long-term contract commitments to any single supplier, Bally Wulff has
placed certain standing orders with suppliers to help assure the availability of
specific quantities on an as-needed basis. These orders are cancelable by Bally
Wulff at any time without penalty. Most of the component parts are standard on
all models of all Bally Wulff's wall machines, which promotes easy conversion
from the production of one model to another in response to customer demand.
Except in connection with certain promotions, Bally Wulff generally maintains
low inventory levels of assembly parts, and the amount of work-in-process is
generally less than the number of machines sold in one week.

Because of its manufacturing structure, Bally Wulff is capable of substantially
increasing its wall machine output without significant capital expenditures.
Bally Wulff continues to improve its manufacturing efficiency and productivity
through the use of computer-aided design systems, automated production
equipment, and devotion of substantial resources to product quality control.

Competition. Germany's wall machine manufacturing industry is dominated by Bally
Wulff and two of its competitors, NSM, AG and Gauselmann, AG. Management
believes these three entities collectively account for approximately 90% of the
entire market. Bally Wulff competes with many companies in the distribution of
coin-operated amusement games, some of which are larger and have greater
resources than Bally Wulff. Bally Wulff's two major competitors own and operate
a significant number of arcades, which may give them a competitive advantage
arising from a built-in market for their games and the ability to test market
new games in their own arcades. Furthermore, increased foreign competition in
Germany may have an adverse impact on the Company's future wall machine
revenues. Management believes that the primary competitive factors in the wall
machine and coin-operated amusement game markets are the quality and depth of
the product line, price and customer service which includes the ability to fill
orders quickly and efficiently.

ROUTE OPERATIONS

Nevada Operations

Overview. In August 2000 the Company signed a definitive agreement with UC
Acquisitions Company, LLC, an independent third-party gaming operator, for the
sale of its Nevada-based route operations. The gross selling price, which is
based on a multiple of cash flows for the 12 month period prior to closing, is
estimated to be approximately $118 million, consisting of $6 million in
preferred stock and $112 million is cash, which will be utilized to pay down
certain lease obligations, pay transactional fees and expenses, with the
remainder (estimated to be approximately $95 million) to be used to reduce the
Term Loans. This transaction is contingent on the buyer obtaining suitable
financing and obtaining approvals from various regulatory bodies, a process
which may take 12 months to complete.

The Company's Nevada route operations involve the selection, ownership,
installation, operation and maintenance of video poker devices, reel-type slot
machines and other electronic gaming machines in local establishments such as
taverns, restaurants, supermarkets, drug stores and convenience stores operated
by third parties ("local establishments"). The Company's route operations target
Nevada residents who generally frequent local establishments close to their
homes.



                                       11
<PAGE>   12
The following table sets forth certain historical data concerning the Company's
Nevada route operations:


                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>

                                                                                          Years ended June 30,
                                                                                          -------------------
                                                                               1998              1999              2000
                                                                               ----              ----              ----
<S>                                                                          <C>               <C>               <C>
Average number of gaming machines operated                                    6,460             7,300             7,856
Average number of locations                                                     624               680               687
Average win per day per gaming machine                                       $53.70            $57.20            $63.10
</TABLE>



At June 30, 2000, the Company operated approximately 8,000 machines on its
Nevada route. The Company has increased the number of gaming machines owned and
operated principally through contracting with new locations as they open and
strategic takeover of contracts at locations operated by several mid-sized route
operators. Contract takeovers added approximately 580, 200, and 470 gaming
machines to the Nevada route during the years ended June 30, 1998, 1999 and
2000, respectively.

The Company enters into long-term agreements with local establishments through
either space leases or revenue-sharing arrangements. Under revenue sharing
arrangements, most common with taverns, restaurants and convenience stores, the
Company does not pay rent, but rather receives a percentage of the net win from
the gaming machines. Under revenue sharing arrangements, the owner of the local
establishment must have a gaming license, in addition to the general slot route
operators license the Company holds. Under space lease arrangements, most common
with supermarkets and drug stores, the Company pays a fixed rental amount to the
owner of the local establishment and the Company receives all of the net win
derived from the gaming machines. Under space lease arrangements, only the
Company (and not the establishment owner) is required to hold a gaming license.
Most of the local establishments serviced by the Company are restricted by law
to operating no more than 15 gaming machines.

Revenue-sharing arrangements accounted for approximately 87%, 88%, and 84% of
revenues and 77%, 76%, and 74% of installed machines, respectively, in the
Company's Nevada route operations for the years ended June 30 1998, 1999 and
2000. At June 30, 2000, the weighted average remaining term of the Company's
revenue sharing arrangements was approximately 3.1 years. Space lease
arrangements accounted for approximately 13%, 12%, and 16% of revenues and 23%,
24%, and 26% of installed machines, respectively, in the Company's Nevada route
operations for the years ended June 30, 1998, 1999 and 2000. At June 30, 2000,
the weighted average remaining term of the Company's space leases was 3.0 years.

The Company has historically been able to renew or replace revenues from
expiring agreements with revenues generated by renewal or replacement contracts.
The Company has emphasized return on investment rather than increasing market
share in renewing or entering into new contracts and has undertaken a systematic
review process to adjust its contract mix to emphasize higher margin contracts
and, where permissible, canceling or not renewing unprofitable contracts.

Sales and Marketing. As the largest route operator in Nevada, the Company
believes that it is able to differentiate itself from its competitors because it
is a full-service operation that provides its customers support for marketing
promotional allowances and uses its design capabilities to provide electronic
gaming machines with features customized to customers' needs. The Company
developed and continues to implement a system called "Gamblers Bonus". Gamblers
Bonus is a proprietary cardless slot players' club and player tracking system,
which allows multiple local establishments to be linked together into a
distributed gaming environment. Through this technology, the Company is able to
provide its players and customers with many of the same gaming choices otherwise
available only in a larger scale casino environment, choices such as
multi-location progressive jackpots, bigger jackpot payouts and traditional
players' club enhancements. Additionally, the Company is offering a series of
new games available only to Gamblers Bonus members.

Since the launch of Gamblers Bonus, the gaming machines linked to Gamblers Bonus
have experienced an increase in net win per day per machine. As of June 30,
2000, the Company had the Gamblers Bonus installed in over 3,500 gaming machines
at approximately 345 locations or 44% of the installed base of gaming machines.
The Company believes Gamblers Bonus will continue to improve both the revenues
and operating efficiencies of its Nevada route operations and has the potential
to create additional opportunities in the route operations segment of the gaming
industry.

The Company has benefited from the growth in population in Nevada, creating more
gaming venues. Certain local politicians have proposed limiting the number or
type of venues where gaming is authorized. Management does not believe the
outcome of these proposals will have a material impact on financial results of
the Company.


                                       12
<PAGE>   13

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000

Customers. The Company has a diversified customer base with no one customer
accounting for more than 5%, 4% and 3% of the Company's revenues generated from
Nevada route operations during the years ended June 30, 1998, 1999 and 2000,
although approximately 11%, 10% and 17% of such revenues were generated through
an affiliated group of such customers for such periods, respectively. The
affiliated group consists of eight partnerships each having one individual
partner who is common to all such partnerships. For the years ended June 30,
1998, 1999 and 2000, the ten largest customers accounted for approximately 20%,
18%, and 9% of the Nevada route operations revenues, respectively.

Assembly Operations. In previous years, the Company's route operations
manufactured its own gaming machines for use in its Nevada route operations.
These machines represent approximately 41% of the gaming machines currently used
in the Nevada route operations at June 30, 2000. In July 1998, the Company
received regulatory approval to begin using the Bally GameMaker platform for
Gamblers Bonus gaming machines deployed on the Nevada route. At June 30, 2000,
approximately 31% of the installed base of gaming machines on the Nevada route
were manufactured by Bally Gaming.

Competition. The Company is subject to substantial direct competition for its
revenue-sharing and space lease locations from several large route operators and
numerous small operators, located principally in Las Vegas, Reno and the
surrounding areas and from other forms of gaming. The Company, Jackpot
Enterprises, Inc., Anchor Gaming, ET&T, and Southwest Gaming are the largest
route operators in Nevada. The principal methods of competition for route
operators include the economic terms of the revenue sharing or space lease
arrangement, the services provided, the Gamblers Bonus product and the
reputation of the route operator. Price competition is intense and can reduce
the Company's gross margin on such operations if the percentage of the gaming
machine revenues retained by the local establishment increases.

Louisiana Operations

Overview. On the basis of its Nevada route operations expertise, in March 1992
the Company obtained a contract to operate video poker gaming machines in the
greater New Orleans, Louisiana area through a subsidiary, Video Services, Inc.
("VSI"). The Company entered into an operating agreement which runs through May
2002 with Fair Grounds Corporation, and its affiliates, Jefferson Downs
Corporation and Finish Line Management Corporation (collectively, "Fair
Grounds"), for the Company to be the exclusive operator of video poker machines
at the only racetrack in the greater New Orleans area and eight associated
off-track betting parlors (OTB's). This agreement contains a five-year option
for the Company to match any third party offer to operate the machines after May
2002. The Company operates the game rooms where the video poker machines are
located for each of the nine facilities owned by Fair Grounds, for which it
receives a percentage of the revenue generated by the machines. As of June 30,
2000, the Company had approximately 670 video poker machines in Louisiana. On
July 1, 1999, pursuant to a prior vote, video poker became illegal in one parish
where the Company operated machines at two OTB's and thus these locations
closed. The two OTB's in this parish accounted for $2.4 million of revenues and
approximately $0.6 million of operating income for VSI during the year ended
June 30, 1999. During fiscal year 2000, the Company redeployed certain of the
video poker machines from these two closed sites to other existing sites. The
Louisiana legislature has considered other legislation to curtail video poker in
the past and may do so again in the future.

Under the Louisiana gaming laws and regulations, the majority stockholder of any
entity operating video poker machines in Louisiana must be a domiciled resident
of the State of Louisiana. As a result, the Company owns 49% of the common stock
of VSI and three prominent members of the Louisiana business and legal community
own the remaining 51%. The Company, however, owns all the voting stock of VSI
and all of its officers and directors are Company employees. The Company has a
71% interest in dividends of VSI in the event dividends are declared. The
Company also formed two other Louisiana subsidiaries, Southern Video Services,
Inc. ("SVS") and Video Distributing Services, Inc. ("VDSI"). Both SVS and VDSI
are structured in a manner similar to VSI except that the Company is entitled to
receive 60% of any SVS dividends. Under the terms of its contract with Fair
Grounds, the Company must conduct any additional video poker operations in
Louisiana other than gaming at racetracks or OTB parlors through SVS. To date,
SVS and VDSI have not engaged in business in Louisiana.

The Company is prohibited by the Louisiana Act from engaging in both the
manufacture and operation of video poker gaming in Louisiana and, therefore, the
Company does not manufacture its own video poker machines for use in Louisiana.



                                       13
<PAGE>   14

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000


Sales and Marketing. VSI has developed an extensive marketing program under the
names "The Players Room" and "Rockin' Horse Lounge" which is designed to attract
primarily local residents to VSI's facilities. Media placement has focused on
newspaper and radio advertising with promotions including a player's club,
direct mailings and offerings of a wide range of prizes. The Company intends to
expand its operations selectively in the greater New Orleans area by increasing
the number of video poker machines in certain of its existing locations as
demand warrants. While the Company has investigated the addition of new
locations under its current contract with the Fair Grounds in areas where
competitive factors are favorable, no plans currently exist to add new
locations. Under the Louisiana Act, racetracks and OTBs are permitted to install
an unlimited number of video poker machines while truckstops and taverns may
install only limited numbers of such machines.

Competition. The Company is subject to extensive competition for contracts to
operate video poker machines and the Company's racetrack and OTB parlors compete
with various riverboats, truckstops and locations with liquor licenses
throughout the New Orleans area. Each truckstop is permitted to operate up to
fifty video poker machines and each tavern is permitted to operate up to three
video poker machines. Louisiana has riverboat gaming statewide and three
riverboats are currently operating in the greater New Orleans area. Riverboats
are permitted to have live table games and an unlimited number of gaming
machines, including slot machines. Louisiana has also has one land-based casino
currently operating.


CASINO OPERATIONS

Overview.

Rainbow Casino. The Rainbow Hotel Casino located in Vicksburg, Mississippi began
operations in July 1994. The facility includes a 25,000-square foot casino,
which was expanded in February 2000 and currently has approximately 1,000 gaming
machines and 16 table games as well as a 245-seat restaurant. The facility also
includes the 89-room Rainbow Hotel, which is owned and operated by a third
party. Originally, the facility also included a 10-acre indoor and outdoor
entertainment complex called Funtricity Entertainment Park, which was developed
by a subsidiary of Six Flags Corporation. In September 1998, the Company
acquired the entertainment park for $0.5 million; however the primary facility
continues to be used for special events. Rainbow Casino is marketed as a
"locals" casino and draws its customers principally from within a 75-mile radius
of Vicksburg. The Vicksburg casino market generated approximately $223 million
in gaming revenue in the twelve months ended June 30, 2000.

The Company is the general partner of Rainbow Casino Vicksburg Partnership, L.P.
("RCVP") the limited partnership that operates the Rainbow Casino. Pursuant to
transactions consummated in March 1995, Rainbow Casino Corporation, an
independent company that was the former general partner of RCVP became a limited
partner and is entitled to receive 10% of the net available cash flows after
debt service and other items, as defined (which amount increases to 20% of such
amount for the proportional revenues above $35.0 million) each year through
December 31, 2010. The Company holds the remaining economic interest in the
partnership.

Rail City Casino. In April 1990, the Company purchased, for an aggregate
purchase price of $9.5 million, substantially all of the assets of the Rail City
Casino (formerly the Plantation Station Casino) located near the border between
the cities of Reno and Sparks in northern Nevada. Rail City is a 20,000
square-foot casino, which as of June 30, 2000 operated approximately 480 gaming
machines, 7 table games, and keno. In addition, Rail City Casino includes a
300-seat restaurant, and offers a race and sports book that is leased to an
independent race and sports book operator. Rail City Casino is convenient to
both Reno and Sparks and caters to the local market.

Sales and Marketing. The Company's casinos target the mid-level gaming customers
in the market. The Company promotes its casinos primarily through special
promotional events and by providing quality food at reasonable prices.

Competition. Gaming of all types is available throughout Nevada and Mississippi
in numerous locations, including many locations that compete directly or
indirectly with the Company's casino operations. The operation of casinos is a
highly competitive business. The principal competitive factors in the industry
include the quality and location of the facility, the nature and quality of the
amenities and customer services offered and the implementation and



                                       14
<PAGE>   15

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000

success of marketing programs. Many of Rail City Casino's competitors include
large casino-hotels that offer more amenities and may be perceived to have more
favorable locations than the Company. The Rainbow Casino was the fourth gaming
facility to open in Vicksburg and as such faces substantial direct competition
for gaming customers in the region. Lady Luck Gaming Corporation owns land in
Vicksburg and may in the future develop a project that would include a dockside
casino, hotel and related amenities. Previously, Horseshoe Gaming, LLC had
announced a casino hotel and auto racing complex on the Big Black River which is
between Vicksburg and Jackson, Mississippi. The legality of that site for gaming
is currently in litigation. At this time management does not know which, if any,
of these sites will be developed. Both of these projects will be contingent on
several factors including regulatory approval and financing.

PATENTS, COPYRIGHTS AND TRADE SECRETS

Bally Gaming and Systems is the copyright owner of its games software, artwork
and video presentation and has registered some of these copyrights with the U.S.
Copyright Office. Some games, cash handling mechanisms, and other gaming device
mechanisms (either currently used or reserved for future development including
several related to Gamblers Bonus) are covered either by pending patent
applications or issued patents, both foreign and domestic. The expiration dates
of these patents vary and are based on their filing or issue dates. In addition,
many of the games have trademarks registered with the U.S. Patent and Trademark
Office, state trademark registries, or both. The Company has over two hundred
registered or pending trademark applications in the United States and around the
world, including the registered U.S. trademark, Gamblers Bonus.

Bally Gaming and Systems is obligated under several patent agreements to pay
royalties ranging from approximately $25 to $107 per applicable game depending
on the components in the gaming machines. Additionally, based on an amendment to
the trademark licensing agreement between the Company and Bally Entertainment
Corporation ("BEC") dated May 10, 1996, Bally Gaming and Systems is obligated to
pay a royalty of $35 per machine on new machines sold beginning on June 18,
1996, with a minimum annual royalty payment of $1.0 million for the initial
five-year term of the amended agreement, which is subject to annual renewals by
the Company thereafter. In addition, the Company has obtained the rights to
certain game ideas and intellectual property that require Bally Gaming and
Systems to pay royalties based on either fixed amounts or variable amounts based
upon game performance. Royalty expense for Bally Gaming and Systems for the
years ended June 30, 1998, 1999, and 2000 was $2.2 million, $1.9 million and
$3.5 million, respectively.

EMPLOYEES AND LABOR RELATIONS

As of June 30, 2000, the Company and its subsidiaries employed approximately
2,300 persons, including approximately 1,280 persons in Nevada, 75 persons in
Louisiana, 500 persons in Mississippi, 40 persons in various other states and
420 persons in Germany. None of such employees is covered by a collective
bargaining agreement. Bally Wulff's employees, however, are covered by German
regulations which apply industry-wide and are developed, to some extent, through
negotiations between representatives of the metal working industry employers and
the trade union representing the employees. These regulations are in the nature
of collective bargaining agreements and cover the general terms and conditions
of such items as wages, vacations and work hours. The regulations codify what
are considered the common standards of employment in the German metal working
industry. The Company believes its relationships with its employees are
satisfactory.

GAMING REGULATIONS AND LICENSING

General. The manufacture and distribution of gaming machines and the operation
of gaming facilities are subject to extensive federal, state, local and foreign
regulation. Although the laws and regulations of the various jurisdictions in
which the Company operates and into which the Company may expand its gaming
operations vary in their technical requirements and are subject to amendment
from time to time, virtually all of these jurisdictions require licenses,
permits, documentation of qualification, including evidence of financial
stability, and other forms of approval for companies engaged in the manufacture
and distribution of gaming machines and the operation of gaming facilities, as
well as the individual licensing of officers, directors, major stockholders and
key personnel of such companies.

Any person who acquires a controlling interest in the Company would have to meet
the requirements of all governmental bodies that regulate the Company's gaming
business. A change in the make-up of the Company's



                                       15
<PAGE>   16

                           ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                            YEAR ENDED JUNE 30, 2000


board of directors and management would require the various gaming authorities
to examine the qualifications of the new board and management.

Nevada. The ownership and operation of casino gaming facilities in Nevada are
subject to (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (the "Nevada Act") and (ii) various local ordinances and regulations.
The Company's gaming, manufacturing, distributing and slot route operations
(herein collectively referred to as "gaming machine operations") are subject to
the licensing and regulatory control of the Nevada State Gaming Control Board
(the "Nevada Board"), the Nevada Gaming Commission (the "Nevada Commission"),
the Clark County Liquor and Gaming Licensing Board (the "Clark County Board"),
and various other county and city regulatory agencies, all of which are
collectively referred to as the "Nevada Gaming Authorities".

The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based on declarations of public policy concerned with, among
other things: (i) the prevention of unsavory and unsuitable persons from having
any involvement with gaming; (ii) the strict regulation of all persons,
locations, practices, associations and activities related to the operation of
licensed gaming establishments and the manufacture and distribution of gaming
machines, cashless wagering systems and associated equipment; (iii) the
establishment and maintenance of responsible accounting practices and
procedures; (iv) the maintenance of effective control over the financial
practices of licensees, including establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports with the
Nevada Gaming Authorities; (v) the prevention of cheating and fraudulent
practices; and (vi) providing a source of state and local revenues through
taxation and licensing fees. Change in such laws, regulations and procedures
could have an adverse effect on the Company's gaming-related operations.

The Company is registered with the Nevada Commission as a publicly-traded
corporation (a "Registered Corporation"). The Company's direct and indirect
subsidiaries that conduct gaming operations at various locations, (collectively,
the "Nevada Subsidiaries") are required to be licensed by the Nevada Gaming
Authorities. The licenses held by the Nevada Subsidiaries require periodic
payments of fees and taxes and are not transferable. The Company, through
registered intermediary companies (individually an "Intermediary Company" and
collectively the "Intermediary Companies"), has been found suitable to own the
stock of the Nevada Subsidiaries, each of which is a corporate licensee
(individually a "Corporate Licensee" and collectively the "Corporate Licensees")
under the terms of the Nevada Act. As a Registered Corporation, the Company is
required periodically to submit detailed financial and operating reports to the
Nevada Commission and furnish any other information the Nevada Commission may
require. No person may become a stockholder of or receive any percentage of the
profits from the Corporate Licensees without first obtaining licenses and
approvals from the Nevada Gaming Authorities. The Company, the Intermediary
Companies and the Corporate Licensees have obtained from the Nevada Gaming
Authorities the various registrations, findings of suitability, approvals,
permits and licenses required to engage in gaming activities, gaming machine
operations, and in the manufacture and distribution of gaming devices for use or
play in Nevada or for distribution outside of Nevada.

All gaming machines and cashless wagering systems manufactured, sold or
distributed for use or play in Nevada or for distribution outside of Nevada must
be manufactured by licensed manufacturers and distributed or sold by licensed
distributors. All gaming machines manufactured for use or play in Nevada must be
approved by the Nevada Commission before they are distributed or exposed for
play. The approval process for gaming machines and cashless wagering systems
includes rigorous testing by the Nevada Board, a field trial and a determination
as to whether the gaming machines or cashless wagering system meets strict
technical standards set forth in the regulations of the Nevada Commission.
Associated equipment (as defined in the Nevada Act) must be administratively
approved by the chairman of the Nevada Board before it is distributed in Nevada.

The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company, the Intermediary
Companies or the Corporate Licensees to determine whether that individual is
suitable or should be licensed as a business associate of a gaming licensee.
Officers, directors and key employees of the Company and the Intermediary
Companies who are actively and directly involved in the licensed activities of
the Corporate Licensees are or may be required to be licensed or found suitable
by the Nevada Gaming Authorities. A finding of suitability is comparable to
licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant for licensing or
a finding of suitability must pay all the costs of the investigation. Changes in
licensed positions must be reported to the Nevada Gaming Authorities and in
addition to their authority to deny an application for a finding of suitability
or licensure, the



                                       16
<PAGE>   17

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

Nevada Gaming Authorities have jurisdiction to disapprove a change in a
corporate position. The Nevada Gaming Authorities may deny an application for
licensing or finding of unsuitability for any cause they deem reasonable.

If the Nevada Gaming Authorities were to find an officer, director, or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Intermediary Companies or the Corporate
Licensees, the companies involved would have to sever all relationships with
that person. In addition, the Nevada Commission may require the Company, the
Intermediary Companies or the Corporate Licensees to terminate the employment of
any person who refuses to file appropriate applications. Licensing and
suitability determinations are not subject to judicial review in Nevada.

The Company and the Corporate Licensees that hold nonrestricted licenses are
required to submit detailed financial and operating reports to the Nevada
Commission. A nonrestricted license is a license for an operation consisting of
16 or more slot machines, or for any number of slot machines together with any
other game, gaming device, race book or sports pool at one establishment.
Substantially all material loans, leases, sales of securities and similar
financing transactions by the Corporate Licensees that hold nonrestricted
licenses must be reported to or approved by the Nevada Commission.

If it were determined that a Corporate Licensee had violated the Nevada Act, the
licenses it holds could be limited, conditioned, suspended or revoked, subject
to compliance with certain statutory and regulatory procedures. In addition, the
Company, the Intermediary Companies, the Corporate Licensees, and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor
could be appointed by the Nevada Commission to operate any nonrestricted gaming
establishment operated by a Corporate Licensee and, under certain circumstances,
earnings generated during the supervisor's appointment (except for reasonable
rental of the casino property) could be forfeited to the state . Limitation,
conditioning, or suspension of the gaming licenses of the Corporate Licensees or
the appointment of a supervisor could and revocation of any gaming license
would, materially adversely affect the gaming-related operations of the Company.

The Gaming Authorities may, at their discretion, require the holder of any
security of the Company to file applications, be investigated, and be found
suitable to own the security of the Company if the Nevada Commission has reason
to believe that the holder's ownership would be inconsistent with the declared
policies of Nevada. The applicant must pay all costs of investigation incurred
by the Nevada Gaming Authorities in conducting any such investigation.

The Nevada Act requires any person who acquires more than 5% of any class of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of any class of a Registered Corporation's voting securities apply to the
Nevada Commission for a finding of suitability within 30 days after the chairman
of the Nevada Board mails written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, that
acquires more than 10%, but not more than 15%, of a class of a Registered
Corporation's voting securities may apply to the Nevada Commission for a waiver
of finding of suitability if the institutional investor holds the securities for
investment purposes only. An institutional investor shall not be deemed to hold
voting securities for investment purposes unless the voting securities were
acquired and are held in the ordinary course of business as an institutional
investor and not for the purpose of causing, directly or indirectly, the
election of a majority of the members of the board of directors of the
Registered Corporation, any change in the corporate charter, bylaws, management,
policies or operations of the Registered Corporation or any of its gaming
affiliates, or any other action the Nevada Commission finds to be inconsistent
with holding the Registered Corporation's voting securities for investment
purposes only. Activities that are not deemed to be inconsistent with holding
voting securities for investment purposes only include: (i) voting on all
matters voted on by stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with investment only intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.

Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the chairman of the Nevada Board may be found unsuitable. The same



                                       17
<PAGE>   18

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000


restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action if,
after it receives notice that a person is unsuitable to be a stockholder or to
have any other relationship with the Company, the Intermediary Companies or the
Corporate Licensees, the Company (i) pays that person any dividend or interest
upon voting securities of the Company, (ii) allows that person to exercise,
directly or indirectly, any voting right conferred through securities held by
that person, (iii) pays remuneration in any form to that person for services
rendered or otherwise, or (iv) fails to pursue all lawful efforts to require
such unsuitable person to relinquish his voting securities, including, if
necessary, the immediate purchase of said voting securities for cash at fair
market value. Additionally, the Clark County Board has taken the position that
it has the authority to approve all persons owning or controlling the stock of
any corporation controlling a gaming license.

The Nevada Commission may in its discretion require the holder of any debt
securities of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security if the Nevada Commission has reason
to believe that such ownership would be inconsistent with the declared policies
of Nevada. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if, without the prior
approval of the Nevada Commission, it (i) pays the unsuitable person any
dividend, interest or any distribution whatsoever, (ii) recognizes any voting
right by such unsuitable person in connection with such securities, (iii) pays
the unsuitable person remuneration in any form, or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation or similar transaction.

The Company is required to maintain in Nevada a current stock ledger, which may
be examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to impose a requirement that a Registered Corporation's stock certificates
bear a legend indicating that the securities are subject to the Nevada Act. The
Nevada Commission has imposed this requirement on the Company.

The Company may not make a public offering of its securities without the prior
approval of the Nevada Commission if the securities or proceeds therefrom are
intended to be used to construct, acquire or finance gaming facilities in Nevada
or to retire or extend obligations incurred for such purposes. In addition, (i)
a Corporate Licensee may not guarantee a security issued by a Registered
Corporation pursuant to a public offering without the prior approval of the
Nevada Commission; and (ii) restrictions on the transfer of an equity security
issued by a Corporate Licensee or Intermediary Company and agreements not to
encumber such securities (collectively, "Stock Restrictions") are ineffective
without the prior approval of the Nevada Commission. The Nevada Commission has
also imposed a requirement on the Company that it must receive the prior
administrative approval of the Nevada Board chairman for any offer for the sale
of an equity security in a private transaction.

Changes in control of the Company through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he obtains control may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission on a variety of
stringent standards before assuming control of such Registered Corporation. The
Nevada Commission may also require controlling stockholders, officers, directors
and other persons having a material relationship or involvement with the entity
proposing to acquire control to be investigated and licensed as a part of the
approval process relating to the transaction.

The Nevada Legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees and Registered Corporations that are
affiliated with those operations may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse affects of these business practices on
Nevada's gaming industry and to promote Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before a Registered Corporation can make



                                       18
<PAGE>   19

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000


exceptional repurchases of voting securities above the current market price
(commonly called " greenmail") and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of a
plan of recapitalization proposed by the Registered Corporation's board of
directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purpose of acquiring control of the
Registered Corporation.

License fees and taxes, computed in various ways depending on the type of gaming
or activity involved, are payable to the State of Nevada and to the counties and
cities in which the Licensees' operations are conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable either monthly,
quarterly or annually and are based on either (i) a percentage of the gross
revenues received, (ii) the number of gaming devices operated, or (iii) the
number of games operated. A casino entertainment tax is also paid by casino
operations where entertainment is furnished in connection with the selling of
food or refreshments. The Corporate Licensees that hold gaming device route
operator licenses or manufacturer or distributor licenses also pay certain fees
to Nevada.

Any person who is licensed, required to be licensed, registered, required to be
registered, or under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board and thereafter maintain a
$10,000 revolving fund to pay the expenses of investigation by the Nevada Board
of the Licensee's participation in such foreign gaming. The revolving fund is
subject to increase or decrease in the discretion of the Nevada Commission.
Thereafter, Licensees are required to comply with certain reporting requirements
imposed by the Nevada Act. Licensees are also subject to disciplinary action by
the Nevada Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to conduct the
foreign gaming operation in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees,
or employ a person in the foreign operations who has been denied a license or
finding of suitability in Nevada on the ground of personal unsuitability.

The sale of alcoholic beverages at establishments operated by a Corporate
Licensee is subject to licensing, control and regulation by applicable
regulatory agencies. All licenses are revocable and are not transferable. The
agencies involved have full power to limit, condition, suspend or revoke any
such license, and any such disciplinary action could (and revocation would) have
a material adverse affect on the operations of the Corporate Licensees.

Louisiana. The manufacture, distribution, servicing and operation of video draw
poker devices ("Devices") in Louisiana is subject to the Louisiana Video Draw
Poker Devices Control Law and the rules and regulations promulgated thereunder
(the "Louisiana Act"). Licensing and regulatory control is maintained by a
single gaming control board for the regulation of gaming in Louisiana. This
Board, created on May 1, 1996, is called the Louisiana Gaming Control Board (the
"Louisiana Board") and oversees all licensing for all forms of legalized gaming
in Louisiana (including all regulatory enforcement, and supervisory authority
that exists in the state as to gaming on Native American lands). The Video
Gaming Division of the Gaming Enforcement Section of the Office of State Police
within the Department of Public Safety and Corrections (the "Division") performs
the investigatory functions for the Louisiana Board. The laws and regulations of
Louisiana are based on policies of maintaining the health, welfare and safety of
the general public and protecting the video gaming industry from elements of
organized crime, illegal gambling activities and other harmful elements, as well
as protecting the public from illegal and unscrupulous gaming to ensure the fair
play of devices.

VSI and SVS, the indirect operating subsidiaries for the Company's gaming
operations in Louisiana, has each been granted a license as a device owner by
the Division. These gaming subsidiaries are Louisiana Licensees (the "Louisiana
Licensees") under the terms of the Louisiana Act. The licenses held by the
Louisiana Licensees expire at midnight on June 30 of each year and must be
renewed annually through payment of fees. All license fees must be paid on or
before May 15 in each year licenses are renewable.

The Louisiana Board may deny, impose a condition on or suspend or revoke a
license, renewal or application for a license for violations of any rules and
regulations of the Louisiana Board or any violations of the Louisiana Act. In
addition, fines for violations of gaming laws or regulations may be levied
against the Louisiana Licensees and the persons involved for each violation of
the gaming laws. The issuance, condition, denial, suspension or revocation is
deemed a pure and absolute privilege and is at the discretion of the Louisiana
Board under the provisions of the Louisiana Act. A license is not property or a
protected interest under the constitution of either the United States or
Louisiana.



                                       19
<PAGE>   20

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000


The Division has the authority to conduct overt and covert investigations of any
person involved directly or indirectly in the video gaming industry in
Louisiana. These investigations have extended to information regarding a
prospective licensee's and his or her spouse's immediate family and relatives
and their affiliations with certain organizations or other business entities.
The investigation may also extend to any person who has or controls more than a
5% ownership, income or profits interest in an applicant for or holder of a
license or who is a key employee, or who has the ability to exercise significant
influence over the licensee. All persons or entities investigated must meet all
suitability requirements and qualifications for a licensee. The Louisiana Board
may deny an application for licensing for any cause it may deem reasonable. The
applicant for licensing must pay a filing fee, which applies to the cost of the
investigation.

In order for a corporation to be licensed as an operator or distributor of video
poker gaming devices by the Louisiana Board, a majority of the stock of the
corporation must be owned by persons who have been domiciled in Louisiana for at
least two years prior to the date of the application.

Bally Gaming is not licensed as a manufacturer of devices under the Louisiana
Act; however Bally Gaming has been licensed as a manufacturer under the
Louisiana Riverboat Economic Development and Gaming Control Act (the "Louisiana
Riverboat Act"). Gaming's application for a permanent manufacturer's license as
it relates to the land-based casino in New Orleans is pending before the
Louisiana Board. The Louisiana Board has recently promulgated regulations
governing its operation and Bally Gaming has filed its application for licensing
as a manufacturer, which application is now pending.
Mississippi. The manufacture and distribution of gaming and associated equipment
and the ownership and operation of casino facilities in Mississippi are subject
to extensive state and local regulation, primarily the licensing and regulatory
control by the Mississippi Gaming Commission (the "Mississippi Commission") and
the Mississippi State Tax Commission.

The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted on June 29, 1990. Although
not identical, the Mississippi Act is similar to the Nevada Gaming Control Act.
The Mississippi Commission has adopted regulations that are also similar in many
respects to the Nevada gaming regulations.

The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and making periodic reports to the Mississippi Commission; (iv) prevent cheating
and fraudulent practices; (v) provide a source of state and local revenues
through taxation and licensing fees; and (vi) ensure that gaming licensees, to
the extent practicable, employ Mississippi residents. The regulations are
subject to amendment and interpretation by the Mississippi Commission. Changes
in Mississippi law or regulations may limit or otherwise materially affect the
types of gaming that may be conducted and could have an adverse effect on the
Company and the Company's Mississippi gaming operations.

The Mississippi Act provides for legalized dockside gaming at the discretion of
the 14 counties that either border the Gulf Coast or the Mississippi River, but
only if the voters in each of those counties have not voted to prohibit gaming
in that county. Currently, dockside gaming is permissible in nine of the 14
eligible counties in the state and gaming operations have commenced in Adams,
Coahoma, Hancock, Harrison, Tunica, Warren and Washington counties. Under
Mississippi law, gaming vessels must be located on the Mississippi River or on
navigable waters in eligible counties along the Mississippi River, or in the
waters of the State of Mississippi lying south of the state in eligible counties
along the Mississippi Gulf Coast. Litigation is pending with respect to the
expansion of eligible gaming sites in which a landowner and a license applicant
have appealed a finding of suitability by the Mississippi Commission of a site
on the Big Black River in Warren County near Interstate 20 between Jackson and
Vicksburg, Mississippi, where the Rainbow Casino, operated by RCVP, is located.
A Hinds County Circuit Court has ruled that the subject site is legal and
suitable for gaming and the Mississippi Commission has appealed the decision to
the Mississippi Supreme Court. The law permits unlimited stakes gaming on
permanently moored vessels on a 24-hour basis and does not restrict the
percentage of space that may be utilized for gaming. There are no limitations on
the number of gaming licenses that may be issued in Mississippi.



                                       20
<PAGE>   21

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

The Company, RCVP, Bally Gaming, Inc. ("BGI") and their affiliates are subject
to the licensing and regulatory control of the Mississippi Commission. The
Company is registered under the Mississippi Act as a publicly traded holding
company of RCVP and BGI is required to periodically submit detailed financial
and operating reports to the Mississippi Commission and furnish any other
information the Mississippi Commission may require. If the Company is unable to
continue to satisfy the registration requirements of the Mississippi Act, the
Company and its affiliates cannot own or operate gaming facilities or continue
to act as a manufacturer and distributor in Mississippi. RCVP must maintain a
gaming license from the Mississippi Commission to operate a casino in
Mississippi and BGI must maintain a manufacturer and distributor license from
the Mississippi Commission to manufacture and distribute gaming products. Such
licenses are issued by the Mississippi Commission subject to certain conditions,
including continued compliance with all applicable state laws and regulations.

Gaming and manufacturer and distributor licenses are not transferable, are
issued for a three-year period and must be renewed or continued thereafter. In
June 2000, RCVP was granted a renewal of its gaming license by the Mississippi
Commission, and BGI was granted a renewal of its manufacturer and distributor
license. No person may become a stockholder of, or receive any percentage of
profits from, a licensed subsidiary of a holding company without first obtaining
licenses and approvals from the Mississippi Commission. The Company and its
affiliates have obtained the necessary approvals from the Mississippi
Commission.

Certain officers and employees of the Company and the officers, directors and
certain key employees of the Company's licensed subsidiaries must be found
suitable or be licensed by the Mississippi Commission. The Company believes it
has obtained, applied for, or is in the process of applying for all necessary
findings of suitability with respect to such persons affiliated with the
Company, RCVP or BGI, although the Mississippi Commission, in its discretion,
may require additional persons to file applications for findings of suitability.
In addition, any person having a material relationship or involvement with the
Company may be required to be found suitable, in which case those persons must
pay the costs and fees associated with such investigation. The Mississippi
Commission may deny an application for a finding of suitability for any cause it
deems reasonable. Changes in certain licensed positions must be reported to the
Mississippi Commission. In addition to its authority to deny an application for
a findings of suitability, the Mississippi Commission can disapprove a change in
a licensed position. The Mississippi Commission has the power to require the
Company and its registered or licensed subsidiaries to suspend or dismiss
officers, directors and other key employees or sever relationships with other
persons who refuse to file appropriate applications or whom the authorities find
unsuitable to act in such capacities.

Employees associated with gaming must obtain work permits that are subject to
immediate suspension under certain circumstances. The Mississippi Commission
must refuse to issue a work permit to a person convicted of a felony and it may
refuse to issue a work permit to a gaming employee if the employee has committed
certain misdemeanors or knowingly violated the Mississippi Act or for any other
reasonable cause.

The Mississippi Commission may, at any time, investigate and require the finding
of suitability of any record or beneficial stockholder of the Company.
Mississippi law requires any person who acquires more than 5% of the common
stock of a publicly traded corporation registered with the Mississippi
Commission to report the acquisition to the Mississippi Commission, and such
person may be required to be found suitable. Also, any person who becomes a
beneficial owner of more than 10% of the common stock of such a company, as
reported to the Securities and Exchange Commission, must apply for a finding of
suitability by the Mississippi Commission and must pay the costs and fees that
the Mississippi Commission incurs in conducting the investigation. The
Mississippi Commission has generally exercised its discretion to require a
finding of suitability of any beneficial owner of more than 5% of a public
company's common stock. However, the Mississippi Commission has adopted a policy
that permits certain institutional investors to own beneficially up to 15% of a
registered public company's common stock without a finding of suitability. If a
stockholder who must be found suitable is a corporation, partnership or trust,
it must submit detailed business and financial information including a list of
beneficial owners.

Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. Any person found unsuitable and who holds,
directly or indirectly, any beneficial ownership of the securities of the
Company beyond such time as the Mississippi Commission prescribes may be guilty
of a misdemeanor. The Company is subject to disciplinary action if, after
receiving notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company or its licensed subsidiaries, the Company:
(i) pays the unsuitable person any dividend or other distribution on the voting
securities of the Company; (ii) recognizes the exercise, directly or indirectly,
of any voting rights conferred




                                       21
<PAGE>   22

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

by securities held by the unsuitable person; (iii) pays the unsuitable person
any remuneration in any form for services rendered or otherwise, except in
certain limited and specific circumstances; or (iv) fails to pursue all lawful
efforts to require the unsuitable person to divest himself of the securities,
including, if necessary, the immediate purchase of the securities for cash at
fair market value. Management believes that compliance by the Company with the
licensing procedures and regulatory requirements of the Mississippi Commission
will not affect the marketability of the Company's securities.

The Company may be required to disclose to the Mississippi Commission on request
the identities of the holders of any debt securities. In addition, under the
Mississippi Act, the Mississippi Commission may in its discretion (i) require
holders of debt securities of registered corporations to file applications, (ii)
investigate such holders and (iii) require such holders to be found suitable to
own such debt securities. Although the Mississippi Commission generally does not
require the individual holders of obligations such as notes to be investigated
and found suitable, the Mississippi Commission retains the discretion to do so
for any reason, including but not limited to a default or where the holder of
the debt instrument exercises a material influence over the gaming operations of
the entity in question. Any holder of debt securities required to apply for a
finding of suitability must pay all investigative fees and costs of the
Mississippi Commission in connection with the investigation.

RCVP and BGI must maintain in Mississippi a current ledger with respect to the
ownership of their equity securities and the Company must maintain a current
list of stockholders in the principal office of RCVP, which list must reflect
the record ownership of each outstanding share of any equity issued by the
Company. The ledger and stockholder lists must be available for inspection by
the Mississippi Commission at any time. If any securities of the Company are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Mississippi Commission. A
failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company must also render maximum assistance in determining the
identity of the beneficial owner.

The Mississippi Act requires that the certificates representing securities of a
registered publicly traded corporation bear a legend to the general effect that
such securities are subject to the Mississippi Act and the regulations of the
Mississippi Commission. The Company has received from the Mississippi Commission
an exemption from this legend requirement. The Mississippi Commission has the
power to impose additional restrictions on the holders of the Company's
securities at any time.

Substantially all loans, leases, sales of securities and similar financing
transactions by a licensed gaming subsidiary must be reported to or approved by
the Mississippi Commission. A licensed gaming subsidiary may not make a public
offering of its securities, but may pledge or mortgage casino facilities as
security for a public offering if it obtains the prior approval of the
Mississippi Commission. The Company may not make a public offering of its
securities without the prior approval of the Mississippi Commission if any part
of the proceeds of the offering is to be used to finance the construction,
acquisition or operation of gaming facilities in Mississippi or to retire or
extend obligations incurred for one or more such purposes. Such approval, if
given, does not constitute a recommendation or approval of the investment merits
of the securities subject to the offering.

Changes in control of the Company through merger, consolidation, acquisition of
assets, management or consulting agreements or any form of takeover cannot occur
without the prior approval of the Mississippi Commission. The Mississippi
Commission may also require controlling stockholders, officers, directors, and
other persons having a material relationship or involvement with the entity
proposing to acquire control to be investigated and licensed as part of the
approval process relating to the transaction.

The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to promote Mississippi's policy to: (i) assure the financial
stability of corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Mississippi
Commission before the Company may make exceptional repurchases of voting
securities above the current market price (commonly called "greenmail") or
before a corporate acquisition opposed by management may



                                       22
<PAGE>   23

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

be consummated. Mississippi's gaming regulations will also require prior
approval by the Mississippi Commission if the Company adopts a plan or
recapitalization proposed by its board of directors opposing a tender offer made
directly to the stockholders for the purpose of acquiring control of the
Company.

Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Commission to have access to information concerning the out-of-state
gaming operations of the Company and its affiliates. The Company has previously
obtained a waiver of foreign gaming approval from the Mississippi Commission for
operations in Nevada and will be required to obtain the approval or a waiver of
such approval from the Mississippi Commission prior to engaging in any
additional future gaming operations outside of Mississippi.

If the Mississippi Commission decides that a licensed gaming subsidiary violated
a gaming law or regulation, the Mississippi Commission could limit, condition,
suspend or revoke the license of the subsidiary. In addition, the licensed
subsidiary, the Company and the persons involved could be subject to substantial
fines for each separate violation. The Mississippi Commission could also attempt
to appoint a supervisor to operate the casino facilities. Limitation,
conditioning or suspension of any gaming license or the appointment of a
supervisor could (and revocation of any gaming license would) materially
adversely affect the Company's and RCVP's gaming operations or BGI's
manufacturer and distributor operations, as the case may be.

License fees and taxes, computed in various ways depending on the type of gaming
involved, are payable to the State of Mississippi and to the counties and cities
in which a licensed gaming subsidiary's operations are conducted. Depending upon
the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based on (i) a percentage of the gross
gaming revenues received by the casino operation, (ii) the number of slot
machines operated by the casino or (iii) the number of table games operated by
the casino. The license fee payable to the State of Mississippi is based upon
"gaming receipts" (generally defined as gross receipts less payouts to customers
as winnings) and equals 4% of gaming receipts of $50,000 or less per month, 6%
of gaming receipts over $50,000 and less than $134,000 per month, and 8% of
gaming receipts over $134,000. The foregoing license fees are allowed as a
credit against the Company's Mississippi income tax liability for the year paid.
The gross revenue fee imposed by the City of Vicksburg, Mississippi, where
RCVP's casino operations are located, equals approximately 4% of gaming
receipts.

The Mississippi Commission has adopted a regulation requiring as a condition of
licensing or license renewal that a gaming establishment's plan include a
500-car parking facility in close proximity to the casino complex and
infrastructure facilities, which will amount to at least 25% of the casino cost.
The Mississippi Commission adopted a change to this regulation increasing the
infrastructure requirement to 100%; however, the regulation grandfathers
existing licensees and applies only to new casino projects and casinos that are
not operating at the time of acquisition or purchase by new owners. Management
of the Company believes it is in compliance with this requirement.

The sale of alcoholic beverages by the Rainbow Casino operated by RCVP is
subject to the licensing, control and regulation by both the City of Vicksburg
and the Alcoholic Beverage Control Division (the "ABC") of the Mississippi State
Tax Commission. The Rainbow Casino area has been designated as a special resort
area, which allows the Rainbow Casino to serve alcoholic beverages on a 24-hour
basis. The ABC has the full power to limit, condition, suspend or revoke any
license for the serving of alcoholic beverages or to place such a licensee on
probation with or without conditions. Any such disciplinary action could (and
revocation would) have a material adverse effect on the Rainbow Casino's
operations. Certain officers and managers of the Rainbow Casino must be
investigated by the ABC in connection with its liquor permits, and changes in
certain positions must be approved by the ABC.

New Jersey. BGI has previously been licensed by the New Jersey Commission as a
gaming-related casino service industry ("CSI") in accordance with the New Jersey
Casino Control Act (the "Casino Control Act"). Due to the change of ownership of
BGI as a result of the merger with Alliance Gaming Corporation, and by operation
of state law, BGI's CSI license was deemed to have lapsed. Prior to the change
of ownership of BGI and in anticipation of same, the Company submitted an
application for qualification. The New Jersey Commission deemed the application
complete and as a result thereof, after the merger, the Company's operations in
New Jersey continue uninterrupted by full regulatory consent, pursuant to
transactional waivers which have been granted by the New Jersey Casino



                                       23
<PAGE>   24

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

Control Commission with consent of the New Jersey Division of Gaming
Enforcement, and which continued to be granted by the New Jersey Casino Control
Commission on six-month blanket terms for parts and service and on a
sale-by-sale basis for all other products pending final regulatory action on the
Company's application for CSI qualification. The New Jersey Casino Control
Commission granted Bally Gaming, Inc. final approval of its application for CSI
qualification April 14, 1999, with approval of the Company as the parent
company.

In considering the qualifications of an applicant for a CSI license, the New
Jersey Commission may require the officers, directors, key personnel, financial
sources and stockholders (in particular those with holdings in excess of 5%) of
the applicant and its holding and intermediary companies to demonstrate their
qualifications. Such persons and entities may be investigated and may be
required to make certain regulatory filings and to disclose and/or to provide
consents to disclose personal and financial data. The costs associated with such
investigation are typically borne by the applicant.

Federal Registration. The operating subsidiaries of the Company that are
involved in gaming activities are required to register annually with the
Attorney General of the United States in connection with the manufacture, sale,
distribution or operation of gaming machines. All currently required filings
have been made.

From time to time, certain legislators have proposed the imposition of a federal
tax on gross gaming revenues. No specific proposals for the imposition of such a
federal tax are currently pending. However, no assurance can be given that such
a tax will not be imposed in the future. Any such tax could have a material
adverse effect on the Company's business, financial condition or results of
operations.

Germany. German legislative authorities regulate and monitor the wall machine
industry so as to ensure certain manufacturing standards and the fairness of
each machine to users. The most significant legislation presently affecting the
wall machine industry relates to prescribed licensing procedures and the use,
installation, operation and taxation of machines.

Wall machine manufacturers are dependent on the successful introduction of new
products each year and currently are required to receive prior government
approval for each new product introduction. Manufacturers are required to apply
for licenses through an agency of the German Federal Ministry of Economics. Such
agency maintains a policy of accepting only two licensing applications from an
individual applicant at any given time. Bally Wulff, through affiliates and
subsidiaries, is in a position to file up to six concurrent applications. After
receiving a prototype of a machine for which the applicant seeks government
licensing approval, the federal agency deliberates for periods that range from
approximately 6 to 24 months. If that product is approved, the wall machine
manufacturer is permitted to reproduce the sample machine initially submitted
for government approval. Every wall machine carries with it a small license card
that permits the machine to be operated for up to four years after the initial
date of sale, after which it may not be used in Germany. In Germany, wall
machines sold via the secondary market may be operated by a new owner but only
for the residual time remaining on each machine's four-year life. In addition to
licensing requirements for manufacturers, any person or entity that intends to
operate a licensed wall machine must apply to local regulatory authorities for a
license, which will not be granted by the authorities if facts justify the
assumption that the applicant does not possess the requisite reliability. In
this proceeding, the applicant must furnish a police certificate of conduct.

German legislation prohibits the public play of wall machines by people under 18
years old. Voluntary agreements among manufacturers and certain amusement game
trade associations, among other things, restrict wall machine advertising and
the ability of a player to play more than two machines at once, require all
machines to carry visible warning notices and provide that every wall machine is
automatically switched off for three minutes after one hour of continuous play.

The Spielverordnung (gaming ordinance) specifically governs wall machines. These
regulations limit game payouts to DM 4.00 (approximately $1.92) per game,
require a minimum payout percentage, detail where the machines may be installed,
how many may be installed and by whom, which games are prohibited, the technical
requirements of the machines and technical review and approval. Operators must
comply with regulations that specify how many machines may operate within
defined square foot areas (15 square meters per machine, with a maximum of ten
machines per location). In taverns, restaurants, hotels and certain other
establishments, no more than two gaming machines are permitted.



                                       24
<PAGE>   25

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

The Baunutzungsverordnung (Ordinance Regarding the Use of Real Estate) governs
the zoning classification of land and the type and density of development within
the various zoning classifications. Effective January 27, 1990, the
Baunutzungsverordnung was amended to restrict the development of larger gaming
halls to core commercial areas, limit the permissibility of smaller gaming halls
in various types of mixed use zones and to ban gaming halls in most types of
residential and all types of industrial use areas. Prior to the amendment,
gaming halls, regardless of size, were generally allowed in core, business,
mixed and industrial zones. In addition, on a case-by-case basis, each local
zoning agency is authorized to exclude certain types of otherwise permissible
uses, including gaming halls.

Subject to certain exceptions, a value-added tax (VAT) of 16% is generally
assessed on the sale or supply of any goods and services in Germany. Since the
total amount paid for particular goods or services is considered to be the gross
price in calculating such tax, the actual rate is 13.79%. The basis for taxation
is the cash remaining in the machines. The rule requiring a minimum payout
percentage is applied to the amount remaining in the cash box net of such VAT.
Depending on the municipality in which a machine is located, operators may also
have to pay a monthly leisure tax on each machine of up to DM 600 (approximately
$292).

During fiscal 2000, Bally Wulff increased the amount of tax reserves by $0.5
million as a result of ongoing audits of open tax years 1992 to 1995. The German
tax authorities have proposed preliminary adjustments of $0.3 million, which has
also been accrued. The German tax authorities have not yet issued the final
assessment from their quadrennial audits.

Additional Jurisdictions. The Company, in the ordinary course of its business,
routinely considers business opportunities to expand its gaming operations into
additional jurisdictions. Although the laws and regulations of the various
jurisdictions in which the Company operates or into which the Company may expand
its gaming operations vary in their technical requirements and are subject to
amendment from time to time, virtually all of those jurisdictions require
licenses, permits, documentation of qualification, including evidence of
financial stability, and other forms of approval for companies engaged in the
manufacture and distribution of gaming machines as well as for the officers,
directors, major stockholders and key personnel of such companies.

The Company and its key personnel have obtained, or applied for, all government
licenses, registrations, findings of suitability, permits and approvals
necessary for the manufacture, distribution and, where permitted, operation of
their gaming machines in the jurisdictions in which the Company does business.
The Company and the holders of its securities may be subject to the provisions
of the gaming laws of each jurisdiction where the Company or its subsidiaries
are licensed or conduct business, including, without limitation, Arizona,
Colorado, Connecticut, Illinois, Indiana, Iowa, Louisiana, Michigan, Minnesota,
Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, South Dakota,
Wisconsin, and the local regulatory authorities within each such state as well
as Australian, Canadian, South African, and other foreign gaming jurisdictions
in which BGII and its subsidiaries are licensed or conduct business. As a result
of the consummation of the Acquisition, the Company and its officers and
directors have been required to apply for any government licenses, permits and
approvals necessary or required by each of these jurisdictions.

Holders of common stock of an entity licensed to manufacture and sell gaming
machines, and in particular those with holdings in excess of 5%, should note
that local laws and regulations may affect their rights regarding the purchase
of such common stock and may require such persons or entities to make certain
regulatory filings, or seek licensing, findings of qualification or other
approvals. In some cases this process may require the holder or prospective
holder to disclose or provide consents to disclose personal and financial data
in connection with necessary investigations, the costs of which are typically
borne by the applicant. The investigatory and approval process can take three to
six months to complete under normal circumstances.



                                       25
<PAGE>   26

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000


ITEM 2.         PROPERTIES

The following table sets forth information regarding the Company's leased
properties (exclusive of space leases in connection with its gaming device
routes) as of June 30, 2000, all of which are fully utilized unless otherwise
noted:

<TABLE>
<CAPTION>

                                                                                                           ANNUAL
                                                                                     BUILDING               RENTAL
    LOCATION                                   USE                                  SQUARE FEET            PAYMENTS
    --------                                   ---                                  -----------            --------
                                                                                                          (In 000s)
<S>                            <C>                                                  <C>                   <C>
Las Vegas, NV                  Nevada route operations                                  18,500                 182
Las Vegas, NV                  Research and development offices                         20,000                 286
Sparks, NV                     Administrative offices and warehousing                   38,300                 345
Sparks, NV                     Sales offices and warehousing                            11,000                 132
Absecon, NJ                    Sales offices and warehousing                            15,800                 101
Biloxi, MS                     Sales offices                                             6,400                  41
Golden, CO                     Sales offices                                             1,500                  18
Westchester, IL                Sales offices                                             4,900                  26
Dania, FL                      Sales offices                                             3,400                   7
Elko, NV                       Sales office and route operations                         4,200                  10
Laughlin, NV                   Sales offices                                               600                  10
Atlantic City, NJ              Administrative offices                                      750                  10
San Juan, P R                  Sales offices                                             1,000                  12
Las Vegas, NV                  Warehousing                                             103,500                 409
Berlin, Germany                Administrative offices and manufacturing                115,500                 520
Hannover, Germany              Administrative offices and warehousing                   20,100                 204
Sparks, NV                     Route operations                                         12,100                  96
Carson City, NV                Route operations                                          2,500                   9
Winnemucca, NV                 Route operations                                          1,200                   5
Pahrump, NV                    Route operations                                            750                   7
Las Vegas, NV                  Route location                                            8,000                 476
Las Vegas, NV (1)              Ground lease                                                ---                 330
Sparks, NV (2)                 Ground lease                                                ---                   5
Vicksburg, MS                  Administrative offices                                    2,700                  19
Vicksburg, MS                  Administrative offices                                    1,200                   9
New Orleans, LA                Louisiana route operations                                6,000                  57
Metairie, LA                   OTB operation                                            11,000                  60
New Orleans, LA                OTB operation                                             5,100                  24
</TABLE>

(1)        Lease consists of ground lease for parking.
(2)        Lease consists of long-term land lease for parking at Rail City
           Casino.

The following table sets forth information regarding properties owned by the
Company as of June 30, 2000, all of which are fully utilized unless otherwise
noted:

<TABLE>
<CAPTION>

                                                                                 BUILDING
    LOCATION                                 USE                                SQUARE FEET
    --------                                 ---                                -----------
<S>                            <C>                                              <C>
Las Vegas, NV                  Administrative offices and
                               manufacturing   (a)                                 150,000
Reno/Sparks, NV                Casino (a)                                           35,000
Vicksburg, MS                  Casino                                               25,000
Vicksburg, MS                  Entertainment facility                               20,000
Vicksburg, MS                  Administrative offices                                3,200
Vicksburg, MS                  Vacant- Land                                             --
Las Vegas, NV                  Tavern/Land                                           5,000
North Las Vegas, NV            Land/Parking                                             --
</TABLE>


(a) These facilities are mortgaged collateral for the Company's Credit Facility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".

                                       26
<PAGE>   27
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

In addition, the Company leases 20 bar and tavern properties that have been
subleased to other operators in connection with its Nevada route operations. The
properties range in size from approximately 1,750 square feet to 7,700 square
feet. The remaining terms of the leases range from 3 months to 5 years with
monthly payments ranging from approximately $1,700 to $11,600.

In addition to the principal facilities, the Company has 20 leased locations and
two owned locations in Germany which are primarily used for sales and service
offices as well as for warehousing purposes. The properties range in size from
approximately 2,300 square feet to 17,000 square feet. The leased locations have
terms of occupancy varying from six months to six and one half years with
monthly payments ranging from approximately $1,500 to $15,800.

See Note 7 of Notes to Consolidated Financial Statements for information as to
the Company's lease commitments with respect to the foregoing rental properties.
The Company believes its facilities are suitable for its needs and the Company
has no future expansion plans that would make these properties inadequate.



ITEM 3.         LEGAL PROCEEDINGS

LITIGATION

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

On June 3, 1999, Sierra Design Group filed suit in federal district court in
Nevada against Oasis Technologies, Inc., the Company, BGI, and various other
affiliates of the Company. The suit seeks a declaratory judgment that a gaming
system designed by Sierra Design Group to meet requirements of various Indian
gaming compacts does not infringe on an Oasis patent. BGI markets the patented
Oasis system, which employs BGI's gaming machines, to Native American casinos in
the state of Washington under a non-exclusive license. Sierra Design Group later
amended its complaint to allege that the Oasis system infringes on a Sierra
patent. Sierra Design also alleges that Oasis interfered with a prospective
Sierra Design customer and unfairly competed by telling the prospective customer
that a Sierra Design product infringed Oasis's patent. Sierra Design's claims
are directed against Oasis rather than BGI. Furthermore, pursuant to its
agreement with Oasis, Oasis must indemnify BGI for any third-party patent
infringement liability. For these reasons, the litigation is not expected to
have a material adverse effect on BGI, the Company, or its other subsidiaries.

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

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

Not applicable.

                                       27
<PAGE>   28
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

                                     PART II

ITEM 5.         MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
                MATTERS

The Common Stock is traded on the Nasdaq Small Cap Index under the symbol
"ALLY". The following table sets forth the high and low closing bid price of the
Common Stock as reported by Nasdaq for the periods indicated. These prices
reflect inter-dealer prices, without retail mark-up or mark-down or commissions
and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>

                                                                                   PRICE RANGE OF
                                                                                    COMMON STOCK
                                                                               ----------------------
                                                                                High             Low
                                                                                ----             ---
           <S>                                                                 <C>             <C>
           FISCAL YEAR ENDED JUNE 30, 1999

                     1st Quarter                                               $ 14.66         $ 8.75
                     2nd Quarter                                                 10.28           6.23
                     3rd Quarter                                                  9.63           4.25
                     4th Quarter                                                  5.63           3.75

           FISCAL YEAR ENDED JUNE 30, 2000
                     1st Quarter                                                 $8.12          $3.69
                     2nd Quarter                                                  8.81           2.44
                     3rd Quarter                                                  4.31           2.19
                     4th Quarter                                                  2.56           1.50
</TABLE>


Note: The above applicable common stock prices have been restated to reflect the
one-for-three-and-one-half reverse stock split effective February 1, 1999.

As of September 1, 2000 the Company had approximately 1,490 holders of record of
its Common Stock.

There is currently no established public trading market for the Company's Series
E Special Stock.

The Company has never declared or paid cash dividends on its Common Stock. The
indenture for the Company's 10% Senior Subordinated Notes (the "Indenture") and
the credit agreement for the Company's bank credit facility each restrict the
Company's ability to pay any dividends or make any other payment or distribution
of any of its Restricted Subsidiaries' Equity Interests (as defined). The
Company intends to follow a policy of retaining earnings, if any, to finance
growth of its business and does not anticipate paying any cash dividends in the
foreseeable future. The declaration and payment of future dividends on the
Common Stock will be at the sole discretion of the Board of Directors and will
depend on the Company's profitably, ability to pay dividends under the terms of
the Indenture and the Company's financial condition, capital requirements,
statutory and contractual restrictions, future prospects and other factors
deemed relevant.

                                       28
<PAGE>   29
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data have been derived from the
audited financial statements of the Company. The table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto.



                           FISCAL YEARS ENDED JUNE 30,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                          1996(1)          1997(4)       1998          1999          2000
                                                        ---------        ---------     ---------     ---------     ---------
                                                                        (IN 000'S, EXCEPT PER SHARE AMOUNTS)
<S>                                                     <C>              <C>           <C>           <C>           <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
           Gaming equipment and systems                 $  10,575        $ 134,734     $ 109,597     $ 127,810     $ 135,180
           Wall machines and amusement games                3,356          131,934        98,611        90,834        68,952
           Route operations                               109,938          127,028       148,507       175,854       202,480
           Casino operations                               48,509           51,450        60,657        63,682        71,468
                                                        ---------        ---------     ---------     ---------     ---------
                                                          172,378          445,146       417,372       458,180       478,080
                                                        ---------        ---------     ---------     ---------     ---------
Costs and expenses:
           Cost of gaming equipment and systems             7,213           84,496        61,684        69,721        75,508
           Cost of wall machines and amusement games        2,022           68,426        54,241        54,035        43,301
           Cost of route operations                        84,212           95,716       114,645       137,692       161,062
           Cost of casino operations                       22,046           22,269        25,930        27,011        27,933
           Selling, general and administrative             31,270           99,520        86,318       104,104       105,155
           Research and development                           370            9,954        15,778        17,190        15,318
           Depreciation and amortization                   10,988           22,606        22,838        23,104        26,788
           Direct acquisition costs (2)                    55,843               --            --            --            --
           Unusual items                                    5,498              700          (325)           --         2,164
                                                        ---------        ---------     ---------     ---------     ---------
                                                          219,462          403,687       381,109       432,857       457,229
                                                        ---------        ---------     ---------     ---------     ---------
Operating income (loss)                                   (47,084)          41,459        36,263        25,323        20,851

Other income (expense)
           Interest income                                  1,571            1,620           813           549           465
           Interest expense                                (8,897)         (23,626)      (28,600)      (31,385)      (34,119)
           Rainbow royalty (3)                             (4,070)          (4,722)         (587)           --            --
           Rainbow Royalty Buyout (3)                          --               --       (19,000)           --            --
           Minority interest                                 (963)          (1,092)       (2,002)       (2,053)       (2,155)
           Other, net                                         301              139         1,025          (431)          924
                                                        ---------        ---------     ---------     ---------     ---------

Income (loss) before income taxes                         (59,142)          13,778       (12,088)       (7,997)      (14,034)
Income tax provision                                         (755)          (7,993)       (3,185)         (830)       (1,001)
                                                        ---------        ---------     ---------     ---------     ---------
Income (loss) before extraordinary item                   (59,897)           5,785       (15,273)       (8,827)      (15,035)
Extraordinary loss without tax benefit                         --               --       (42,033)           --            --
                                                        ---------        ---------     ---------     ---------     ---------
Net income (loss)                                         (59,897)           5,785       (57,306)       (8,827)      (15,035)

Special stock dividends                                      (362)         (11,264)       (3,551)       (1,697)           --
Premium on repurchase/redemption of
      Series B Special Stock                                   --             (710)      (16,553)           --            --
                                                        ---------        ---------     ---------     ---------     ---------
Net loss applicable to common shares                    $ (60,259)       $  (6,189)    $ (77,410)    $ (10,524)    $ (15,035)
                                                        =========        =========     =========     =========     =========

Basic net loss per common share (5)                     $  (16.22)       $   (0.68)    $   (8.47)    $   (1.09)    $   (1.47)
                                                        =========        =========     =========     =========     =========
</TABLE>

                                       29
<PAGE>   30
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000


ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)


                           FISCAL YEARS ENDED JUNE 30,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                             1996(1)        1997(4)      1998          1999          2000
                                            --------       --------    ---------     ---------     ---------
                                                          (IN 000'S, EXCEPT PER SHARE AMOUNTS)
<S>                                         <C>            <C>         <C>           <C>           <C>
BALANCE SHEET DATA
Cash and cash equivalents and
           securities available for sale    $ 48,057       $ 28,924    $  23,487     $  16,930     $  34,044
Working capital                              111,009        110,795      119,480       108,661       115,979
Total assets                                 375,504        352,016      366,837       356,307       351,287
Total long term debt,
           including current maturities      191,344        173,839      325,953       318,706       345,059
Series B Special Stock                        51,552         58,981           --            --            --
Total stockholders' equity (deficiency)       69,846         53,555      (23,748)      (30,408)      (50,795)
</TABLE>


(1)     The Company acquired BGII on June 18, 1996. Therefore the results of
        operations for the year ended June 30, 1996 include the results of
        operations of BGII for the last twelve days of that fiscal year.

(2)     Includes non-cash accounting loss on debenture conversion of $30.1
        million in fiscal year 1996 as a result of the conversion of the
        Company's Convertible Debentures into equity securities.

(3)     Represents royalty fee related to the HFS financing at the Rainbow
        Casino. The Company repurchased this royalty obligation from HFS on
        August 12, 1997.

(4)     See discussion of refinancing transaction completed in August 1997 in
        "Management's Discussion and Analysis of Financial Condition and Results
        of Operations - Liquidity and Capital Resources".

(5)     The earnings per share amounts have been restated to reflect the
        one-for-three-and-one-half reverse stock split effective February 1,
        1999.


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

Liquidity and Capital Resources

At June 30, 2000, the Company had $32.0 million in cash and cash equivalents,
$2.0 million in short-term investments, and $4.6 million in unborrowed
availability on its revolving credit facility in accordance with borrowing base
limitations in the bank credit agreement which is more fully described below. In
addition, the Company had net working capital of approximately $116.0 million,
an increase of approximately $7.3 million from June 30, 1999, which is explained
in the working capital section below. Consolidated cash and cash equivalents at
June 30, 2000 includes approximately $22.0 million of cash which is utilized in
Casino and Route Operations which is held in vaults, cages or change banks.

In August 1997 the Company completed a series of related transactions as
described below (the "Refinancing") which consisted of the private placement of
$150.0 million of 10% Senior Subordinated Notes and the closing of $230.0
million of bank financing. The bank financing provides for (i) term loans in the
aggregate amount of up to $140.0 million, comprised of a $75.0 million tranche
with a 7 1/2-year term (the "Tranche B Term Loan"), a $40.0 million tranche with
an 8-year term (the "Tranche C Term Loan") and a $25.0 million tranche with a 7
1/2-year term (the "Delayed Draw Term Facility," and together with the Tranche B
Term Loan and the Tranche C Term Loan, the "Term Loan Facilities"); and (ii) a
$90.0 million revolving credit facility with a 6-year term (later amended to
$80.0 million). At June 30, 2000, the borrowing base for the revolving credit
facility consists of eligible receivables and inventory, as defined in the bank
credit agreement, totaled $67.0 million.

As part of the Refinancing, the Company used the proceeds of the Senior
Subordinated Note offering, together with borrowings under the revolving credit
facility and the Term Loan Facilities and cash on hand, to fund (a) the

                                       30
<PAGE>   31
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

repurchase at a premium of substantially all of the Company's 12 7/8% Notes,
plus accrued interest to August 8, 1997 totaling $183.7 million, (b) the
redemption at liquidation value of all of the Company's Series B Preferred Stock
on September 8, 1997 totaling $77.6 million, (c) the purchase from HFS Gaming
Corporation of the right to receive royalty payments based on revenues of the
Rainbow Casino and the purchase of related debt owed to an HFS affiliate,
National Gaming Mississippi, Inc. on August 12, 1997 totaling $26.3 million and
(d) the payment of transaction fees and expenses totaling $16.5 million.
Additionally, in July 1997 the Company redeemed the remaining balance of its 7
1/2% Convertible Debentures at a price of 104, or a total of $1.7 million.

In conjunction with the Refinancing, the Company incurred charges of
approximately $77.6 million, including the $27.7 million premium on the
repurchase of the 12 7/8% Notes, $16.6 million for the difference between the
carrying value and the liquidation value of the Series B Preferred Stock and
$19.0 million for the Rainbow Casino royalty buyout.

Beginning in August 1998, the Company has received a series of consents from its
bank group in order to cure both technical and financial covenant defaults, and
to amend certain of the current and future financial maintenance covenants in
the credit agreement. At June 30, 2000, the Company is in compliance with such
covenants. The Company is also in compliance with the operational covenants
contained in the indenture for the Senior Subordinated Notes.

In October 1999, the Company received consents from its bank group to pursue the
sale of certain route and casino assets. In August 2000, the Company signed a
definitive agreement with UC Acquisitions Company, LLC, an independent
third-party gaming operator, for the sale of its Nevada-based route operations.
The gross selling price, which is based on a multiple of cash flows for the 12
month period prior to closing, is estimated to be approximately $118 million,
consisting of $6 million in preferred stock and $112 million is cash, which will
be utilized to pay down certain lease obligations, pay transactional fees and
expenses, with the remainder (estimated to be approximately $95 million) to be
used to reduce the Term Loans. This transaction is contingent on the buyer
obtaining suitable financing and obtaining approvals from various regulatory
bodies, a process which may take 12 months to complete.

Consistent with the Company's plan to expand the proprietary gaming operations
of its Bally Gaming and Systems business unit, the Company has increased its
investment in leased gaming equipment during the fiscal year ended June 30,
2000. The Company will continue the roll out, and thus increase its investment
in, these proprietary games and wide area progressive games in the future. The
Company is actively managing its working capital and other assets. As part of
the these efforts, during fiscal 2000, the Company received $1.0 million for the
release of an option it held to operate gaming machines at a dormant dog racing
track in Kansas, sold certain gaming management and development rights for $3.0
million plus $7.0 million in future contingent consideration, and entered into
sale and leaseback transactions for $3.2 million for gaming machines deployed in
its Nevada Route Operation. As part of this plan, similar dispositions of other
assets may continue. Additionally, the Fifth Amendment to the bank credit
agreement allows the Company to obtain third party financing for up to $15
million for is proprietary gaming operations of Bally Gaming and Systems. This
financing may be in the form of traditional secured borrowings or lease type
financing.

Management believes that cash flow from operating activities, cash and cash
equivalents held and the $80.0 million Revolving Credit Facility, as limited by
the borrowing base, will provide the Company with sufficient capital resources
and liquidity. At June 30, 2000, the Company had no material commitments for
capital expenditures.

                                       31
<PAGE>   32
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

WORKING CAPITAL

The following table presents the components of consolidated working capital at
June 30, 1999 and 2000:

<TABLE>
<CAPTION>

                                           Balance at June 30,
                                           -------------------
                                            1999          2000         Change
                                          --------      --------      --------
<S>                                       <C>           <C>           <C>
Cash and cash equivalents                 $ 16,930      $ 32,044      $ 15,114
Short-term investments                          --         2,000         2,000
Accounts and notes receivable, net          92,665        82,444       (10,221)
Inventories, net                            46,138        32,019       (14,119)
Other current assets                        11,423        11,198          (225)
                                          --------      --------      --------

 Total current assets                      167,156       159,705        (7,451)
Accounts payable                            17,372        10,367        (7,005)
Accrued liabilities                         39,196        32,323        (6,873)
Current maturities of long-term debt         1,927         1,036          (891)
                                          --------      --------      --------
Total current liabilities                   58,495        43,726       (14,769)
                                          --------      --------      --------
Net working capital                       $108,661      $115,979      $  7,318
                                          ========      ========      ========
</TABLE>

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 inventory due to management's efforts to reduce the levels of
finished goods, (iii) a net decrease in accounts receivable resulting from cash
collections and increases in bad debt reserves (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.

Cash Flow

During the year ended June 30, 2000, $3.0 million of cash was used in operating
activities resulting from the net loss for the year and cash used to increase
inventories and reductions in accounts payable.

During the year ended June 30, 2000, the Company used $9.8 million of cash in
investing activities resulting primarily from $13.0 million in capital
expenditures, $1.5 million of payments made in acquiring gaming rights for route
locations, and $2.8 million of payments made to acquire other long term assets.
The above cash uses were partially offset by $3.2 million in proceeds from
sales-leaseback transactions, $1.0 million received from the release of an
option the Company had to operate gaming machines at a dormant dog track in
Kansas and cash proceeds of $3.0 million from the sale of certain gaming
development and management rights.

During the year ended June 30, 2000, cash was provided by drawing down funds
from the revolving credit facility ($34.7 million), and was also used for
payments on long term debt ($6.5 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 financings are normally collateralized by such
equipment, the resale value of the collateral in the event of default may be
less than the amount financed. Accordingly, the Company 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.

Year 2000

The Year 2000 readiness issue, which was common to most businesses, arose from
the inability of certain information systems, and other time and date sensitive
products and systems, to properly recognize and process date-sensitive
information on and beyond January 1, 2000. The Company did not experience any
significant business or operations disruptions as a result of Year 2000 issues.


                                       32
<PAGE>   33
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000


Euro Currency Conversion

The Company's Bally Wulff subsidiary uses the German deutschmark as its
functional currency. The new Euro currency will replace the deutschmark 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. The Company's products can be brought into Euro compliance by moving a
switch inside the wall machine. The cost of the new front glass showing Euro
denominations will generally be borne by the customers.

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

                                       33
<PAGE>   34
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

RESULTS OF OPERATIONS

The following table presents the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA") and operating income by business unit
(with unusual items presented separately):

<TABLE>
<CAPTION>

                                                 Years ended June 30,
                                                 1998           1999           2000
                                               --------       --------       --------
<S>                                            <C>            <C>            <C>
EBITDA by business unit:
Bally Gaming and Systems                       $ 10,808       $  9,799       $ 12,385
Wall Machines and Amusement Games                18,661         10,150          3,583
Route Operations                                 24,577         24,860         24,503
Casino Operations                                20,781         21,672         25,954
Corporate expenses                              (16,051)       (18,054)       (14,688)
Unusual items                                       325             --         (4,098)
                                               --------       --------       --------
Total EBITDA                                   $ 59,101       $ 48,427       $ 47,639
                                               ========       ========       ========

Operating income (loss) by business unit:
Bally Gaming and Systems                       $  5,238       $  5,779       $  4,523
Wall Machines and Amusement Games                13,094          5,334         (2,193)
Route Operations                                 16,432         14,586         15,162
Casino Operations                                18,736         19,348         23,805
Corporate expenses                              (17,562)       (19,724)       (16,348)
Unusual items                                       325             --         (4,098)
                                               --------       --------       --------
Total Operating Income                         $ 36,263       $ 25,323       $ 20,851
                                               ========       ========       ========
</TABLE>

The Company believes that the analysis of EBITDA is a useful, however, this
information should not be construed as an alternative to net income (loss) or
any other GAAP measure of performance as an indicator of the Company's
performance or to GAAP-defined cash flows generated by operating, investing and
financing activities as an indicator of cash flows or a measure of liquidity.
EBITDA may not be comparable to similarly titled measures reported by other
companies.

2000 COMPARED WITH 1999

BALLY GAMING AND SYSTEMS

For the year ended June 30, 2000, Bally Gaming and Systems reported revenues of
$135.2 million, an increase of 6% compared to revenues of $127.8 million in the
prior year. Bally Gaming and Systems reported shipments of new gaming machines
of approximately 8,700 units, an 30% decrease compared to shipments of
approximately 12,300 in the prior year. This decrease was a result of declining
demand for the Company's core products and delays in bringing new product to
market. By market segment, Bally Gaming and Systems unit sales for the current
year consisted of approximately 1,370 units to the Nevada and Atlantic City
markets, 2,870 units to international markets and 4,460 units to riverboats,
Native American and other domestic markets. Systems reported shipments of 35,300
SDS units, a 59% increase compared to 22,300 units in the prior year. This
increase was primarily a result of shipments related to new casino openings and
to casinos acquired by Harrah's and Park Place Entertainment that previously
used competitors' systems. Revenues from recurring revenue sources totaled $27.1
million, an increase of 286% compared to revenues of $7.0 million in the prior
year period. Recurring revenues include revenue received from the operation of
the wide-area progressive system, fees received from the operation of certain
proprietary and niche games and SDS hardware and software maintenance fees.

For the year ended June 30, 2000, gross profit margins remained constant at
approximately 46%, which was attributed to the increase in higher margin
recurring revenues and SDS sales, offset by lower game sales margins due to low
unit volume. Bally Gaming and Systems reported operating income before unusual
items of $4.5 million, a decrease of 22% compared to operating income of $5.8
million in the prior year. The decrease in operating income resulted primarily
from higher depreciation expenses due to the continued roll out of progressive
gaming devices and higher

                                       34
<PAGE>   35
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000


provisions for uncollectible receivables. Research and development costs totaled
$12.6 million, a decrease of 9% over the prior year.

WALL MACHINES AND AMUSEMENT GAMES

For the year ended June 30, 2000, Wall Machines and Amusement Games reported
revenues of $68.9 million, a decrease of 24% compared to revenues of $90.8
million in the prior year. The decrease in revenues resulted primarily from a
18% decrease in the number of new wall machine units sold, a 3% decrease in the
selling price of new wall machines, excluding those sold as part of a new
single-site progressive jackpot system, and a 9% decrease in leased wall machine
and amusement game revenues, due primarily to lower market demand pending the
outcome of potential changes to laws regulating wall machines. In addition, due
to the potential changes in the laws regulating wall machines, which if passed
could have a favorable effect on demand in the future, current demand is soft
and will likely remain that way until the outcome of the proposed law changes is
known. The currency translation impact of the fluctuation of the German mark
versus the U.S. dollar decreased revenues by $7.9 million during the current
year.

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 June 30, 2000, a total of 5,500 machines were deployed in
the leasing program compared to 5,000 at June 30, 1999, an increase of 10%.

For the year ended June 30, 2000, gross profit margin decreased to 37% from 41%
in the prior year. The gross margin decrease resulted primarily from the
unfavorable impact of lower revenues, and increased competition which has led to
offering higher values on used machines taken on trade-ins and a lower fixed
cost absorption rate as well as lower sales of the higher margin jackpot
systems. Wall Machines and Amusement Games reported operating loss before
unusual items of ($2.2) million, compared to operating income of $5.3 million in
the prior year period.

ROUTE OPERATIONS

For the year ended June 30, 2000, the Route Operations business unit reported
total revenues of approximately $202.5 million, an increase of 15% compared to
revenues of $175.9 million in the prior year. Revenues from the Nevada route
operations increased to approximately $183.2 million or 19% over the prior year.
This improvement was attributable to an increase in the average net win per
gaming machine per day of 11% to $63.30 from $57.20 in the prior year and a 7%
increase in the weighted average number of gaming machines during the current
year to 7,800 units as compared to 7,300 units in the prior year. Gamblers'
Bonus, a cardless players club and player tracking system continued to have a
favorable impact on the net win per day. As of June 30, 2000, the Gamblers'
Bonus product was installed in over 3,500 gaming machines at approximately 345
locations statewide or 44% of the installed base of gaming machines. Revenues
from route operations in Louisiana totaled $19.2 million, a decrease of 11%
compared to the prior year. This decrease was primarily the result of a decline
in the net win per gaming machine per day of 4% to $77.50 from $80.50 in the
prior year and a 9% decrease in the average number of machines to 680 from 740
in the prior year resulting from the loss of two locations due to parish gaming
referendums.

For the year ended June 30, 2000, cost of revenues for Route Operations totaled
as a percentage of revenues, increased to 80% from 78% in the prior year. This
increase was primarily due to higher space lease and participation costs for the
Nevada route operations. Cost of route revenues for Route Operations includes
rents under both space lease and revenue sharing arrangements, gaming taxes and
direct labor including payroll taxes and benefits.

For the fiscal year ended June 30, 2000, the Route Operations business unit
reported operating income of $15.2 million, an increase of 4% compared to
operating income of $14.6 million in the prior year. The increase in operating
income resulted from the aforementioned increase in revenues, offset by an
increase in selling, general, and administrative expenses as a percentage of
revenues, principally marketing and promotion costs at the Nevada route
operations, and a higher provision for doubtful receivables for the Nevada route
operations.

CASINO OPERATIONS

For the year ended June 30, 2000, the Casino Operations business unit reported
revenues of $71.5 million, an increase of 12% compared to revenues of $63.7
million in the prior year. This improvement is due to a 9% increase in revenues

                                       35
<PAGE>   36
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

at the Rainbow Casino and a 22% increase in revenues at the Rail City Casino.
The improvement at the Rainbow Casino was attributable to a 16% increase in the
average number of gaming machines, offset by a 7% decrease in the net win per
day to $148, both of which are a result of the casino expansion completed during
the current fiscal year. The revenue improvement at the Rail City Casino was
attributable to an increase in the average gaming machine net win per day of 20%
to $78 from $65 in the prior year and a 7% increase in the average number of
gaming machines.

For the year ended June 30, 2000, the cost of revenues for Casino Operations as
a percentage of revenues, improved to 39% compared to 42% for the prior year.
This improvement was a result of the increase in revenues which were achieved
without incremental increases in certain operating costs. Cost of casino
revenues includes cost of goods sold, gaming taxes, rent and direct labor
including payroll taxes and benefits.

UNUSUAL ITEMS

During the year ended June 30, 2000, the Company recorded the following unusual
items:

-       Restructuring and related charges totaling $8.1 million. The
        restructuring and related costs were incurred pursuant to a plan adopted
        by the Company for staff reductions at the Bally Gaming and Systems,
        Wall Machine and Amusement Games, and at its corporate office. Included
        in the restructuring costs described above is a $1.9 million charge for
        a valuation reserve for certain inventory for the Australian market,
        which is included in the cost of gaming equipment and systems in the
        Consolidated Statement of Operations.

-       Gains from the sale of certain gaming management and development rights
        totaling $4.0 million.

There were no items classified as unusual in the fiscal year ended June 30,
1999.

CONSOLIDATED

Total revenues for the year ended June 30, 2000 were approximately $478.1
million, an increase of 4% compared to revenues of $458.2 million in the prior
year. Each of the Company's business units reported year over year growth in
revenues, except for its Wall Machines and Amusement Games business unit. Cost
of revenues as a percentage of total revenues increased slightly to 64% from 63%
in the prior year period.

Selling, general and administrative expenses for the year ended June 30, 2000
were approximately $105.2 million, an increase of 1% compared to costs of $104.1
million in the prior year. This increase was due to the increases in expenses at
all of the business units, except Wall Machine and Amusement Games and Corporate
Administrative costs.

Research and development costs for the year ended June 30, 2000 were
approximately $15.3 million, a decrease of 11% compared to costs of $17.2
million in the prior year, which is discussed above.

Depreciation and amortization for the year ended June 30, 2000 were
approximately $26.8 million, a 16% increase compared to $23.1 million in the
prior fiscal year. In the prior year the Company incurred higher levels of
research and development costs related to the launch of the wide-area
progressive system.

INTEREST INCOME AND EXPENSE AND INCOME TAXES

Net interest expense in the year ended June 30, 2000, increased to $33.7
million, an increase of 9% compared to the net interest expense of $30.8 million
in the prior year. The increase is due primarily to fees totaling $1.0 million
associated with amendments to the bank credit agreement, coupled with a higher
average amount of debt in the current year and higher interest rates.

The Company recorded an income tax provision of $1.0 million in the year ended
June 30, 2000, compared to a provision of $0.8 million in the prior year. The
current year provision is due primarily to establishing additional reserves for
open tax years currently under audit in Germany, and domestic state income
taxes. At June 30, 2000, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $75 million which are available to
offset future federal taxable income, if any, expiring in the years 2007 through
2020. At June 30, 2000 the Company had foreign tax credit carry forwards of
approximately $7.5 million and alternative minimum tax credit

                                       36
<PAGE>   37
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

(AMT) carry forwards of approximately $1.3 million. Foreign tax credits have
expiration dates ranging from 2001 to 2005 unless utilized prior to such time.
AMT credits are available to be carried forward indefinitely and may be utilized
against regular U.S. corporate tax to the extent it does not exceed computed AMT
calculations. In addition, approximately $2.0 million of the net operating loss
carryforwards cannot be utilized until fiscal year 2001, pursuant to Section 382
of the Internal Revenue Code.

1999 COMPARED WITH 1998

BALLY GAMING AND SYSTEMS

For the year ended June 30, 1999, Bally Gaming and Systems reported revenues of
$127.8 million, an increase of 17% compared to revenues of $109.6 million in the
fiscal year ended June 30, 1998. Bally Gaming and Systems reported shipments of
new gaming machines of approximately 12,300 units, an 8% decrease compared to
shipments of approximately 13,400 in the prior year. By market segment, Bally
Gaming and Systems unit sales for the current year consisted of approximately
2,700 units to the Nevada and Atlantic City markets, 7,300 units to
international markets and 2,300 units to riverboats, Native American and other
domestic markets. Systems shipments totaled 22,300 SDS units, compared to 23,900
in the prior year. This decrease was primarily a result of the timing of
shipments related to new casino openings and to casinos acquired by Harrah's and
Park Place Entertainment that previously used competitors' systems. Revenues
from recurring revenue sources were $7.0 million, an increase of 82% compared to
revenues of $3.8 million in the prior year period, which resulted from the
launch of the wide-are progressive system and increases in the installed base of
proprietary and niche games.

For the year ended June 30, 1999, gross profit margins improved to 45% from 44%
in the prior year period. The improvement was due primarily to a change in
product mix to higher margin gaming machines, an increase in higher margin SDS
unit revenues and higher revenues from machines that provide recurring revenues,
partially offset by an increase in the provision for inventory obsolescence in
the current year. Bally Gaming and Systems reported operating income of $5.8
million, an increase of 10% compared to operating income of $5.2 million in the
prior year. The increase in operating income resulted primarily from higher
revenues and improved margins and a decrease in depreciation as certain
intangible assets related to the acquisition of Bally Gaming International, Inc.
were fully amortized in the prior year, partially offset by higher selling,
general and administrative expenses, primarily higher marketing costs related to
new product launches and the implementation of a product management organization
focus, an increase in the provision for doubtful receivables, and an increase in
research and development costs. Research and development costs totaled $13.9
million, an increase of 10% over the prior year, resulting from the Company's
ongoing efforts to expand its new and existing product offerings.

WALL MACHINES AND AMUSEMENT GAMES

For the year ended June 30, 1999, Wall Machines and Amusement Games reported
revenues of $90.8 million, a decrease of 8% compared to revenues of $98.6
million in the prior year. The decrease in revenues resulted primarily from a
22% decrease in the number of new wall machine units sold, a 3% decrease in the
selling price of new wall machines, excluding those sold as part of a new
single-site progressive jackpot system, a 13% decrease in amusement game
revenues and a 9% decrease in leased wall machine revenues, all due primarily to
lower market demand pending the outcome of potential changes to laws regulating
wall machines. This was partially offset by sales of wall machines coupled with
a new single-site progressive jackpot system which resulted in a 13% overall
increase in average selling price of new machines. The Company does not foresee
any reversal of the pricing pressures in the near future. In addition, due to
the potential changes in the laws regulating wall machines, which if passed
could have a favorable effect on demand in the future, current demand is soft
and will likely remain that way until the outcome of the proposed law changes is
known. The currency translation impact of the fluctuation of the German mark
versus the U.S. dollar increased revenues by $2.1 million during the current
year.

The Wall Machines and Amusement Games business unit continued its leasing
program whereby new wall machines 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 June 30,
1999, a total of 5,000 machines were deployed in the leasing program compared to
5,700 at June 30, 1998, a decrease of 13%. This decrease was due to the
completion of a large lease program in September 1998 quarter that was not
renewed by Bally Wulff.

                                       37
<PAGE>   38
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000


For the year ended June 30, 1999, gross profit margin decreased to 41% from 45%
in the prior year. The gross margin decrease resulted primarily from the
unfavorable impact of lower revenues, increased competition which has led to
offering higher values on used machines taken on trade-ins and a lower fixed
cost absorption rate, partially offset by sales of the higher margin progressive
jackpot system. Wall Machines and Amusement Games reported operating income of
$5.3 million, a decrease of 59% compared to $13.1 million in the prior year
period. The decrease in operating income resulted primarily from the
aforementioned decrease in revenues and gross margins and an increase in
selling, general and administrative expenses, principally certain separation
accruals and a higher provision for doubtful receivables, partially offset by
lower depreciation expense resulting from a lower installed base of leased
equipment.

ROUTE OPERATIONS

For the year ended June 30, 1999, the Route Operations business unit reported
total revenues of approximately $175.9 million, an increase of 18% compared to
revenues of $148.5 million in the prior year. Revenues from the Nevada route
operations increased to approximately $154.2 million or 21% over the prior year.
This improvement was attributable to an increase in the average net win per
gaming machine per day of 7% to $57.20 from $53.70 in the prior year and a 13%
increase in the weighted average number of gaming machines during the current
year to 7,300 units as compared to 6,460 units in the prior year. Gamblers'
Bonus, a cardless players club and player tracking system continued to have a
favorable impact on the net win per day. As of June 30, 1998, the Gamblers'
Bonus product was installed in over 2,600 gaming machines at approximately 240
locations statewide or 35% of the installed base of gaming machines, up 29% over
June 30, 1999. Revenues from route operations in Louisiana improved to $21.7
million, an increase of 3% compared to the prior year. This increase was the
result primarily of an improvement in the net win per gaming machine per day of
4% to $80.50 from $77.40 in the prior year, partially offset by a 1% decrease in
the average number of machines to 740 from 750 in the prior year.

For the year ended June 30, 1999, cost of revenues for Route Operations as a
percentage of revenues, increased to 78% from 77% in the prior year. Cost of
revenues for the Nevada route operations increased, as a percent of related
revenues, increased to 80% from 79% in the prior year. The increase was due
primarily to lower margins on new and renewed locations (due to competitive
pressures), an increase in rental and participation payments on gaming machines
and higher direct payroll costs. Costs of revenues for route operations in
Louisiana increased, as a percent of related revenues, to 66% from 64% in the
prior year. The increase was due primarily to an increase in direct costs,
principally health insurance costs.

CASINO OPERATIONS

For the year ended June 30, 1999, the Casino Operations business unit reported
revenues of $63.7 million, an increase of 5% compared to revenues of $60.7
million in the prior year. This improvement is due to a 4% increase in revenues
at the Rainbow Casino and an 8% increase in revenues at the Rail City Casino.
The improvement at the Rainbow Casino was attributable to an increase in the
average gaming machine net win per day of 6% to $159 from $150 in the prior year
and a 2% increase in the average number of gaming machines. The revenue
improvement at the Rail City Casino was attributable to an increase in the
average gaming machine net win per day of 8% to $65 from $60 in the prior year
and an 8% increase in the average number of gaming machines.

For the year ended June 30, 1999, the cost of revenues for Casino Operations as
a percentage of revenues, improved to 42% compared to 43% for the prior year.

UNUSUAL ITEMS

There were no items classified as unusual in the fiscal year ended June 30,
1999. During the year ended June 30, 1998, the Company recorded the following
unusual items:

-       The Company settled a dispute with Alpha Hospitality and General
        Electric Credit Corporation concerning certain customer notes receivable
        on which the Company had certain recourse obligations. The Company
        contributed $2.5 million to the final settlement with the holder of the
        notes, and reversed $6.0 million of reserves previously established for
        these recourse obligations. In addition, as part of the settlement the
        Company became the owner of approximately 566,000 shares of Alpha
        Hospitality common stock, which trades

                                       38
<PAGE>   39
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

        on the NASDAQ Small Cap market. Pursuant to the limitations provided for
        in the settlement agreement, the Company subsequently sold these shares.

-       As a result of settling a dispute over the exclusive use of certain
        technologies and changes in gaming regulations, the Company evaluated
        the cash flow of certain of its technology assets, in accordance with
        the provisions of the Statement of Financial Accounting Standards No.
        121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
        Assets to be Disposed of," and determined certain items met the
        definition of having become impaired. During the year ended June 30,
        1998 the Company recorded write-downs totaling $2.8 million for these
        items.

-       The Company accrued $0.7 million for the present value of contractual
        payments due to a former member of the board of directors who was not
        re-elected to the board at the December 1997 annual shareholders
        meeting.

-       The Company accrued $0.6 million as restructuring charges for Bally
        Gaming and Systems.

-       The Company recorded a $1.6 million charge for final settlement of
        litigation related to the acquisition of BGII.

CONSOLIDATED

Total revenues for the year ended June 30, 1999 were approximately $458.2
million, an increase of 10% compared to revenues of $417.4 million in the prior
year. The increase is due primarily to the increases in revenues at the Bally
Gaming and Systems, Route Operations and Casino Operations business units,
partially offset by the decrease in revenues at the Wall Machines and Amusement
Games business unit. Cost of revenues as a percentage of total revenues
increased slightly to 63% from 62% in the prior year period.

Selling, general and administrative expenses for the year ended June 30, 1999
were approximately $104.1 million, an increase of 21% compared to costs of $86.3
million in the prior year. This increase was due to the increases in expenses at
all of the business units, an increase in corporate administrative costs,
principally higher payroll and related expenses, and a higher provision for
doubtful receivables.

Research and development costs for the year ended June 30, 1999 were
approximately $17.2 million, an increase of 9% compared to costs of $15.8
million in the prior year. This increase was due to an increase in costs at the
Bally Gaming and Systems and the Wall Machines and Amusement Games business
units to develop and support a greater number of products.

Depreciation and amortization for the year ended June 30, 1999, were
approximately $23.1 million, a slight increase of 1% compared to depreciation
and amortization of $22.8 million in the prior fiscal year. This increase was
due primarily to an increase in amortization of deferred financing costs and an
increase in depreciation at the Route Operations and Casino Operations business
units, mostly offset by a decrease in depreciation at the Bally Gaming and
Systems and Wall Machines and Amusement Games business units.

INTEREST INCOME AND EXPENSE AND INCOME TAXES

Net interest expense in the year ended June 30, 1999, increased to $30.8
million, an increase of 11% compared to the net interest expense of $27.8
million in the prior year. The increase is due primarily to a fee associated
with amending the bank credit agreement, coupled with a higher average amount of
debt in the current year, partially offset by lower interest rates.

The Company recorded an income tax provision of $0.8 million in the year ended
June 30, 1999, compared to a provision of $3.2 million in the prior year. The
current year provision is due primarily to establishing a valuation allowance
against deferred tax assets for the Wall Machine and Amusement business unit and
domestic state income taxes.

                                       39
<PAGE>   40
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

RISK FACTORS

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

The information contained in this Form 10-K and the Company's other filings with
the Securities Exchange Commission 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. Set forth below are certain important factors
that could cause actual results to differ materially from those in such "looking
forward" statements.

HIGH LEVERAGE; ABILITY TO SERVICE DEBT, LIQUIDITY

The Company has a substantial amount of indebtedness. As of June 30, 2000 the
aggregate outstanding principal amount of the Company's long-term indebtedness
including current maturities was $345.1 million. The Company also has available
to it up to $17.6 million in unborrowed capacity under the Revolving Credit
Facility. The Company had a net capital deficiency at June 30, 2000 of $50.8
million.

The Company's credit facility and indenture contain a number of significant
covenants that, among other things, restrict the ability of the Company and
certain of its subsidiaries to dispose of assets, incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions, enter into
certain acquisitions, repurchase equity interests (as defined) or subordinated
indebtedness, issue or sell equity interests of the Company's subsidiaries (as
defined), engage in mergers or consolidations, or engage in certain transactions
with subsidiaries and affiliates and otherwise restrict corporate activities.
There can be no assurance that such restrictions will not adversely affect the
Company's ability to finance its future operations or capital needs or engage in
other business activities that may be in the interest of the Company. In
addition, the bank credit facility also requires the Company to maintain
compliance with certain financial ratios. The ability of the Company to comply
with such ratios may be affected by events beyond the Company's control. A
breach of any of these covenants or the inability of the Company to comply with
the required financial ratios could result in a default under the bank credit
facility. In the event of any such default, the lenders under the new credit
facility could elect to declare all borrowings outstanding under the bank credit
facility, together with accrued interest and other fees, to be due and payable,
to require the Company to apply all of its available cash to repay such
borrowings or to prevent the Company from making debt service payments on the
Senior Subordinated Notes, any of which would be an event of default under the
Senior Subordinated Notes. If the Company were unable to repay any such
borrowings when due, the lenders could proceed against their collateral. If the
indebtedness under the bank credit facility or the Notes were to be accelerated,
there can be no assurance that the assets of the Company would be sufficient to
repay such indebtedness in full.

Due to the low amount of consolidated EBITDA and increased borrowings under the
credit facility, the Company did not meet the financial covenants in the bank
credit facility at both December 31, 1998 and March 31, 2000. The Company and
the banks amended the current and future financial maintenance covenants in the
bank credit facility effective December 31, 1998 and again at March 31, 2000.
Consent fees paid to the bank group totaled $0.5 million and $1.0 million in the
fiscal years ended June 30, 1999 and 2000, respectively. The Company is in
compliance with such amended covenants, but no assurance can be given that the
Company will continue to meet the amended covenants in the future.

The Company's obligations to make principal and interest payments on outstanding
indebtedness, and to comply with the covenants in the Indenture and the
agreements governing borrowings under the bank credit facility, will have
several important effects on its future operations including the following: (i)
the portion of the Company's cash flow from operations which will be dedicated
to the payment of principal and interest on its indebtedness will not be
available for other purposes; (ii) certain of the Company's borrowings are at
variable rates of interest, which could result in higher expense in the event of
increases in interest rates; (iii) the Company may be more vulnerable to
downturns in its business or in the general economy and may be restricted from
making acquisitions, introducing new technologies or exploiting business
opportunities; and (iv) the Company's ability to obtain additional financing

                                       40
<PAGE>   41
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

in the future for working capital, capital expenditures, general corporate or
other purposes may be impaired. Additionally, the Company's ability to meet its
debt service obligations and to reduce its total debt will be dependent upon the
Company's future performance, which will be subject to general economic and
regulatory conditions and to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control.

No assurance can be given that the Company will be able to generate the cash
flow necessary to permit the Company to meet its fixed charges and repayment
obligations. Any inability of the Company to service its fixed charges and
repayment obligations would have a significant adverse effect on the Company.

OPERATING HISTORY--RECENT LOSSES

The Company incurred net losses of $8.8 million for the fiscal year ended June
30, 1999 and $15.0 million for the year ended June 30, 2000, including certain
unusual charges. There can be no assurance that the Company will be profitable,
and that it will not incur unusual or non-recurring charges, in the future.

COMPETITION

Bally Gaming and Systems. The market for gaming machines is extremely
competitive, and there are a number of established, well-financed and well-known
companies producing machines that compete with each of Bally Gaming and Systems
product lines in each of Bally Gaming and Systems markets. The domestic market
for gaming machines is dominated by a single competitor, International Game
Technology ("IGT"), with a number of smaller competitors in the field. In
addition, certain technology-oriented companies have recently entered or may
enter the gaming machine market. Management believes that some of these
competitors have greater capital resources than the Company. Competition among
gaming machine manufacturers, particularly with respect to sales of gaming
machines to new and emerging markets, is based on competitive customer pricing
and financing terms, appeal to the player, product quality, and having an
extensive distribution and sales network. Sales to established casinos in Nevada
normally require completion of a successful trial period for the machines in the
casino.

The competition for the computerized monitoring systems currently consists of
IGT, Casino Data Systems and, to a lesser extent, Acres Gaming, Inc., Gaming
Systems International, Inc., Mikohn Gaming Corporation and Logical Solutions
International. Competition is keen in this market due to the number of providers
and the limited number of casinos and the jurisdictions in which they operate.
Pricing, product feature and function, accuracy, and reliability are all main
factors in determining a provider's success in selling its system. Bally Gaming
and Systems believes the future success of its operations will be determined by
its ability to bring new and innovative products to the marketplace while at the
same time maintaining the base of loyal existing customers.

Wall Machines and Amusements Games. Germany's wall machine manufacturing
industry is dominated by Bally Wulff and two of its competitors. Management
believes these three entities collectively account for more than 90% of the
entire market for wall machines, which exists almost exclusively in Germany.
Bally Wulff's two major competitors have greater resources than the Company and
own and operate a significant number of arcades, which gives them a competitive
advantage arising from a built-in market for their games and the ability to test
market new games in their own arcades. In addition, wall machines compete for
floor space in arcades with non-payout entertainment machines, which have
gathered an increasing amount of the space in arcades. These machines are not
subject to the strict German licensing requirements governing wall machines.
Bally Wulff has not fully participated in the non-payout entertainment machine
market.

The wall machine industry is subject to a number of regulations which are
currently being reviewed by the German legislature. The outcome of this review
and whether it will be favorable or unfavorable to Bally Wulff cannot be
predicted at this time. The potential for changes in these regulations is
currently having a negative demand on the market.

Route Operations. The competition for obtaining and renewing route contracts in
Nevada is high and continues to intensify. Such competition has, over time,
reduced the Company's gross profit margins for such operations. In addition,
such competition has required the Company to provide financial incentives to
retain or obtain certain route locations. Such incentives include long-term
lease commitments, guarantees of leases in favor of owners of local
establishments, substantial promotional allowances and advance deposits,
payments of lease rentals in advance, payment of one-time fees for the right to
operate gaming locations and loans for buildings and tenant-improvement

                                       41
<PAGE>   42
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

costs. Notwithstanding the Company's business strategy of emphasizing
profitability rather than market share, the future success of the Company's
Route Operations will continue to be dependent to some extent on its ability and
willingness to provide such financial inducements. Although the Company has
historically generated sufficient new route contracts to offset the loss of old
route contracts, due to increased competition, the increased sophistication and
bargaining power of customers and possibly other factors not yet known, there
can be no assurance that the Company will be able to obtain new route contracts
or renew or extend its route contracts upon their expiration or termination, or
that, if renewed or extended, the terms will be as favorable to the Company. In
Louisiana, the Company's Route Operations at the racetrack and OTBs compete with
various truck stops and locations with liquor licenses throughout the New
Orleans area, as well as riverboat gaming and one land-based casino which
re-opened in New Orleans in October 1999.

Casino Operations. The operation of casinos is also a highly competitive
business. The principal competitive factors in the industry include the quality
and location of the facility, the nature and quality of the amenities and
customer services offered and the implementation and success of marketing
programs. In Sparks, Nevada, the principal competition for the Company's
operations comes from larger casinos focusing on the local market. The Company's
Rainbow Casino in Vicksburg, Mississippi faces intense direct competition from
other gaming facilities serving the Vicksburg market. Competition from casinos
in nearby locations may also be reducing the market from which Vicksburg casinos
draw most of their patrons. Moreover, additional potential gaming sites remain
in and around Vicksburg and Sparks; some of these sites may be closer to larger
population centers and, if developed, might enjoy a competitive advantage over
the Company's casinos. Lady Luck Gaming Corporation owns a site in Vicksburg and
may develop a project that would include a dockside casino, hotel and related
amenities. Previously, Horseshoe Gaming, LLC had announced a casino hotel and
auto racing complex on the Big Black River between Vicksburg and Jackson,
Mississippi. The legality of that site for gaming is currently in litigation. At
this time management does not know which, if any, of these sites will be
developed. Both of these projects will be contingent on several factors
including regulatory approval and financing.

PRODUCT DEVELOPMENT

The future success of the Company depends to a large extent upon its ability to
design, manufacture and market technologically sophisticated and entertaining
products that achieve high levels of player acceptance. The development of a
successful new product or product design by a competitor could adversely affect
sales of the Company's products and force it to attempt to respond quickly with
its own competing products. Response speed is lower in jurisdictions requiring
product approvals prior to commercialization. The Company's plans with respect
to the introduction of more sophisticated technology into the electronic gaming
machine market are designed to lead to an increase in market share and
profitability for the Company. However, there is no assurance that any such
products will be developed, or that if developed they will receive necessary
regulatory approvals or be commercially successful. Although the Company is
developing a number of new products, there can be no guarantee of commercial
acceptance of any of its products.

The gaming industry is employing new technology in many new areas, and the
Company and its competitors continue to file for patents protecting such
technologies. Although the Company is not aware of any patent violations, there
can be no assurances that patents currently pending may be determined to have
infringed upon an existing patent held by a third party.

Bally Gaming and Systems has recently deployed new products that are placed in
casinos and earn recurring revenues and cash flows. The amount of revenues
earned is dependent on the earning power of the game. The games will likely have
a shorter life than more traditional games, and the Company will have to
continue to design and deploy successful games to maintain this stream of
revenue. There can be no assurance that the games recently deployed will be
successful or that the Company will be able to design and deploy new recurring
revenue games.

SALES TO NON-TRADITIONAL GAMING MARKETS

The continued growth of the non-traditional markets outside of Nevada and
Atlantic City for electronic gaming machines is contingent on the public's
acceptance of these markets and an ongoing regulatory approval process by
federal, state and local governmental authorities. The Company cannot predict
which new jurisdictions or markets, if any, will approve the operation of
electronic gaming machines, the timing of any such approval or the level of the

                                       42
<PAGE>   43
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

Company's participation in any such markets, or jurisdictions currently
permitting gaming will continue to do so in the future.

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 financings are normally collateralized by such
equipment, the resale value of the collateral in the event of default may be
less than the amount financed. Accordingly, the Company 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.

FOREIGN OPERATIONS

The Company's business in foreign markets is subject to the risks customarily
associated with such activities. These risks include fluctuations in foreign
currency exchange rates and controls, expropriation, nationalization and other
economic, tax and regulatory policies of local governments as well as the laws
and policies of the United States affecting foreign trade and investment. As of
June 30, 2000, Bally Gaming and Systems has $26.4 million of receivables from
countries outside of the United States most of which are denominated in U.S.
dollars. The Company does not generally enter into foreign exchange contracts to
hedge its exposure to foreign exchange rate fluctuations.

DEPENDENCE ON KEY PERSONNEL

The success of the Company will be dependent, to a significant extent, on the
continued services of a relatively small group of executive personnel. The loss
or unavailability of one or more of such executive officers or the inability to
attract or retain key employees in the future could have an adverse effect on
the Company's operations.

STRICT REGULATION BY GAMING AUTHORITIES

The manufacture and distribution of gaming machines and the conduct of gaming
operations are subject to extensive federal, state, local and foreign regulation
by various gaming authorities (each, a "Gaming Authority"). Although the laws
and regulations of the various jurisdictions in which the Company operates vary
in their technical requirements and are subject to amendment from time to time,
virtually all these jurisdictions require licenses, permits, documentation of
the qualification, including evidence of integrity and financial stability, and
other forms of approval for companies engaged in gaming operations and the
manufacture and distribution of gaming machines as well as for the officers,
directors, major stockholders and key personnel of such companies. The Company
and its key personnel have obtained, or applied for, all government licenses,
registrations, findings of suitability, permits and approvals necessary for the
manufacture and distribution, and operation where permitted, of its gaming
machines in the jurisdictions in which it currently does business. However,
there can be no assurance that such licenses, registrations, findings of
suitability, permits or approvals will be given or renewed in the future or that
the Company will obtain the licenses necessary to operate in emerging markets.

During the past twelve months, the regulations governing the conduct of gaming
for route locations in Nevada have been modified. While the Company believes
such regulations will not significantly impact its operations or financial
results, no assurance can be given that future changes in regulations will not
be enacted that would negatively impact operations or financial results.

The Company's business is dependent on regulatory requirements. For example,
recurring demand exists for Bally Wulff's products because German regulations
limit the permissible use of wall machines to a period of four years. A change
in applicable regulations could adversely affect the market for the Company's
products and services.

The Company currently has an agreement with Fair Grounds Corporation, Jefferson
Downs Corporation and Finish Line Management Corporation to be the exclusive
operator of video poker machines at the only racetrack and ten associated OTBs
in the greater New Orleans area. On November 5, 1996 voters in Louisiana
approved a proposition to eliminate video poker in one of the seven parishes in
which the Company operates gaming machines in OTBs in

                                       43
<PAGE>   44
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

the greater New Orleans area. These operations also depend on the financial
viability of the racetrack and the OTBs, which is beyond the control of the
Company. See "Business--Gaming Regulations and Licensing".

Additionally, there can be no assurance that any regulatory agency will not
enact new rules or change regulations that would negatively impact the Company's
ability to operate or its financial results.

GAMING TAXES AND VALUE ADDED TAXES

Gaming operators are typically subject to significant taxes and fees in addition
to corporate and state income taxes, and such taxes and fees are subject to
increase at any time. Any material increase in these taxes or fees, which could
occur prospectively or retroactively, would adversely affect the Company. Sales
of Bally Wulff's products in Germany are generally subject to value added taxes
("V.A.T."). During fiscal 2000, Bally Wulff increased the amount of tax reserves
by $0.5 million (to a total reserve of $0.8 million) as a result of developments
in ongoing quadrennial audits of Wulff's tax returns for the years 1992 through
1995. The German tax authorities have proposed preliminary adjustments of $0.3
million, which has been accrued. The German tax authorities have not yet issued
the final assessment from their quadrennial audits.

The Company pays and expects to continue to pay substantial taxes and fees in
Nevada, Louisiana and Mississippi and expects to pay substantial taxes and fees
in any other jurisdiction in which it conducts gaming operations. There can be
no assurance as to future changes in taxation on gaming operations.

CHANGE OF CONTROL

Upon the occurrence of a Change of Control (as defined), each holder of the
Senior Subordinated Notes may require the Company to repurchase the Senior
Subordinated Notes held by such holder at 101% of the principal amount thereof,
plus accrued interest to the date of repurchase. The bank credit facility
prohibits the Company from purchasing any Senior Subordinated Notes, and
provides that the occurrence of certain change of control events with respect to
the Company would constitute a default thereunder. In the event of a change of
control, the Company must offer to repay all borrowings under the bank credit
facility or obtain the consent of its lenders under the credit agreement to the
purchase of Senior Subordinated Notes. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing Senior Subordinated Notes. In such case, the Company's failure to
repurchase tendered Senior Subordinated Notes would constitute a default under
the indenture, which, in turn, would constitute a default under the credit
facility. There can be no assurance that the Company will have the financial
ability to purchase the Senior Subordinated Notes on the occurrence of a change
of control. There can be no assurance that the Company will be able to comply
with all of its obligations under the new credit facility, the indenture, and
its other indebtedness on the occurrence of a change of control.

CURRENCY RATE FLUCTUATIONS

The Company derives revenues from its non-U.S. subsidiaries, all of which
revenues are denominated in their local currencies, and their results are
affected by changes in the relative values of non-U.S. currencies and the U.S.
dollar. Most of the currencies in countries in which the Company has foreign
operations weakened versus the U.S. dollar in 1999 and 2000, which resulted in
assets and liabilities denominated in local currencies being translated into
fewer dollars. The Company does not currently utilize hedging instruments.

MARKET RISKS

During the normal course of business the Company is routinely subjected to a
variety of market risks, examples of which include, but are not limited to,
interest and currency rate movements, collectibility of accounts and notes
receivable, and recoverability of residual values on leased assets. The Company
constantly assesses these risks and has established policies and practices
designed to protect against the adverse effects of these and other potential
exposures. Although the Company does not anticipate any material losses in these
risk areas, no assurances can be made that material losses will not be incurred
in these areas in the future.

The Company has performed a sensitivity analysis of its financial instruments,
which consist of the Company's cash and cash equivalents and debt. The Company
has no derivative financial instruments. In performing the sensitivity

                                       44
<PAGE>   45
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

analysis, the Company defines risk of loss as the hypothetical impact on
earnings, of changes in the market interest rates or currency exchange rates.

The results of the sensitivity analysis at June 30, 2000, are as follows:

Interest Rate Risk:

The Company had total debt as of June 30, 2000 of $345.1 million, of which
$132.2 million of borrowings under the Term Loan Facilities and $40.0 million of
borrowings on the Revolving Credit Facility are at a floating rate based on
LIBOR and $22.4 million of German borrowings on revolving credit facilities are
at a floating rate based on the Eurodeutschmark borrowing rate. If the LIBOR and
Eurodeutschmark rates were each to increase or decrease by 100 basis points,
with all other factors remaining constant, earnings would decrease or increase
by approximately $2.0 million on a pre-tax basis, all other factors remaining
constant.

Foreign Currency Exchange Rate Risk:

The Company has subsidiaries with the following functional currencies: German
Deutschemark, Australian Dollar and South African Rand, although the only
subsidiaries currently with material amounts of assets, liabilities and revenues
are in Germany. If the German deutschemark declined 10% against the U.S. dollar,
there would be a corresponding decrease in earnings reported in the consolidated
group, of approximately $0.6 million. Such a change in the German deutschemark
would result in an immaterial transaction loss, but would result in a charge to
accumulated other comprehensive loss, which is a component of stockholder's
equity, of approximately $4.7 million, all other factors remaining constant.

ESTIMATES

The Company's financial statements are prepared using estimates and assumptions
that affect the reported amounts of assets and liabilities. Actual results may
differ from these estimates either favorably or unfavorably, which may impact
future results.

ITEM 7A.   QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Item 7 of this Report- "Risk Factors- Currency Rate Fluctuations and
Market Risks."

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements, including the notes thereto,
and supplementary financial information are listed in Part IV, Item 14, of this
Report and are included after the signature page beginning at page F-1.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE

Effective June 1, 2000, Alliance Gaming Corporation (the "Company") dismissed
KPMG LLP ("KPMG"). The decision to change accountants was approved by the Audit
Committee and the Board of Directors of the Company.

The reports of KPMG on the Company's consolidated balance sheets as of June 30,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1999, did not contain an adverse opinion or disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope, or
accounting principles.

There were no disagreements between the Company and KPMG as to any matter of
accounting principles or practices, financial statement disclosure, or audit
scope or procedure, which disagreements, if not resolved to the satisfaction of
KPMG, would have caused it to make a reference to the subject matter of the
disagreement in connection with its reports on the financial statements for such
periods within the meaning of Item 304 (a)(1)(iv) of Regulation S-K.

                                       45
<PAGE>   46
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

Effective June 1, 2000, the Company engaged the firm of Arthur Andersen LLP as
independent public accountants for the Company's fiscal year ending June 30,
2000 to replace KPMG. The Company's Board of Directors approved the selection of
Arthur Andersen LLP as independent accountants upon the recommendation of the
Company's Audit Committee.

PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference from the
Proxy Statement, which will be filed with the Securities and Exchange Commission
within 120 days of the end of the Company's fiscal year covered by this report.

ITEM 11.   EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the
Proxy Statement, which will be filed with the Securities and Exchange Commission
within 120 days of the end of the Company's fiscal year covered by this report.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
Proxy Statement, which will be filed with the Securities and Exchange Commission
within 120 days of the end of the Company's fiscal year covered by this report.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
Proxy Statement which will be filed with the Securities and Exchange Commission
within 120 days of the end of the Company's fiscal year covered by this report.

                                       46
<PAGE>   47
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

PART IV
<TABLE>
<CAPTION>

<S>        <C>                                                                                                         <C>
ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)        Documents filed as part of this report:                                                                     PAGE
                                                                                                                       ----

1.         Financial Statements:

           Reports of Independent Public Accountants                                                                   F-1 - F-2

           Consolidated Balance Sheets as of June 30, 1999 and 2000                                                    F-3

           Consolidated Statements of Operations for the Years Ended June 30, 1998, 1999 and 2000                      F-4

           Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended June 30,
           1998, 1999 and 2000                                                                                         F-5

           Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1999 and 2000                      F-6

           Notes to Consolidated Financial Statements                                                                  F-7

2.         Consolidated Supplemental Schedules:

           Not applicable.

3.         Exhibits:
</TABLE>


EXHIBIT
NUMBER          DESCRIPTION
------          -----------

[S]        [C]

2.1         Agreement and Plan of Merger among Alliance, BGII Acquisition Corp.
            and BGII, dated as of October 18, 1995, as amended and restated
            (incorporated herein by reference to Annex I to the prospectus
            included in Alliance's Form S-4, Registration Number 333-02799 ).

2.2         Basic Agreement, dated as of October 29, 1993, among United Gaming,
            Inc., The Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh
            Seippel, and exhibits thereto (incorporated herein by reference to
            Alliance's Form 8-K dated October 29, 1993).

2.3         Consolidation Agreement, dated March 29, 1995 among United Gaming
            Rainbow, Inc., RCC, RCVP, NGM, HFS, National Gaming Corporation,
            Rainbow Development Corporation and Leigh Seippel and John A.
            Barrett, Jr. (incorporated herein by reference to Alliance's Form
            8-K dated March 29, 1995).

3.1         Restated Articles of Incorporation of the Registrant, as amended
            (incorporated herein by reference to Exhibit 3.1 to Alliance's Form
            S-2, Registration Number 33-72990).

3.2         Revised and Amended By-Laws of the Registrant (incorporated herein
            by reference to Alliance's Form 10-Q for the quarter ended December
            31, 1997.)

3.3         Certificate of Designations, Preferences, and Relative,
            Participating, Optional and Other Special Rights of Special Stock
            and Qualifications, Limitations and Restrictions of 11 1/2%
            Non-Voting, Pay-in-Kind Special Stock, Series E (incorporated herein
            by reference to Exhibit 9(c)(5) to Amendment No. 1 to Alliance's
            Schedule S-4 dated May 9, 1996).

                                       47
<PAGE>   48
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>

EXHIBIT
NUMBER               DESCRIPTION
------               -----------

<S>        <C>
4.1        Form of Indenture among the Company, certain Guarantors referred to
           therein and United States Trust Company of New York, as Trustee, in
           respect of Alliance's 10% Senior Subordinated Notes due 2007
           (including form of Senior Subordinated Note and Guarantee)
           (incorporated by reference to Alliance's Form S-4 dated December 1,
           1997).

4.2        Credit Agreement among Alliance Gaming Corporation, Bally Wulff
           Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders, and
           Credit Suisse First Boston, dated August 8, 1997 (incorporated herein
           by reference to the Company's annual report on Form 10-K dated June
           30 1997).

4.3        First Amendment and Consent among Alliance Gaming Corporation, Bally
           Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders,
           and Credit Suisse First Boston, dated August 31, 1998 (incorporated
           herein by reference to the Company's annual report on Form 10-K dated
           June 30, 1998).

4.4        Second Amendment and Consent among Alliance Gaming Corporation, Bally
           Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders,
           and Credit Suisse First Boston, dated January 27, 1999 (incorporated
           herein by reference to the Company's quarterly report on Form 10-Q
           dated December 30, 1998).

4.5        Third Amendment and Consent among Alliance Gaming Corporation, Bally
           Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders,
           and Credit Suisse First Boston as administrative agent dated October
           28, 1999 (omits certain information that has been filed separately
           with the Commission, and is incorporated herein by reference to the
           Company's Form 10Q dated September 30, 1999).

4.6        Fourth Amendment and Consent among Alliance Gaming Corporation, Bally
           Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders,
           and Credit Suisse First Boston as administrative agent dated December
           16, 1999 (incorporated herein by reference to the Company's Form 10Q
           dated December 31, 1999).

4.7        Fifth Amendment and Consent among Alliance Gaming Corporation, Bally
           Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders,
           and Credit Suisse First Boston as administrative agent dated April
           24, 2000 (incorporated herein by reference to the Company's Form 10Q
           dated March 31, 2000).

4.8        Sixth Amendment and Consent among Alliance Gaming Corporation, Bally
           Wulff Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders,
           and Credit Suisse First Boston as administrative agent dated May 4,
           2000 (incorporated herein by reference to the Company's Form 10Q
           dated March 31, 2000).

4.10       Rights Agreement dated as of March 9, 1998 between the Company and
           American Stock Transfer & Trust Company (incorporated herein by
           reference to Form 8-A dated March 10, 1998).

4.11       First Amendment to the Rights Agreement dated as of September 15,
           1998 between the Company and American Stock Transfer & Trust Company
           (incorporated herein by reference to the Company's annual report on
           Form 10-K dated June 30, 1998).
</TABLE>

                                       48
<PAGE>   49
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000

<TABLE>
<CAPTION>

EXHIBIT
NUMBER               DESCRIPTION
------               -----------

<S>         <C>
4.12        Form of Certificate of Designations with respect to Series F Special
            Stock (attached as Exhibit A to the Rights Agreement) (incorporated
            herein by reference to Form 8-A dated March 10, 1998).

4.13        Form of Right Certificate (attached as Exhibit B to the Rights
            Agreement) (incorporated herein by reference to Form 8-A dated March
            10, 1998).

4.14        Summary of Rights to Purchase Series F Special Shares (attached as
            Exhibit C to the Rights Agreement) (incorporated herein by reference
            to Form 8-A dated March 10, 1998).

10.4        Alliance Gaming Corporation 1996 Long Term Incentive Plan
            (incorporated herein by reference to the Company's Form S-8 filed
            August 12, 1997).*

10.5        Letter of Agreement dated June 25, 1993 among United Gaming, Inc.
            and Kirkland-Ft. Worth Investment Partners, L.P., Kirkland
            Investment Corporation and as to certain provisions, Alfred H.
            Wilms, including Exhibit A (Form of Securities Purchase Agreement),
            Exhibit B (Form of Stockholders Agreement), Exhibit C (Form of
            Certificate of Designations of Non-Voting Junior Convertible
            Preferred Stock), Exhibit D (Form of Warrant Agreement), and Exhibit
            E (Form of press release) thereto (incorporated herein by reference
            to Alliance's Form 8-K dated June 25, 1993).

10.6        Advisory Agreement, dated June 25, 1993 among United Gaming, Inc.,
            Gaming Systems Advisors, L.P. and, as to certain provisions, Mr.
            Alfred H. Wilms, including Exhibit A (Form of Warrant Agreement) and
            Exhibit B (Form of press release) thereto (incorporated herein by
            reference to Alliance's Form 8-K dated June 25, 1993).

10.7        United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan
            (incorporated herein by reference to Alliance's Form S-8
            Registration Number 33-45811 and Registration Number 33-75308).*

10.8        Gaming and Technology, Inc. 1984 Employee Stock Option Plan
            (incorporated herein by reference to Alliance's Form S-8
            Registration Number 2-98777).*

10.9        Agreement, dated as of September 14, 1993, by and among United
            Gaming, Inc., Kirkland-Ft. Worth Investments Partners, L.P.,
            Kirkland Investment Corporation, Gaming Systems Advisors, L.P. and
            Alfred H. Wilms (incorporated herein by reference to Alliance's Form
            8-K dated September 21, 1993).

10.12       Stockholders Agreement, dated as of September 21, 1993, by and among
            United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P.,
            and Alfred H. Wilms (incorporated herein by reference to Alliance's
            Form 8-K dated September 21, 1993).

10.13       Amendment to Stockholders Agreement dated as of October 20, 1994
            (incorporated herein by reference to Alliance's Form S-8
            Registration Number 33-45811 and Registration Number 33-75308).
</TABLE>


                                       49
<PAGE>   50
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>

EXHIBIT
NUMBER               DESCRIPTION
------               -----------

<S>         <C>
10.14       Selling Stockholder Letter Agreement dated as of March 20, 1995
            (incorporated herein by reference to Alliance's Form S-3
            Registration Number 33-58233).

10.15       Securities Purchase Agreement, dated as of September 21, 1993, by
            and among United Gaming, Inc., Kirkland-Ft. Worth Investment
            Partners, L.P. and Kirkland Investment Corporation (incorporated
            herein by reference to Alliance's Form 8-K dated September 21,
            1993).

10.19       Management Agreement, dated as of October 29, 1993, among Rainbow
            Casino-Vicksburg Partnership, L.P., Rainbow Casino Corporation and
            Mississippi Ventures, Inc., as manager (incorporated herein by
            reference to Alliance's Form 8-K dated October 29, 1993).

10.28       Letter Agreement, dated as of June 29,1994, among United Gaming,
            Inc., Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh
            Seippel, consented to by HFS Gaming Corporation (incorporated herein
            by reference to Alliance's Form 8-K dated August 11, 1994).

10.29       Letter Agreement, dated as of July 16, 1994, among United Gaming,
            Inc., Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh
            Seippel, consented to by HFS Gaming Corporation (incorporated herein
            by reference to Alliance's Form 8-K dated August 11, 1994).

10.30       Second Amendment to Casino Financing Agreement, dated as of August
            11, 1994, among United Gaming, Inc., United Gaming Rainbow, Inc.,
            Rainbow Casino-Vicksburg Partnership, L.P., Rainbow Casino
            Corporation, John A. Barrett, Jr., Leigh Seippel and HFS Gaming
            Corporation (incorporated herein by reference to Alliance's Form 8-K
            dated August 11, 1994).

10.31       Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P.,
            dated as of July 8, 1994 (incorporated herein by reference to
            Alliance's Form 8-K dated August 11, 1994).

10.32       Second Amended and Restated Agreement of Limited Partnership, dated
            March 29,1995, between United Gaming Rainbow and Rainbow Casino
            Corporation (incorporated herein by reference to Alliance's Form 8-K
            dated March 29, 1995).

10.43       Letter Agreement, dated March 29, 1995, among United Gaming Rainbow,
            RCC, Leigh Seippel, John A. Barrett, Jr. and Butler, Snow, O'Mara,
            Stevens & Cannada (incorporated herein by reference to Alliance's
            Form 8-K dated March 29, 1995).

10.44       Class A Note Payable, dated March 29, 1995, issued by RCVP to United
            Gaming Rainbow (incorporated herein by reference to Alliance's Form
            8-K dated March 29, 1995).

10.45       Class B Note Payable, dated March 29, 1995, issued by RCVP to United
            Gaming Rainbow (incorporated herein by reference to Alliance's Form
            8-K dated March 29, 1995).

10.46       Class B Note Payable, dated March 29, 1995, issued by RCVP to
            National Gaming Mississippi, Inc. (incorporated herein by reference
            to Alliance's Form 8-K dated March 29, 1995).

10.50       Trademark License Agreement, dated November 11, 1991 between Bally
            Manufacturing Corporation and Bally Gaming International, Inc.
            (incorporated herein by reference to exhibit 10(i)(d) included in
            BGII's Annual Report on Form 10-K for the fiscal year ended December
            31, 1991).
</TABLE>

                                       50
<PAGE>   51

<TABLE>
<CAPTION>

EXHIBIT
NUMBER               DESCRIPTION
------               -----------
<S>         <C>
10.51       Amended and Restated Trademark License Agreement, dated July 8,
            1992, by and between Bally Gaming International, Inc. and Bally
            Manufacturing Corporation (incorporated herein by reference to
            exhibit 10(i)(d) included in BGII's Registration Statement on Form
            S-1 No. 33-48347 filed on July 9, 1992).

10.53       Second Amendment to Trademark License Agreement and Settlement
            Agreement, dated March 31, 1995, by and between Bally Entertainment
            Corporation and Bally Gaming International, Inc. (incorporated
            herein by reference to Exhibit I, included in BGII's Current Report
            on Form 8-K dated April 3, 1995).

10.54       Third Amendment to Trademark License Agreement and Settlement
            Agreement, dated May 10, 1996, by and between Bally Entertainment
            Corporation, Alliance Gaming Corporation and BGII Acquisition Corp.
            (incorporated by reference to exhibit 10.77 to S-2 Registration
            Statement No. 333-02147).


10.65       Employment Agreement between Hans Kloss and Alliance Gaming
            Corporation dated July 1, 1998 (incorporated herein by reference).*

10.72       Employment Agreement Supplement, dated as of August 29, 1996,
            between the Company and Joel Kirschbaum (incorporated by reference
            to the Company quarterly report on Form 10-Q for March 31, 1997).*

10.73       Employment Agreement Supplement, dated as of August 29, 1996,
            between the Company and Anthony DiCesare (incorporated by reference
            to the Company quarterly report on Form 10-Q for March 31, 1997).*

10.76       Employment Agreement, dated July 1, 1997 between the Company and
            Joel Kirschbaum (incorporated herein by reference to the Company's
            Annual Report on Form 10-K dated June 30 1997).*

10.77       Employment Agreement, dated July 1, 1997 between the Company and
            Anthony DiCesare (incorporated herein by reference to the Company's
            Annual Report on Form 10-K dated June 30 1997).*

10.78       Agreement, between the Company and Kirkland Investment Corporation
            dated July 1, 1997 (incorporated herein by reference to the
            Company's Annual Report on Form 10-K dated June 30 1997).

10.79       Amendment Number 1 to the agreement between the Company and Kirkland
            Investment Corporation dated July 1, 1997 (incorporated herein by
            reference to the Company's Annual Report on Form 10-K dated June 30
            1997).

10.80       Amended and Restated Employment Agreement, effective November 4,
            1999, between the Company and Robert L. Miodunski. (incorporated by
            reference to the Company's quarterly report on Form 10-Q for
            September 30, 1999).

10.81       Amendment to Employment Agreement between the Company and Anthony L.
            DiCesare, effective January 4, 2000, (incorporated by reference to
            the Company's quarterly report on Form 10-Q for March 31, 2000).

10.82       Amendment to Employment Agreement between the Company and Joel
            Kirschbaum, effective January 4, 2000, (incorporated by reference to
            the Company's quarterly report on Form 10-Q for March 31, 2000).

10.83       Amendment #2 to the Agreement between the Company and Kirkland
            Investment Corporation effective January 4, 2000, (incorporated by
            reference to the Company's quarterly report on Form 10-Q for March
            31, 2000).

10.84       Purchase Agreement dated as of August 11, 2000 among UC Acquisition
            Company of Nevada, LLC, Alliance Gaming Corporation, and APT Games,
            Inc. with respect to United Coin Machine Co.
</TABLE>

                                       51
<PAGE>   52
                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
EXHIBIT
NUMBER               DESCRIPTION
------               -----------

<S>        <C>
21         Subsidiaries of the Registrant.

23.1       Consent of Arthur Andersen, LLP

23.2       Consent of KPMG LLP

27.1       Financial Data Schedule

*          Management contract or compensatory plan or arrangement.

(b)        Reports on Form 8-K:

           On June 6, 2000, the Company filed a report on Form 8-K, reporting
           that the Company had dismissed KPMG LLP as the Company's independent
           accountants, and that the Board of Directors had engaged Arthur
           Andersen LLP.

(c)        See Item 14(a)(3) above.

(d)        See Item 14(a)(2) above.
</TABLE>

                                       52
<PAGE>   53

                           ALLIANCE GAMING CORPORATION
                                    FORM 10-K

                            YEAR ENDED JUNE 30, 2000


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

ALLIANCE GAMING CORPORATION                  DATED:   September  27, 2000


By         /s/ Robert L. Miodunski
  -------------------------------------------
           Robert L. Miodunski,
           Director, President and Chief
           Operating Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

 Name                                          Title                                              Date
 ----                                          -----                                              ----
<S>                                            <C>                                                <C>
/s/ Robert L. Miodunski                        Director, President and Chief Operating            September  27, 2000
----------------------------------             Officer (Principal Executive Officer)
Robert L. Miodunski


/s/ Robert L. Saxton                           Sr. Vice President, Secretary, Treasurer           September  27, 2000
----------------------------------             and Chief Financial Officer (Principal
Robert L. Saxton                               Financial and Accounting Officer)



/s/ Jacques Andre                              Director                                           September  27, 2000
----------------------------------
Jacques Andre


/s/ Anthony DiCesare                           Director                                           September  27, 2000
----------------------------------
Anthony DiCesare


/s/ Joel Kirschbaum                            Director                                           September  27, 2000
----------------------------------
Joel Kirschbaum


/s/ David Robbins                              Director and Chairman of the Board                 September  27, 2000
----------------------------------
David Robbins

                                               Director
----------------------------------
Morton Topfer
</TABLE>

                                       53
<PAGE>   54


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


The Board of Directors and Stockholders of
Alliance Gaming Corporation:

We have audited the accompanying consolidated balance sheet of Alliance Gaming
Corporation and Subsidiaries as of June 30, 2000 and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
the year ended June 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alliance Gaming
Corporation and Subsidiaries as of June 30, 2000, and the results of their
operations and their cash flows for the year ended June 30, 2000, in conformity
with accounting principles generally accepted in the United States.




                                              Arthur Andersen LLP





Las Vegas, Nevada
August 16, 2000


<PAGE>   55



                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Stockholders
Alliance Gaming Corporation:

We have audited the accompanying consolidated balance sheet of Alliance Gaming
Corporation and Subsidiaries as of June 30, 1999 and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
each of the years in the two-year period ended June 30, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alliance Gaming
Corporation and Subsidiaries as of June 30, 1999, and the results of their
operations and their cash flows for each of the years in the two-year period
ended June 30, 1999, in conformity with accounting principles generally accepted
in the United States.




                                                        KPMG LLP





Phoenix, Arizona
August 11, 1999



<PAGE>   56


                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                         (In 000's except share amounts)

                                     ASSETS
<TABLE>
<CAPTION>


                                                                                              June 30,        June 30,
                                                                                                1999            2000
                                                                                             ---------       ---------
<S>                                                                                          <C>             <C>
Current assets:
   Cash and cash equivalents                                                                 $  16,930       $  32,044
    Short-term investments                                                                          --           2,000
   Accounts and notes receivable, net of allowance for doubtful accounts
       of $12,705 and $19,255                                                                   92,665          82,444
   Inventories, net of reserves of $7,077 and $6,660                                            46,138          32,019
   Other current assets                                                                         11,423          11,198
                                                                                             ---------       ---------
           Total current assets                                                                167,156         159,705
                                                                                             ---------       ---------

Long-term notes receivable, net of allowance for doubtful accounts
    of  $991 and $954                                                                            5,782           4,043
Leased gaming equipment, net of accumulated depreciation of $5,111 and $10,713                  10,981          16,959
Property, plant and equipment, net of accumulated depreciation and amortization
   of $51,686 and $60,028                                                                       74,159          76,823
Excess of costs over net assets of acquired businesses,
     net of accumulated amortization of $4,604 and $5,946                                       57,593          54,994
Intangible assets, net of accumulated amortization of $18,351 and $20,609                       26,854          21,850
Deferred tax assets, net of valuation allowance                                                  8,982          12,174
Other assets, net of reserves of $3,468 and $1,813                                               4,800           4,739
                                                                                             ---------       ---------
                                                                                             $ 356,307       $ 351,287
                                                                                             =========       =========

                                               LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
   Accounts payable                                                                          $  17,372       $  10,367
   Accrued liabilities                                                                          39,196          32,323
   Current maturities of long term debt                                                          1,927           1,036
                                                                                             ---------       ---------
           Total current liabilities                                                            58,495          43,726
                                                                                             ---------       ---------
Long term debt, net                                                                            316,779         344,023
Other liabilities                                                                                9,458          12,972
                                                                                             ---------       ---------
           Total liabilities                                                                   384,732         400,721
                                                                                             ---------       ---------

Minority interest                                                                                1,983           1,361

Commitments and contingencies
Stockholders' deficiency:
   Special Stock, 10,000,000 shares authorized:
       Series E, $100 liquidation value; 153,802 shares and 46,242 shares
      issued and outstanding                                                                    15,380           4,624
   Common Stock, $.10 par value; 50,000,000 shares authorized,
      9,791,000 and 10,335,000 shares issued                                                       979           1,034
   Treasury stock, at cost, 85,300 shares and 83,000 shares                                       (522)           (508)
   Additional paid-in capital                                                                  129,991         141,130
   Accumulated other comprehensive losses                                                      (15,986)        (21,790)
   Accumulated deficit                                                                        (160,250)       (175,285)
                                                                                             ---------       ---------
           Total stockholders' deficiency                                                      (30,408)        (50,795)
                                                                                             ---------       ---------
                                                                                             $ 356,307       $ 351,287
                                                                                             =========       =========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>   57


                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                      (In 000's, except per share amounts)

<TABLE>
<CAPTION>

                                                                              Years Ended June 30,
                                                                  -----------------------------------------
                                                                     1998            1999            2000
                                                                  ---------       ---------       ---------
<S>                                                               <C>             <C>             <C>
Revenues:
    Gaming equipment and systems                                  $ 109,597       $ 127,810       $ 135,180
    Wall machines and amusement games                                98,611          90,834          68,952
    Route operations                                                148,507         175,854         202,480
    Casino operations                                                60,657          63,682          71,468
                                                                  ---------       ---------       ---------
                                                                    417,372         458,180         478,080
                                                                  ---------       ---------       ---------
Costs and expenses:
   Cost of gaming equipment and systems                              61,684          69,721          75,508
   Cost of wall machines and amusement games                         54,241          54,035          43,301
   Cost of route operations                                         114,645         137,692         161,062
   Cost of casino operations                                         25,930          27,011          27,933
   Selling, general and administrative                               86,318         104,104         105,155
   Research and development costs                                    15,778          17,190          15,318
   Depreciation and amortization                                     22,838          23,104          26,788
   Unusual items                                                       (325)             --           2,164
                                                                  ---------       ---------       ---------
                                                                    381,109         432,857         457,229
                                                                  ---------       ---------       ---------

Operating income                                                     36,263          25,323          20,851

Other income (expense):
    Interest income                                                     813             549             465
    Interest expense                                                (28,600)        (31,385)        (34,119)
    Rainbow royalty                                                    (587)             --              --
    Rainbow royalty buyout                                          (19,000)             --              --
    Minority interest                                                (2,002)         (2,053)         (2,155)
    Other, net                                                        1,025            (431)            924
                                                                  ---------       ---------       ---------

Loss before income taxes                                            (12,088)         (7,997)        (14,034)
Income tax provision                                                 (3,185)           (830)         (1,001)
                                                                  ---------       ---------       ---------

Net loss before extraordinary item                                  (15,273)         (8,827)        (15,035)
Extraordinary loss, without tax benefit                             (42,033)             --              --
                                                                  ---------       ---------       ---------
Net loss                                                            (57,306)         (8,827)        (15,035)

Special Stock dividends                                              (3,551)         (1,697)             --
Premium on repurchase/redemption of Series B Special Stock          (16,553)             --              --
                                                                  ---------       ---------       ---------
Net loss applicable to common shares                              $ (77,410)      $ (10,524)      $ (15,035)
                                                                  =========       =========       =========

Basic and diluted loss per share:
   Loss before extraordinary item                                 $   (3.87)      $   (1.09)      $   (1.47)
   Extraordinary loss                                                 (4.60)             --              --
                                                                  ---------       ---------       ---------
      Net loss                                                    $   (8.47)      $   (1.09)      $   (1.47)
                                                                  =========       =========       =========


Basic and diluted weighted average common shares outstanding          9,142           9,665          10,221
                                                                  =========       =========       =========
</TABLE>



          See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>   58


                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

                                   (In 000's)

<TABLE>
<CAPTION>

                                                                                                                         Total
                                                                                              Accumulated                Stock-
                                         Common Stock                              Additional    Other                   holders'
                                       -----------------     Series E    Treasury   Paid-in   Comprehensive  Accum.      Equity
                                       Shares    Dollars   Special Stock   Stock    Capital      Income      Deficit  (Deficiency)
                                       ------    -------   -------------   -----    -------      ------      -------   -----------
<S>                                    <C>       <C>       <C>           <C>       <C>         <C>           <C>       <C>
Balances at June 30, 1997               31,852     $3,185     $12,368      $--     $138,590    $(11,719)    $(88,869)    $53,555

Net loss                                    --         --          --       --           --          --      (57,306)    (57,306)
Shares issued upon exercise of
   options                                 250         25          --       --          830          --           --         855
Special Stock dividends                     --         --       1,479       --           --          --       (3,551)     (2,072)
Conversion of Series E Special
   Stock to common stock                    20          2        (115)      --          113          --           --          --
Special Stock redemption premium            --         --          --       --      (16,553)         --           --     (16,553)
Foreign currency translation
   adjustment                               --         --          --       --           --      (2,227)          --      (2,227)
                                       -------    -------    --------    -----    ---------    --------    ---------    --------

Balances at June 30, 1998               32,122      3,212      13,732       --      122,980     (13,946)    (149,726)    (23,748)

Net loss                                    --         --          --       --           --          --       (8,827)     (8,827)
1-for-3.5 reverse common stock
   split                               (22,916)    (2,291)         --       --        2,291          --           --          --
Shares issued upon exercise of
   options and warrants                    585         58          --       --        4,720          --           --       4,778
Special Stock dividends                     --         --       1,648       --           --          --       (1,697)        (49)
Repurchases of common stock for
  treasury                                  --         --          --     (522)          --          --           --        (522)
Foreign currency translation
  adjustment                                --         --          --       --           --      (2,040)          --      (2,040)
                                       -------    -------    --------    -----    ---------    --------    ---------    --------

Balances at June 30, 1999                9,791        979      15,380     (522)     129,991     (15,986)    (160,250)    (30,408)
                                       -------    -------    --------    -----    ---------    --------    ---------    --------

Net loss                                    --         --          --       --           --          --      (15,035)    (15,035)
Treasure shares issued upon exercise
  of options                                --         --          --       14           (4)         --           --          10
Issuance of Special Stock                   --         --         442       --           --          --           --         442
Shares issued upon conversion of
  Special Stock                            544         55     (11,198)      --       11,143          --           --          --
Foreign currency translation
  adjustment                                --         --          --       --           --      (5,804)          --      (5,804)
                                       -------    -------    --------    -----    ---------    --------    ---------    --------

Balances at June 30, 2000               10,335    $ 1,034    $  4,624    $(508)   $ 141,130    $(21,790)   $(175,285)   $(50,795)
                                       =======    =======    ========    =====    =========    ========    =========    ========
</TABLE>



          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>   59

                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


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

                                                                                         Years Ended June 30,
                                                                                         --------------------
                                                                                   1998           1999           2000
                                                                                 ---------       --------       --------
<S>                                                                              <C>             <C>            <C>
Cash flows from operating activities:
   Net loss                                                                      $ (57,306)      $ (8,827)      $(15,035)
     Adjustments to reconcile net loss
      to net cash provided by (used in) operating activities:
       Depreciation and amortization                                                22,838         23,104         26,788
       Amortization of debt discounts                                                   44             52             52
       Extraordinary item                                                           42,033             --             --
       Write down of other assets                                                    2,329            828            411
       (Gain) loss on sale of assets                                                   133            225         (4,158)
       Provision for losses on (recovery of) receivables                            (7,194)         3,174          7,927
       Other                                                                           (51)        (1,171)           351
   Change in operating assets and liabilities, net of effects of businesses
    acquired:
       Accounts and notes receivable                                                 1,946         (1,553)           130
       Inventories                                                                  (9,221)       (13,649)        (3,445)
       Other current assets                                                         (3,012)          (429)        (1,911)
       Accounts payable                                                             (3,793)         6,940         (6,870)
       Accrued liabilities                                                           2,594           (139)        (7,199)
                                                                                 ---------       --------       --------
         Net cash provided by (used in) operating activities                        (8,660)         8,555         (2,959)
                                                                                 ---------       --------       --------

Cash flows from investing activities:
   Additions to property, plant and equipment                                      (15,541)       (11,755)       (13,012)
   Proceeds from disposal of assets                                                     55            356          4,316
   Proceeds from sale/leaseback transaction                                             --          5,240          3,169
   Additions to other long-term assets                                              (9,633)        (5,943)        (4,305)
                                                                                 ---------       --------       --------
         Net cash used in investing activities                                     (25,119)       (12,102)        (9,832)
                                                                                 ---------       --------       --------

Cash flows from financing activities:
   Conversion/refinancing fees and expenses                                        (32,752)            --             --
   Capitalized debt issuance costs                                                 (11,456)            --             --
   Proceeds from long-term debt                                                    303,734             --             --
   Reduction of long-term debt                                                    (179,747)        (5,089)        (6,467)
   Net change in credit lines                                                       25,398         (2,077)        34,661
   Repurchase/redemption of Series B Special Stock                                 (77,568)            --             --
   Purchase of common stock for treasury                                                --           (522)            --
   Proceeds from exercise of stock options and warrants                                855          4,778             10
                                                                                 ---------       --------       --------
         Net cash provided by (used in) financing activities                        28,464         (2,910)        28,204
                                                                                 ---------       --------       --------

   Effect of exchange rate changes on cash                                            (122)          (100)          (299)
                                                                                 ---------       --------       --------
   Cash and cash equivalents:
         Increase (decrease) for year                                               (5,437)        (6,557)        15,114
         Balance, beginning of year                                                 28,924         23,487         16,930
                                                                                 ---------       --------       --------
         Balance, end of year                                                    $  23,487       $ 16,930       $ 32,044
                                                                                 =========       ========       ========

</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>   60
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                    YEARS ENDED JUNE 30, 1998, 1999 AND 2000

1.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF
           BUSINESS

           Description of business

           Alliance Gaming Corporation ("Alliance" or the "Company"), a Nevada
           Corporation, is a diversified, worldwide gaming company that (i)
           designs, manufactures and distributes gaming machines and
           computerized monitoring systems for gaming machines, (ii) owns and
           manages a significant installed base of gaming machines, (iii) owns
           and operates two regional casinos and (iv) in Germany, designs,
           manufactures and distributes wall-mounted gaming machines and
           distributes third-party manufactured amusement games.

           Principles of consolidation

           The accompanying consolidated financial statements include the
           accounts of Alliance Gaming Corporation, and its wholly-owned and
           partially owned, controlled subsidiaries. In the case of Video
           Services, Inc. ("VSI"), the Company owns 100% of the voting stock.
           The Company is entitled to receive 71% of dividends declared by VSI,
           if any, at such time that dividends are declared. All significant
           intercompany accounts and transactions have been eliminated. Certain
           reclassifications have been made to prior year financial statements
           to conform with the current year presentation.

           Cash and cash equivalents

           Cash equivalents consist of highly liquid debt instruments purchased
           with an original maturity of three months or less at the date of
           purchase and are carried at cost, which approximates market value.
           Cash and cash equivalents also includes $15.4 million and $22.0
           million at June 30, 1999 and 2000 utilized in Casino and Route
           Operations which is held in vaults, cages or change banks. The
           Company maintains a restricted cash account to ensure availability of
           funds to pay progressive jackpot liabilities which at June 30, 2000
           totaled approximately $1.3 million.

           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:

<TABLE>
<CAPTION>

                                                                                       1999               2000
                                                                                       ----               ----
                                                                                              (In 000's)
                     <S>                                                              <C>                <C>
                     Raw materials                                                    $16,676            $14,143
                     Work-in-process                                                    2,057                948
                     Finished goods                                                    27,405             16,928
                                                                                       ------             ------
                        Total inventories                                             $46,138            $32,019
                                                                                      =======            =======
</TABLE>


           Property, plant and equipment and leased gaming equipment

           Property, plant and equipment are stated at cost and depreciated over
           the estimated useful lives or lease terms, if less, using the
           straight line method as follows: buildings and improvements, 30-50
           years; gaming equipment, 3-7 years; furniture, fixtures and
           equipment, 3-10 years; and leasehold improvements, 5-20 years. Leased
           gaming equipment is stated at cost and depreciated over estimated
           useful lives ranging from 3-4 years.

           Significant replacements and improvements are capitalized; other
           maintenance and repairs are expensed. The cost and accumulated
           depreciation of assets retired or otherwise disposed of are
           eliminated from the accounts and any resulting gain or loss is
           credited or charged to income as appropriate.


                                      F-7
<PAGE>   61
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

           Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>

                                                                                       1999                 2000
                                                                                       ----                 ----
                                                                                                 (In 000's)
           <S>                                                                        <C>                  <C>
           Land and land improvements                                                 $21,195              $18,989
           Buildings and leasehold improvements                                        31,537               24,940
           Gaming equipment                                                            47,751               78,487
           Furniture, fixtures and equipment                                           25,362               14,435
           Less accumulated depreciation and amortization                             (51,686)             (60,028)
                                                                                      -------              -------
             Total property, plant and equipment, net                                 $74,159              $76,823
                                                                                      =======              =======
</TABLE>


           Excess of costs over net assets of acquired businesses

           The excess of the cost over the fair value of net assets of acquired
           businesses is generally amortized on the straight-line method over a
           period of 40 years, and primarily results from the acquisition of
           Bally Gaming International, Inc. in 1996. Subsequent to an
           acquisition, the Company continually evaluates whether later events
           and circumstances have occurred that indicate the remaining estimated
           useful life of such an intangible asset may warrant revision or that
           the remaining balance may not be recoverable. When factors indicate
           that an impairment evaluation is required, the Company uses estimates
           of future undiscounted cash flows in determining if the asset value
           is recoverable.

           Intangible assets

           Intangible assets consist primarily of costs associated with the
           acquisition of location leases which are capitalized and amortized
           over the expected life of the leases, ranging from one to 17 years,
           with an average life of approximately 6 years, and deferred issuance
           costs for financings which are amortized over the life of the related
           financing.

           Accrued liabilities

           Accrued liabilities consists of the following:

<TABLE>
<CAPTION>

                                                                 1999                 2000
                                                                 ----                 ----
                                                                         (In 000's)
                     <S>                                       <C>                    <C>
                     Payroll and related costs                 $ 11,887               $8,966
                     Interest                                     8,352                7,111
                     Professional and consulting fees             2,476                1,399
                     Sales, use and income taxes                  4,098                3,527
                     Deferred revenues                            2,194                4,709
                     Other                                       10,189                6,611
                                                                 ------                -----
                         Total accrued liabilities              $39,196              $32,323
                                                                =======              =======
</TABLE>


           Estimates

           The preparation of the consolidated financial statements in
           conformity with generally accepted accounting principles requires
           management to make estimates and assumptions that affect the reported
           amounts of assets and liabilities and disclosure of contingent assets
           and liabilities at the date of the consolidated financial statements
           and the reported amounts of revenues and expenses during the
           reporting period. Actual results could differ from those estimates.


           Revenue recognition

           The Company sells gaming equipment and systems on normal credit terms
           (90 days or less), or over terms of generally up to 36 months or more
           or through payments from net winnings of the machines until the
           purchase price is paid. Revenue from sales of gaming machines and
           amusement games is normally


                                      F-8
<PAGE>   62
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           recognized at the time products are shipped and title has passed to
           the customer. Revenue from sales of software included in computerized
           monitoring systems is recognized at the time the system is accepted
           by the customer, which normally coincides with installation of the
           equipment. Revenue from sales of hardware included in computerized
           monitoring systems is recognized at the time the product is shipped.

           The Company's Bally Gaming and Systems business unit earns revenues
           from recurring revenue sources which consist of the operations of the
           multi-site linked progressive jackpot systems, the operation of
           gaming machines at customer locations, exclusive of route operations,
           the revenues from gaming machines owned by the Company and placed in
           a casino on a daily lease or rental basis, and revenues from computer
           monitoring system maintenance and support services. Revenue is
           normally recognized based on the Company's share of coins wagered, on
           its share of net winnings, or on the lease or rental rate. Revenues
           from computer monitoring system maintenance and support services are
           recognized monthly over the life of the respective maintenance
           contracts.

           In accordance with industry practice, the Company recognizes gaming
           revenues as the net win from gaming machine operations, which is the
           difference between coins and currency deposited into the machines and
           payments to customers and, for other games, the difference between
           gaming wins and losses. The Company recognizes total net win from
           gaming machines as revenues for route operations which operate under
           revenue-sharing arrangements and revenue-sharing payments as a cost
           of route operations. The Company monitors its exposure for credit
           losses and maintains allowances for anticipated losses.

           Unusual items

           The Company separately discloses certain income and expense items
           that are unusual or infrequently occurring. Generally such items are
           netted together and shown as a separate component of Operating Income
           (loss); items reflected elsewhere in the consolidated statements of
           operations are separately identified below.

           During the year ended June 30, 2000, the Company recorded the
           following unusual items:

           -    Restructuring and related charges totaling $8.1 million. The
                restructuring and related costs were incurred pursuant to a plan
                adopted by the Company for staff reductions at the Bally Gaming
                and Systems, Wall Machine and Amusement Games, and at its
                corporate office. Included in the restructuring costs described
                above is a $1.9 million charge for a valuation reserve for
                certain inventory for the Australian market, which is included
                in the cost of gaming equipment and systems in the accompanying
                consolidated statement of operations.

           -    Gains from the sale of certain gaming management and development
                rights totaling $4.0 million.

           The Company recorded no unusual items during the year ended June 30,
           1999. During the year ended June 30, 1998, the Company recorded the
           following unusual items:

           -    As a result of settling a dispute over the
                exclusive use of certain technologies and changes in gaming
                regulations, the Company evaluated the cash flow of certain of
                its technology assets, in accordance with the provisions of
                the Statement of Financial Accounting Standards No. 121,
                "Accounting for the Impairment of Long-Lived Assets and
                Long-Lived Assets to be Disposed of," and determined certain
                items met the definition of having become impaired. During the
                year ended June 30, 1998 the Company recorded write-downs
                totaling $2.8 million for these items.
           -    The Company accrued $0.7 million for the present value of
                contractual payments due to a former member of the board of
                directors who was not re-elected to the board at the December
                1997 annual shareholders meeting.
           -    The Company accrued $0.6 million as restructuring charges for
                Bally Gaming and Systems.
           -    The Company recorded a $1.6 million charge for
                final settlement of litigation related to the acquisition of
                BGII.
           -    The Company settled a dispute with Alpha Hospitality and
                General Electric Credit Corporation concerning certain customer
                notes receivable on which the Company had certain recourse
                obligations. The Company contributed $2.5 million to the final
                settlement with the holder of the notes, and reversed $6.0
                million of reserves previously established for these recourse
                obligations.

                                      F-9
<PAGE>   63
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                In addition, as part of the settlement the Company became the
                sole owner of approximately 566,000 shares of Alpha Hospitality
                common stock, all of which has subsequently been sold.

           Foreign currency translation

           The functional currency of the Company's foreign subsidiaries is
           their local currency. Assets and liabilities of foreign operations
           are translated into U.S. dollars at the rate of exchange at the end
           of the period, and the income and expense accounts are translated at
           the average rate of exchange for the period. Translation adjustments
           are reflected as a separate component of stockholders' deficiency.
           Gains and losses on foreign currency transactions are included in the
           accompanying consolidated statements of operations.

           Income taxes

           Income taxes are accounted for under the asset and liability method.
           Deferred tax assets and liabilities are recognized for the future tax
           consequences attributable to differences between the financial
           statement carrying amounts of assets and liabilities and their
           respective tax bases. Deferred tax assets and liabilities are
           measured using enacted tax rates expected to apply to taxable income
           in the years in which those temporary differences are expected to be
           recovered or settled. The effect on deferred tax assets and
           liabilities of a change in tax rates is recognized in the period that
           includes the enactment date. Taxes on income of the Company's foreign
           subsidiaries are provided at the tax rates applicable to the tax
           jurisdictions in which they are located.

           Loss per share of common stock

           In February 1997, the Financial Accounting Standard Board issued
           Statement of Financial Accounting Standards No. 128, "Earnings Per
           Share" ("FAS No. 128"), which supersedes APB Opinion No. 15. This
           statement replaces primary EPS with basic EPS, and generally requires
           dual presentation of basic and diluted EPS. Under FAS No. 128, basic
           and diluted earnings per share are computed based on the weighted
           average number of shares of Common Stock outstanding.

           The following computation of basic and diluted loss per share from
           continuing operations, extraordinary loss and loss applicable to
           common shares is as follows:

<TABLE>
<CAPTION>

                                                          Fiscal Years ended June 30,
                                                  -----------------------------------------
                                                     1998            1999            2000
                                                  ---------       ---------       ---------
                                                      (In 000's except per share amounts)
<S>                                               <C>             <C>             <C>
Loss before extraordinary item                    $ (15,273)      $  (8,827)      $ (15,035)
Extraordinary loss                                  (42,033)             --              --
                                                  ---------       ---------       ---------
     Net Loss                                       (57,306)         (8,827)        (15,035)
Special Stock dividends                               3,551           1,697              --
Premium on repurchase/redemption
        of Series B Special Stock                    16,553              --              --
                                                  ---------       ---------       ---------
Loss applicable to common shares                  $ (77,410)      $ (10,524)      $ (15,035)
                                                  =========       =========       =========
Weighted average common shares
     outstanding                                      9,142           9,665          10,221
Effect of dilutive securities                            --              --              --
                                                  ---------       ---------       ---------
Weighted average common and
     dilutive shares outstanding                      9,142           9,665          10,221
                                                  =========       =========       =========
Loss per diluted share:
        Loss before extraordinary item            $   (3.87)      $   (1.09)      $   (1.47)
        Extraordinary item                            (4.60)             --              --
                                                  ---------       ---------       ---------
BASIC AND DILUTED EPS                             $   (8.47)      $   (1.09)      $   (1.47)
                                                  =========       =========       =========
</TABLE>


                                      F-10
<PAGE>   64
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           The following securities were not included in the computation of
           diluted loss per share because to do so would have been anti-dilutive
           for the periods presented:

<TABLE>
<CAPTION>

                                        Fiscal Years ended June 30,
                                     ---------------------------------
                                       1998         1999         2000
                                     -------      -------      -------
                                                 (in 000's)
<S>                                    <C>          <C>          <C>
Stock options                          1,553        1,483        1,623
Warrants                               2,891        2,294          929
Series E Special stock                   667          747          225
                                     -------      -------      -------
                                       5,111        4,524        2,777
                                     =======      =======      =======
Adjusted for application of the
treasury stock method                    579           --           --
                                     =======      =======      =======
</TABLE>

           Fair value of financial instruments

           The fair value of a financial instrument is the amount at which the
           instrument could be exchanged in a current transaction between
           willing parties, other than in a forced sale or liquidation. The
           carrying amounts at June 30, 1999 and 2000 for the Company's
           financial instruments approximate fair value.

2.         RECEIVABLES

           The Gaming Equipment and Systems and Wall Machines and Amusement
           Games business units grant customers payment terms under contracts of
           sale. These contracts are generally for terms of one to three years,
           with interest at prevailing rates, and are generally collateralized
           by the related equipment sold, although the value of such equipment,
           if repossessed, may be less than the receivable balance outstanding.
           See "Concentration of Credit Risk". The Company's Nevada route
           operations from time to time makes loans to location operators for
           build-outs, tenant improvements and initial operating expenses, which
           are generally secured by the personal guarantees of the operators and
           the locations' assets. The majority of the loans bear interest rates
           between 8% to 10.75% and are expected to be repaid over a period of
           time not to exceed the life of the revenue sharing arrangement and
           have due dates ranging from September 2000 to August 2009.

           The following table represents, at June 30, 2000, scheduled
           collections of accounts and notes receivable (net of allowances for
           doubtful accounts) by fiscal year:

<TABLE>
<CAPTION>

                                            Years ending June 30,
--------------------------------------------------------------------------------------------------------------
                                                (In 000's)

  2001           2002             2003             2004             2005          Thereafter         Total
-------      -----------      -----------      -----------      -----------      -----------      -----------
<S>          <C>              <C>              <C>                      <C>      <C>              <C>
$82,444      $     2,445      $       963      $       350      $       285      $        --      $    86,487
=======      ===========      ===========      ===========      ===========      ===========      ===========
</TABLE>


3.         DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION

           Long-term debt and lines of credit at June 30, 1999 and 2000
consisted of the following:

<TABLE>
<CAPTION>

                                                       1999          2000
                                                     --------      --------
                                                            (In 000's)
<S>                                                   <C>          <C>
10% Senior Subordinated Notes due 2007, net of
     unamortized discount of  $702 and $649           149,298      $149,351
Term loan facilities:
     Tranche B Term Loan                               72,380        70,641
     Tranche C Term Loan                               38,744        37,776
     Delayed Draw Term Facility                        24,372        23,789
Revolving credit facility                              32,200        62,360
Other, secured by related equipment                     1,712         1,142
                                                     --------      --------
                                                      318,706       345,059
Less current maturities                                 1,927         1,036
                                                     --------      --------
Long-term debt, less current maturities              $316,779      $344,023
                                                     ========      ========
</TABLE>

                                      F-11
<PAGE>   65
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           In August 1997 the Company effected a series of related transactions
           (the "Refinancing"). The Refinancing consisted of the private
           placement of $150.0 million of Senior Subordinated Notes and the
           closing of $230.0 million of bank financing as later amended. The
           bank financing provides for (i) term loans in the aggregate amount of
           up to $140.0 million, comprised of a $75.0 million tranche with a
           7-year term (the "Tranche B Term Loan"), a $40.0 million tranche with
           an 8-year term (the "Tranche C Term Loan"), and a $25.0 million
           tranche with a 7-year term (the "Delayed Draw Term Facility" and
           together with the Tranche B Term Loan and the Tranche C Term Loan,
           the "Term Loan Facilities"); and (ii) a $90.0 million revolving
           credit facility (later amended to $80.0 million) with a 6-year term.
           Each of these credit facilities is a variable rate borrowing in
           accordance with a credit grid. The interest rates at the highest
           level of the credit grid and maturity dates are as follows:

<TABLE>
<CAPTION>

                                                                            Initial                               Maturity
                                                                              Rate                                  Date
                                                                              ----                                  ----
                     <S>                                                    <C>                             <C>
                     Tranche B Term Loan                                    LIBOR + 4.25%                   January 31, 2005
                     Tranche C Term Loan                                    LIBOR + 4.50%                      July 31, 2005
                     Delayed Draw Term Facility                             LIBOR + 4.25%                   January 31, 2005
                     Revolving Credit Facility                              LIBOR + 3.75%                      July 31, 2003
</TABLE>


           The Revolving Credit Facility also allows for German Deutschemark
           borrowings at the Eurodeutschemark rate plus 3.75% (or 8.34% at June
           30, 2000).

           At June 30, 2000, borrowings under the $80.0 million Revolving Credit
           facility totaled $62.4 million, of which $22.4 million were German
           Deutschemark borrowings. Based on the terms of the revolving credit
           facility, the Company would have been able to borrow an additional
           $4.6 million as of June 30, 2000. The borrowing base for the
           revolving credit facility includes eligible receivables and inventory
           (as defined).

           The bank credit facility is collateralized by substantially all
           domestic property and is guaranteed by each domestic subsidiary of
           the U.S. Borrower and German Subsidiaries (both as defined), other
           than the entity which holds the Company's interest in its Louisiana
           operations and other non-material subsidiaries (as defined), and
           secured by both a U.S. and German Pledge Agreement (both as defined).
           The bank facility contains a number of maintenance covenants and it
           and the indenture have other significant covenants that, among other
           things, restrict the ability of the Company and certain of its
           subsidiaries to dispose of assets, incur additional indebtedness and
           issue preferred stock, pay dividends or make other distributions,
           enter into certain acquisitions, repurchase equity interests 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. In the quarter ended March
           31, 2000, the Company did not meet certain covenants in the credit
           agreement. The Company and the banks have amended the current and
           future financial maintenance covenants in the bank credit agreement
           effective March 31, 2000 such that the Company is in compliance with
           such covenants. As of June 30, 2000 the Company is in compliance with
           these covenants. The Company is also in compliance with the
           operational covenants contained in the indenture for the Senior
           Subordinated Notes.

           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

                                      F-12
<PAGE>   66
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           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.

           As a result of the Refinancing described above, in the fiscal year
           ended June 30, 1998 the Company recorded an extraordinary loss of
           $42.0 million consisting of the $27.7 million premium paid to
           repurchase the Company's 12-7/8% Senior Secured Notes, the payment of
           related transaction fees and expenses (including $2.0 million paid to
           related parties pursuant to employment agreements), and the
           charge-off of the unamortized debt discount and deferred financing
           fees. There was no tax benefit recognized for the extraordinary item
           as a valuation allowance was recorded to fully reserve the net
           operating losses created. Additionally, in the fiscal year ended June
           30, 1998, the Company also recorded a $19.0 million charge for the
           cost of the Rainbow Royalty Buyout. Additionally, the Company
           recorded a $16.6 million charge to equity and a corresponding
           increase in the net loss applicable to common shares for the
           difference between the carrying value and the liquidation value of
           the Series B Special Stock, all of which was redeemed on September 8,
           1997 at the liquidation price of $100 per share, plus accrued
           dividends.

           Maturities of long-term debt, for each of the five fiscal years
           ending subsequent to June 30, 2000 are as follows:

<TABLE>
<CAPTION>

                                                           Years endin June 30,
              -------------------------------------------------------------------------------------------------
                                                                (In 000's)
              2001             2002               2003              2004                2005         Thereafter          Total
              ----             ----               ----              ----                ----         ----------          -----
              <S>             <C>              <C>               <C>                  <C>             <C>               <C>
              $1,036          $1,228           $75,657           $55,287              $57,856         $153,995          $345,059
              ======          ======           =======           =======              =======         ========          ========
</TABLE>

4.         STOCKHOLDERS' EQUITY, OPTIONS, WARRANTS AND RIGHTS

           Special Stock

           The Company's Articles of Incorporation authorize the issuance of up
           to 10,000,000 shares of special stock ("Special Stock"). To date,
           there have been four series of Special Stock authorized for issuance:
           the Initial Series, the Series B, the Series E and the Series F.
           Special Stock consists of non-voting stock where no holder of the
           Special Stock shall be entitled to vote at any meeting of
           stockholders or otherwise, except as may be specifically provided by
           law or as approved by the Board of Directors in certain limited
           circumstances at the time of the stock issuance. The Special Stock
           may be issued from time to time in one or more series, each series
           having such designations, preferences and relative, participating,
           optional or other special rights, qualifications, limitations or
           restrictions as shall be stated and expressed in the resolution
           providing for the issuance of Special Stock or any series thereof
           adopted by the Board of Directors.

           In June 1996, the Company completed an offering of 200,000 shares of
           its 15% Non-Voting Senior Pay-in-Kind Special Stock, Series B (the
           "Series B Special Stock"). The Series B Special Stock was also issued
           as part of the consideration in the acquisition of Bally Gaming
           International, Inc. As discussed in Note 3, on September 8, 1997 the
           Company redeemed all of the outstanding shares of Series B Special
           Stock at their liquidation price of $100 per share, plus accrued
           dividends. The Company recorded non-cash dividends in the form of
           additional shares of Series B Special Stock totaling $2.0 million for
           fiscal year ended June 30, 1998.

           In June 1996, the Company issued 113,160 shares of Series E Special
           Stock to certain holders of the Company's 7-1/2% Convertible
           Subordinated Debentures who elected to receive such stock in lieu of
           receiving common stock. The holders of shares of Series E Special
           Stock have no voting rights except as required by law. Each share of
           Series E Special Stock accrued non-cash cumulative dividends until
           July 7, 1999 at an annual rate of 11-1/2%, at which point the
           dividends ceased on July 1, 1999, the total shares of Series E
           Special Stock outstanding was 158,224, convertible into approximately
           769,000 shares of common stock. The Series E Special Stock is
           convertible into common stock at a conversion price of $20.58 per
           share (equivalent to a conversion rate of approximately 4.859 shares
           of common stock per share of Series E Special Stock), subject to
           adjustment under certain circumstances, and has a $100 liquidation
           preference per

                                      F-13
<PAGE>   67
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


           share. During the fiscal year ended June 30, 2000, approximately
           112,000 shares of Series E Special Stock were converted into
           approximately 544,000 shares of common stock.

           Stock Option Plans

           In 1984, the Company created an Employee Stock Option Plan (the "1984
           Plan") that provides for the issuance of up to 571,000 shares of
           common stock to Company employees and directors. Generally, options
           are granted at the fair market value of the Company's Common Stock at
           the date of the grant and are exercisable over ten years.

           In 1992, the Company created the 1991 Long Term Incentive Plan (the
           "1991 Plan") that, as amended, provides for the issuance of up to
           857,000 shares of common stock to Company employees and directors.
           Generally, options are granted at the fair market value of the
           Company's Common Stock at the date of the grant and are exercisable
           over five to ten years.

           In April 1997 the Company's shareholders approved the 1996 Long-Term
           Incentive Plan (the "1996 Plan") which provides for the issuance of
           up to 857,000 shares of common stock to Company employees, directors
           and designated paid consultants. Generally, options are granted at
           the fair value of the Company's common stock at the date of grant and
           are exercisable over five to ten years.

           On August 29, 1996, the Board of Directors repriced the exercise
           price of previously issued, unexercised options for substantially all
           current employees and directors to $12.0312 per share which was the
           closing price of the Company's common stock on the closing date of
           the BGII acquisition, June 18, 1996. The closing price of the
           Company's common stock on August 29, 1996 was $8.75.

           Transactions involving stock options are summarized as follows:

<TABLE>
<CAPTION>

                               Options Outstanding
                               -------------------
                                                             Weighted-Average
                                                 Shares       Exercise Price
                                                 ------       --------------

<S>                                             <C>          <C>
Balance, June 30, 1997                          1,318,947       $    13.44
----------------------
           Granted                                419,115            15.30
           Exercised                              (71,453)           13.30
           Canceled                              (114,095)           24.33
                                               ----------       ----------
Balance, June 30, 1998                          1,552,514            13.20
----------------------
           Granted                                228,914             7.67
           Exercised                              (13,596)           15.76
           Canceled                              (284,944)           12.30
                                               ----------       ----------
Balance, June 30, 1999                          1,482,888            12.50
----------------------
           Granted                                486,978             2.25
           Exercised                               (2,333)            2.25
           Canceled                              (340,016)            2.69
                                               ----------       ----------
Balance, June 30, 2000                          1,627,517       $    10.03
----------------------                         ==========       ==========

Exercisable at June 30, 2000                    1,440,468       $    10.08
                                               ==========       ==========
</TABLE>

                                      F-14
<PAGE>   68
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


           At June 30, 2000, the range of exercise prices for options
           outstanding was $2.25 to $22.31. The weighted average remaining
           contractual life, by range of exercise price, for options outstanding
           and exercisable at June 30, 2000 is as follows:


<TABLE>
<CAPTION>

                                               Options Outstanding                                 Options Exercisable
                                      -------------------------------------                        -------------------
                                         Weighted-Avg.                                      Weighted-Avg.
                 Range of                  Remaining           Outstanding                   Remaining           Outstanding
              Exercise Prices          Contractual Life          Shares                  Contractual Life          Shares
              ---------------          ----------------          ------                  ----------------          ------
              <S>                      <C>                     <C>                        <C>                    <C>
                $2.25 - $4.00                9.60                365,000                         9.60               358,333
                $4.01 - $5.00                3.87                 24,167                         3.87                15,334
               $5.01 - $10.00                5.76                230,852                         4.33               125,930
              $10.01 - $15.00                2.43                845,030                         2.45               804,479
                  over $15.01                1.37                162,468                         1.13               136,392
                                                                --------                                           --------
                          All                4.42              1,627,517                         4.28             1,440,468
                                                               =========                                          =========
</TABLE>

           The Company accounts for its stock-based employee compensation awards
           in accordance with Accounting Principles Board Opinion No. 25,
           "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25,
           because the exercise price of the Company's employee stock options
           equals or exceeds the market price on date of grant, no compensation
           expense is recognized. Had the Company determined compensation cost
           based on the fair value at the grant date for its stock options under
           SFAS No. 123, "Accounting for Stock Based Compensation," the
           Company's net loss applicable to common shares would have increased
           from a loss of $77.4 million (or $8.47 per share) to $79.3 million
           (or $8.67 per share) on a pro forma basis for the year ended June 30,
           1998, from a loss of $10.5 million (or $1.09 per share) to $12.4
           million (or $1.29 per share) on a pro forma basis for the year ended
           June 30, 1999 and from a loss of $15.0 million (or $1.47 per share)
           to $17.8 million (or $1.75 per share) on a pro forma basis for the
           year ended June 30, 2000. The pro forma net loss reflects only
           options granted in 1998, 1999, and 2000. Therefore, the full impact
           of calculating compensation cost for stock options under SFAS No. 123
           is not reflected in the pro forma net loss amounts presented above
           because compensation cost is reflected over the options' vesting
           period, generally three years, and compensation cost for options
           granted prior to July 1, 1995 is not considered.

           The per share weighted-average fair value of stock options granted
           during 1998, 1999 and 2000 was $1.71, $2.74 and $1.55 respectively,
           on the date of grant using the Black-Scholes option-pricing model
           with the following weighted-average assumptions for 1998, 1999 and
           2000: expected dividend yield of 0%, risk free interest rates ranging
           from 3.9% to 6.5%, a volatility factor of .69, .62, and .74 for 1998,
           1999 and 2000, respectively, and expected lives varying from 3 to 10
           years.

           Warrants

           Upon closing of a private placement of debt and an equity investment
           by Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland") on
           September 21, 1993, the Company issued warrants to Kirkland to
           purchase up to 785,714 shares of Common Stock at $5.25 per share,
           however the warrants became exercisable only after the market price
           of the Common Stock reached $38.50, $45.50 and $52.50. Under the same
           terms, the Company issued warrants to purchase 357,143 and 8,571
           shares of Common Stock to Gaming Systems Advisors, L.P. ("GSA") and
           L.H. Friend, Weinress & Frankson, Inc. ("Friend"), respectively. All
           of these warrants expired in fiscal year 2000. The Company also
           issued warrants to purchase 142,857 and 71,429 shares of Common Stock
           at $28.875 per share to the initial purchasers of the private
           placement debt; Donaldson, Lufkin & Jenrette Securities Corporation
           ("DLJ") and Oppenheimer & Co., Inc. ("Oppenheimer"), respectively,
           each of which expired on September 21, 1999. During fiscal year 1996,
           in connection with the commencement of employment with the Company,
           the then Board Chairman and then Vice-Chairman were each granted
           warrants to purchase 71,429 shares of common stock on the same terms
           as the Kirkland warrants described above except that such warrants
           expire on September 21, 2000.

           At the completion of the BGII acquisition in fiscal year 1996, GSA
           was issued an additional 714,286 warrants on the same terms as the
           original warrants issued to Kirkland described above, except with an

                                      F-15
<PAGE>   69
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           expiration date of June 18, 2002. During the financing stage of the
           BGII acquisition, Cerberus Partners L.P. and certain affiliates of
           Canyon Partners, Inc. were issued warrants to purchase 71,429 shares
           of Common Stock at $17.50 per share which expire on August 31, 2002.
           None of the warrants described above were exercisable at June 30,
           2000.

           Share Repurchase Plan

           In January 1999 the Company's Board of Directors approved a share
           repurchase plan for up to 1.18 million shares of its Common Stock.
           Under the plan, subject to price and market conditions, purchases of
           shares were made from time to time during calendar 1999 in the open
           market or in privately negotiated transactions using available cash
           financing. As of June 30, 1999, the Company had repurchased 85,300
           shares of common stock at a cost of $522,500 and no additional shares
           have been purchased since that time. The Company has issued 2,333 of
           the acquired common shares to satisfy obligations pursuant to the
           exercise of stock options under the Company's stock option plan.

           At June 30, 2000, shares of the Company's Common Stock were reserved
           for future issuance as follows:

<TABLE>
<CAPTION>

                <S>                                                                           <C>
                Shares underlying stock options issued or
                     issuable under its stock option plans                                    1,623,000
                Shares underlying all warrants issued                                           929,000
                Shares underlying Series E Special Stock issued                                 225,000
                                                                                              ---------
                          Total                                                               2,777,000
                                                                                              =========
</TABLE>

           Reverse Stock Split

           On January 14, 1999 the Company's Board of Directors announced a
           one-for-three-and-one-half reverse stock split of its Common Stock
           effective February 1, 1999. The effects of the reverse split were to
           reduce the authorized number of common shares from 175.0 million to
           50.0 million and to decrease the number of shares of Common Stock
           then outstanding from 34.3 million to 9.8 million. In connection with
           the reverse split, the share number, exercise price and the trigger
           prices, as applicable, for the Company's stock options and warrants
           were proportionately adjusted. In lieu of fractional shares resulting
           from the reverse split, stockholders received a cash payment from the
           sale of the aggregate fractional shares on the open market. The
           reverse split also impacted the conversion ratio on the Company's
           Series E Special Stock. Each share of Series E Special Stock is now
           convertible into 4.859 shares of Common Stock instead of 17.007
           shares. All share and per share data included in these financial
           statements have been restated to reflect the reverse split.

           Stockholder Rights Plan

           In February 1998, the Company's Board of Directors adopted a
           Stockholder Rights Plan ("Plan"). The Plan is designed to preserve
           the long-term value of the shareholders' investment in the Company.
           Pursuant to the Plan, each shareholder received a distribution of one
           Right for each share of the Company's outstanding common stock of
           record on March 12, 1998. Each Right expires on March 12, 2008, and
           entitles the holder to purchase one one-hundredth (1/100) of a share
           of a Series F Special Stock for $87.50. Initially the Rights are
           represented by the Company's common stock certificates and are not
           exercisable. The Rights become exercisable only after a person or
           group acquires beneficial ownership of 10% or more of the Company's
           Common Stock (or 15% if the acquirer is an institutional investor) or
           publicly announces its intention to commence a tender offer that
           would result in that beneficial ownership level. Under certain
           circumstances involving a buyer's acquisition of 10% of the Company's
           Common Stock (or 15% in the case of an institutional investor), all
           Rights holders except the buyer will be entitled to purchase Common
           Stock at half price. If the Company is acquired through a merger,
           after such an acquisition, all Rights holders except the buyer will
           be entitled to purchase stock in the buyer at half price. The Company
           may redeem the rights at $0.0035 at any time before a buyer acquires
           10% (or 15% in the case of an institutional investor) of the
           Company's Common Stock.

                                      F-16
<PAGE>   70
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.         INCOME TAXES

           The components of the Company's income tax expense for the years
           ended June 30, 1998, 1999 and 2000 are as follows:

<TABLE>
<CAPTION>

                                          1998          1999         2000
                                         -------       -------      -------
                                                      (In 000s)
<S>                                      <C>           <C>          <C>
Current tax expense:
          U. S. Federal                  $    --       $    --      $    --
          Foreign                          2,743            64          280
          State                              568           510          527
                                         -------       -------      -------
                                           3,311           574          807
                                         -------       -------      -------
Deferred tax expense
          U. S. Federal                       --            --           --
          Foreign                           (126)          256          194
          State                               --            --           --
                                         -------       -------      -------
   Total provision for income taxes      $ 3,185       $   830      $ 1,001
                                         =======       =======      =======
</TABLE>


           A reconciliation of the Company's income tax provision (benefit) as
           compared to the tax provision calculated by applying the statutory
           federal tax rate (35%) to the income (loss) before income taxes for
           the years ended June 30, 1998, 1999 and 2000 are as follows:

<TABLE>
<CAPTION>

                                                             1998          1999          2000
                                                           --------       -------       -------
                                                                        (In 000's)

<S>                                                        <C>            <C>           <C>
Computed expected income tax expense (benefit) at 35%      $(18,942)      $(2,799)      $(4,911)
Permanent differences                                          (601)       (1,677)       (1,874)
Change in valuation allowance                                17,613          (591)        1,895
State income taxes, net of federal benefit                      369           332           343
Net effect of German operations                                 754         1,958            --
Expired foreign tax credits                                   1,770         3,607            --
Other, net                                                    2,222            --         5,548
                                                           --------       -------       -------
                                                           $  3,185       $   830       $ 1,001
                                                           ========       =======       =======\
</TABLE>


           The major components of the deferred tax assets and liabilities as of
           June 30, 1999 and 2000 are presented below:

<TABLE>
<CAPTION>


                                                              1999         2000
                                                             -------      -------
                                                                  (In 000's)
<S>                                                          <C>          <C>
Deferred tax assets:
     Net operating loss carry forwards                       $17,668      $26,250
     Foreign tax credit carry forwards                         7,527        7,527
     Inventory obsolescence reserves                           3,307        2,946
     Bad debt reserves                                         2,697        3,805
     Accruals not currently deductible for tax purposes        3,373        3,430
     Refinancing costs being amortized for tax purposes       10,683        8,582
     Other                                                     8,170        9,493
                                                             -------      -------
Total gross deferred tax assets                               53,425       62,033
Less:  Valuation allowance                                    44,443       49,859
                                                             -------      -------
Deferred tax assets                                          $ 8,982      $12,174
                                                             =======      =======

Deferred tax liabilities:
     Property and equipment, due principally to
          depreciation  differences                          $ 3,349      $ 6,629
     Other                                                     3,580        3,687
                                                             -------      -------
Total gross deferred tax liabilities (a)                       6,929       10,316
                                                             -------      -------
Net deferred tax assets                                      $ 2,053      $ 1,858
                                                             =======      =======
</TABLE>


           (a) Included in the other non-current liabilities in the accompanying
           consolidated balance sheets.

                                      F-17
<PAGE>   71
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           Management has considered certain tax planning strategies as
           permitted by Statement of Financial Accounting Standards No. 109
           "Accounting for Income Taxes". Management has determined that tax
           benefits associated with recorded deferred tax assets, net of
           valuation allowance, are more likely than not realizable through
           future taxable income and future reversals of existing taxable
           temporary differences.

           At June 30, 2000, the Company had net operating loss carry forwards
           for federal income tax purposes of approximately $75 million which
           are available to offset future federal taxable income, if any,
           expiring in the years 2007 through 2020. In addition, approximately
           $2.0 million of the Company's net operating loss are not deductible
           until the year ended June 30, 2001 pursuant to Section 382 of the
           Internal Revenue Code. At June 30, 2000 the Company had foreign tax
           credit carry forwards of approximately $7.5 million and alternative
           minimum tax credit (AMT) carry forwards of approximately $1.3
           million. Foreign tax credits have expiration dates ranging from 2001
           to 2005. AMT credits are available to be carried forward indefinitely
           and may be utilized against regular U.S. corporate tax to the extent
           it does not exceed computed AMT calculations.

6.         SUPPLEMENTAL CASH FLOW INFORMATION

           The following supplemental information is related to the consolidated
           statements of cash flows. The Company recorded the following
           significant non-cash items for the years ended June 30, 1998, 1999
           and 2000:

<TABLE>
<CAPTION>

                                                                   1998         1999         2000
                                                                  -------      -------      -------
                                                                              (In 000's)
<S>                                                               <C>          <C>          <C>
Reclassify inventory to property, plant and equipment and
     leased gaming equipment                                      $ 4,132      $ 9,613      $16,174
Dividends for Series E and Series B Special Stock                   3,551        1,697          442
Translation rate adjustment                                         2,105        1,940        5,505
Reclassify other assets to property, plant and equipment               --          444          242
Reclassify receivables to other assets                                540          376           --
Deferred gain on sale/leaseback transaction                            --        1,057        1,546
Reclassify excess costs over net assets of acquired business
   to property, plant and equipment                                    --           --          500
Conversion of Series E Stock to Common Stock                           --           --       11,198
</TABLE>


           Payments for interest expense in fiscal years, 1998, 1999 and 2000
           were approximately $19.9 million, $31.6 million and $34.0 million,
           respectively. Payments for income taxes, net of refunds received, in
           fiscal years 1998, 1999 and 2000 were approximately $7.3 million,
           $3.3 million and $(0.1) million, respectively.

7.         COMMITMENTS AND CONTINGENCIES

           Liabilities for loss contingencies arising from claims, assessments,
           litigation, fines and penalties, or other sources are recorded when
           it is probable that a liability has been incurred and the amount of
           the liability can be reasonably estimated.

           The Company is obligated under several patent agreements to pay
           royalties ranging from approximately $25 to $107 per applicable game
           depending on the components in the gaming machines. Additionally,
           based on an amendment to the trademark licensing agreement between
           BGII and Bally Entertainment Corporation dated May 10, 1996, the
           Company is obligated to pay a royalty on new machines sold or leased
           after June 18, 1996 of $35 per machine with a minimum annual royalty
           payment of $1.0 million for the initial five-year term of the amended
           agreement, which is subject to annual renewals thereafter at the
           option of the Company. Royalty expense under this agreement for the
           years ended June 30, 1998, 1999 and 2000 was $1.0 million. Total
           royalty expense for the Company for the years ended June 30, 1998,
           1999 and 2000 was $2.2 million, $1.9 million and $3.4 million,
           respectively. In addition, the Company has obtained the rights to
           certain game ideas and intellectual property that call for payment of
           royalties based on either fixed amounts or variable amounts based on
           game performance.

           The Company leases office space, equipment, warehouse and repair
           facilities, Route Operation locations, casino and other locations
           under non-cancelable operating leases. Certain Route Operation
           location leases

                                      F-18
<PAGE>   72
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


           provide only for contingent rentals based upon a percentage of gaming
           revenue and are cancelable at any time by either party. Future
           minimum rentals under non-cancelable operating leases at June 30,
           2000 are:

<TABLE>
<CAPTION>



                                                                  Years ended June 30,
                                ----------------------------------------------------------------------------------------
                                                                       (In 000's)
                               2001           2002           2003           2004           2005       Thereafter         Total
                           --------       --------       --------       --------       --------       ----------       ---------
<S>                        <C>            <C>            <C>            <C>            <C>              <C>            <C>
Minimum rentals            $ 26,528       $ 23,525       $ 20,141       $ 15,383       $ 12,777         $ 63,127       $ 161,481
Total sublease income        (1,376)        (1,379)        (1,003)          (970)          (803)          (1,802)         (7,333)
                           --------       --------       --------       --------       --------         --------       ---------
  Net minimum rentals      $ 25,152       $ 22,146       $ 19,138       $ 14,413       $ 11,974         $ 61,325       $ 154,148
                           ========       ========       ========       ========       ========         ========       =========
</TABLE>


           Operating lease rental expense, including contingent lease rentals,
           for years ended June 30, 1998, 1999 and 2000 was as follows:

<TABLE>
<CAPTION>

                               1998            1999            2000
                            ---------       ---------       ---------
                                           (In 000's)

<S>                         <C>             <C>             <C>
Minimum rentals             $  15,534       $  17,147       $  27,322
Contingent rentals             85,915         105,568         120,877
                            ---------       ---------       ---------
                              101,449         122,715         148,199
Sublease rental income         (2,136)         (1,574)         (1,416)
                            ---------       ---------       ---------
                            $  99,313       $ 121,141       $ 146,783
                            =========       =========       =========
</TABLE>

           The Company has entered into a series of sale lease-back transactions
           with a third party finance company. The transactions involve gaming
           devices and have a term of 48 months, with a fair value purchase
           option at the end of the term, and are being treated as operating
           leases. Proceeds from these sale lease-back transactions totaled $5.2
           million and $3.2 million for the years ended June 30, 1999 and 2000.
           The Company has recorded deferred gains from these transactions
           totaling $1.1 million and $1.5 million for the years ended June 30,
           1999 and 2000,  respectively, which are being amortized straight-line
           over the term of the respective leases as a reduction in rental
           expense.

           Pursuant to the transactions consummated in March 1995, Rainbow
           Casino Corporation (RCC), the former owner of 55% of the Rainbow
           Casino, is now entitled to receive 10% of the net available cash flow
           after debt service and other items, as defined (which amount
           increases to 20% of such amount when revenues exceed $35.0 million
           but only on such incremental amount), for a period of 15 years.

           During fiscal 2000, Bally Wulff increased the amount of tax reserves
           by $0.5 million (to a total reserve of $0.8 million) as a result of
           developments in ongoing quadrennial audits of Wulff's tax returns for
           the years 1992 through 1995. The German tax authorities have proposed
           preliminary adjustments of $0.3 million, which has been accrued. The
           German tax authorities have not yet issued the final assessment from
           their quadrennial audits.

           LITIGATION

           On September 25, 1995, BGII was named as a defendant in a class
           action lawsuit filed in Federal District Court in Nevada, by Larry
           Schreirer on behalf of himself and all others similarly situated. The
           plaintiffs filed suit against BGII and approximately 45 other
           defendants. Each defendant is involved in the gaming business as
           either a gaming machine manufacturer, distributor, or casino
           operator. The class action lawsuit arises out of alleged fraudulent
           marketing and operation of casino video poker machines and electronic
           slot machines. The plaintiffs allege that the defendants' actions
           constitute violations of the Racketeer Influenced and Corrupt
           Organizations Act (RICO) and give rise to claims of common law fraud
           and unjust enrichment. The plaintiffs are seeking monetary damages in
           excess of $1.0 billion, and are asking that any damage awards be
           trebled under applicable Federal law. Management believes the
           plaintiffs' lawsuit to be without merit. The Company intends to
           vigorously pursue all legal defenses available to it.

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

                                      F-19
<PAGE>   73
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.         CONCENTRATION OF CREDIT RISK

           The financial instruments that potentially subject the Company to
           concentrations of credit risk consist principally of accounts and
           notes receivable. Each of the Company's business units conducts
           business in and the resulting receivables are concentrated in
           specific legalized gaming regions. The Company also distributes its
           products through third party distributors resulting in distributor
           receivables.

           At June 30, 2000 net accounts and notes receivable by region as a
           percentage of total net receivables are as follows:
<TABLE>
<CAPTION>


                                          Gaming          Wall Machines
                                         Equipment        and Amusement         Route           Casino
                                        and Systems           Games           Operations       Operations           Total
                                       ------------       ------------       ------------      ------------      ------------
<S>                                    <C>               <C>                 <C>               <C>               <C>
Germany                                         0.4%              36.5%                -%                -%              36.9%
Other international jurisdictions              30.5                0.2                 --                --              30.7
Nevada                                          9.9                 --                6.1                --              16.0
Others individually less than 5%               16.4                 --                 --                --              16.4
                                       ------------       ------------       ------------      ------------      ------------
                                               57.2%              36.7%               6.1%               -%             100.0%
                                       ============       ============       ============      ============      ============
</TABLE>


           Receivables from emerging market customers contain increased risk
           factors compared to receivables at the Bally Wulff entities or other
           traditional markets for Bally Gaming and Systems.

9.         SEGMENT AND GEOGRAPHICAL INFORMATION

           The Company operates in four business segments: (i) Gaming Equipment
           and Systems which designs, manufactures and distributes gaming
           machines and computerized monitoring systems for gaming machines,
           (ii) Wall Machines and Amusement Games designs, manufactures and
           distributes wall-mounted gaming machines and distributes third party
           manufactured amusement games, (iii) Route Operations (see Note 11)
           owns and manages a significant installed base of gaming machines, and
           (iv) Casino Operations which owns and operates two regional casinos.

           The tables below presents information as to the Company's revenues,
           operating income, identifiable assets, capital expenditures and
           depreciation and amortization by segment:

<TABLE>
<CAPTION>
                                                                                              (In $000's)
                                                                                        Years Ended June 30,
                                                                               -----------------------------------------
                                                                                  1998          1999            2000
                                                                                  ----          ----            ----
<S>                                                                             <C>            <C>             <C>
              Revenues:
                Gaming Equipment and Systems                                    $109,597       $127,810        $135,180
                Wall Machines and Amusement Games                                 98,611         90,834          68,952
                Route Operations                                                 148,507        175,854         202,480
                Casino Operations                                                 60,657         63,682          71,468
                                                                                --------        -------         -------
             Total revenues                                                     $417,372       $458,180        $478,080
                                                                                ========       ========        ========

               Intersegment revenues:
                Gaming Equipment and Systems                                      $1,640          $ 751          $1,907
                Wall Machines and Amusement Games                                    226            413             232
                Route Operations                                                       -              -               -
                Casino Operations                                                      -              -               -
                                                                                     ---             --              --
            Total intersegment revenues                                           $1,866         $1,164          $2,139
                                                                                  ======         ======          ======
</TABLE>

                                      F-20
<PAGE>   74

<TABLE>
<CAPTION>

                                                    Years Ended June 30,
                                         -----------------------------------------
                                            1998            1999            2000
                                         ---------       ---------       ---------
<S>                                      <C>             <C>             <C>
Operating income (loss):
 Gaming Equipment and Systems            $   5,238       $   5,779       $   4,523
 Wall Machines and Amusement Games          13,094           5,334          (2,193)
 Route Operations                           16,432          14,586          15,162
 Casino Operations                          18,736          19,348          23,805
 Corporate/other                           (17,237)        (19,724)        (20,446)
                                         ---------       ---------       ---------
Total operating income                   $  36,263       $  25,323       $  20,851
                                         =========       =========       =========

Identifiable assets:
 Gaming Equipment and Systems            $ 141,167       $ 153,183       $ 145,051
 Wall Machines and Amusement Games          96,135          87,620          76,235
 Route Operations                           66,659          62,487          62,946
 Casino Operations                          43,980          44,592          48,043
 Corporate/other                            18,896           8,425          19,012
                                         ---------       ---------       ---------
Total identifiable assets                $ 366,837       $ 356,307       $ 351,287
                                         =========       =========       =========

Capital expenditures:
 Gaming Equipment and Systems            $   1,769       $   2,587       $   3,226
 Wall Machines and Amusement Games           1,306           1,129             515
 Route Operations                            8,336           5,476           3,993
 Casino Operations                           3,980           2,414           5,112
 Corporate/other                               150             149             166
                                         ---------       ---------       ---------
Total capital expenditures               $  15,541       $  11,755       $  13,012
                                         =========       =========       =========

Depreciation and amortization:
 Gaming Equipment and Systems            $   5,570       $   4,020       $   7,862
 Wall Machines and Amusement Games           5,567           4,816           5,776
 Route Operations                            8,145          10,274           9,341
 Casino Operations                           2,045           2,324           2,149
 Corporate/other                             1,511           1,670           1,660
                                         ---------       ---------       ---------
Total depreciation and amortization      $  22,838       $  23,104       $  26,788
                                         =========       =========       =========
</TABLE>

           The Company has operations based primarily in Germany and the United
           States. 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. See "Concentration of Credit
           Risk".

           The table below presents information as to the Company's revenues,
           operating income, identifiable assets capital expenditures and
           depreciation and amortization by geographic region:
<TABLE>
<CAPTION>


                            Years Ended June 30,
                    ------------------------------------
                      1998          1999          2000
                    --------      --------      --------
                                (In $000's)
<S>                 <C>           <C>           <C>
Revenues:
 United States      $305,082      $350,339      $388,203
 Germany             111,279       100,939        79,330
 Other foreign         1,011         6,902        10,547
                    --------      --------      --------
Total revenues      $417,372      $458,180      $478,080
                    ========      ========      ========
</TABLE>

                                      F-21
<PAGE>   75
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

                                                    Years Ended June 30,
                                            1998            1999            2000
                                         ---------       ---------       ---------
<S>                                      <C>             <C>             <C>
Operating income (loss):
 United States                           $  23,677       $  22,329       $  32,561
 Germany                                    13,978           3,451          (4,994)
 Other foreign                              (1,392)           (457)         (6,716)
                                         ---------       ---------       ---------
Total operating income                   $  36,263       $  25,323       $  20,851
                                         =========       =========       =========

Identifiable assets:
 United States                           $ 252,092       $ 248,470       $ 255,454
 Germany                                   111,559         103,687          91,800
 Other foreign                               3,186           4,150           4,033
                                         ---------       ---------       ---------
Total identifiable assets                $ 366,837       $ 356,307       $ 351,287
                                         =========       =========       =========

Capital expenditures:
 United States                           $  14,124       $  10,314       $  12,348
 Germany                                     1,372           1,141             521
 Other foreign                                  45             300             143
                                         ---------       ---------       ---------
Total capital expenditures               $  15,541       $  11,755       $  13,012
                                         =========       =========       =========

Depreciation and amortization:
 United States                           $  16,410       $  17,437       $  19,818
 Germany                                     5,747           4,998           5,924
 Other Foreign                                 681             669           1,046
                                         ---------       ---------       ---------
Total depreciation and amortization      $  22,838       $  23,104       $  26,788
                                         =========       =========       =========
</TABLE>


10.       INTERIM FINANCIAL INFORMATION (UNAUDITED)

           Following is the unaudited quarterly results of the Company for the
           years ended June 30, 1999 and 2000. This information is not covered
           by the Independent Auditors' Report.

<TABLE>
<CAPTION>

                                                                                     Quarter
                                                             ---------------------------------------------------------
                                                               First           Second          Third          Fourth
                                                             ---------        ---------       --------        --------
                                                                          (In 000's, except per share data)

                           1999
                           ----
           <S>                                                <C>             <C>             <C>             <C>
           Revenues                                           $  98,771       $ 103,910       $ 125,733       $129,766
           Operating income (loss)                                6,310          (1,777)          9,678         11,112
           Net income (loss)                                     (2,276)         (9,757)          1,191          2,015
           Net income (loss) applicable to common shares         (2,682)        (10,175)            761          1,572
           Income (loss) per diluted share                    $   (0.28)      $   (1.04)      $    0.08       $   0.16

                           2000
                           ----
           Revenues                                           $ 117,202       $ 114,487       $ 117,544       $128,847
           Operating income                                       8,397           2,445           1,056          8,953
           Net income (loss) applicable to common shares            445          (7,176)         (9,090)           786
           Income (loss) per diluted share                    $    0.04       $   (0.70)      $   (0.89)      $   0.08
</TABLE>

                                      F-22
<PAGE>   76
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.        SUBSEQUENT EVENTS

           In August 2000 the Company signed a definitive agreement with UC
           Acquisitions Company, LLC, an independent third-party gaming
           operator, for the sale of its Nevada-based route operations. The
           gross selling price, which is based on a multiple of cash flows for
           the 12 month period prior to closing, is estimated to be
           approximately $118 million, consisting of $6 million in preferred
           stock and $112 million is cash, which will be utilized to pay down
           certain lease obligations, pay transactional fees and expenses, with
           the remainder (estimated to be approximately $95 million) to be used
           to reduce the Term Loans. This transaction is contingent on the buyer
           obtaining suitable financing and obtaining approvals from various
           regulatory bodies, a process which may take more than 12 months to
           complete.


12.        CONSOLIDATING FINANCIAL STATEMENTS

           The following consolidating financial statements are presented to
           provide certain financial information regarding guaranteeing and
           non-guaranteeing subsidiaries in relation to the Company's Senior
           Subordinated Notes which were issued in the Refinancing transaction
           completed in August 1997 (see note 3). 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.

                                      F-23
<PAGE>   77
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          CONSOLIDATING BALANCE SHEETS
                                  June 30, 1999
                                   (In 000's)

<TABLE>
<CAPTION>
                                                      ASSETS
                                                                                                               Alliance
                                                                                                                Gaming
                                                       Parent and            Non-                             Corporation
                                                      Guaranteeing       Guaranteeing                             and
                                                      Subsidiaries       Subsidiaries       Eliminations      Subsidiaries
                                                    ---------------    ---------------    ---------------    ---------------
<S>                                                 <C>                <C>                <C>                <C>
Current assets:
   Cash and cash equivalents                        $         6,065    $        10,865    $            --    $        16,930
   Accounts and notes receivable, net                        46,423             50,917             (4,675)            92,665
   Inventories, net                                          30,513             16,154               (529)            46,138
   Other current assets                                       8,510              2,913                 --             11,423
                                                    ---------------    ---------------    ---------------    ---------------
        Total current assets                                 91,511             80,849             (5,204)           167,156
                                                    ---------------    ---------------    ---------------    ---------------
Long-term notes receivable, net                              99,961              1,797            (95,976)             5,782
Leased equipment, net                                         3,923              7,058                 --             10,981
Property, plant and equipment, net                           41,880             32,279                 --             74,159
Excess of costs over net assets of acquired
   businesses, net                                           38,904             18,689                 --             57,593
Intangible assets, net                                       26,448                406                 --             26,854
Investments in subsidiaries                                  86,993                 --            (86,993)                --
Deferred tax assets                                           4,122              4,860                 --              8,982
Other assets, net                                            21,190            (12,197)            (4,193)             4,800
                                                    ---------------    ---------------    ---------------    ---------------
                                                    $       414,932    $       133,741    $      (192,366)   $       356,307
                                                    ===============    ===============    ===============    ===============

                              LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
   Accounts payable                                 $        14,706    $         2,666    $            --    $        17,372
   Accrued liabilities                                       26,771             13,746             (1,321)            39,196
   Current maturities of long-term debt                       6,175              3,299             (7,547)             1,927
                                                    ---------------    ---------------    ---------------    ---------------
        Total current liabilities                            47,652             19,711             (8,868)            58,495
                                                    ---------------    ---------------    ---------------    ---------------
Long term debt                                              388,220             24,379            (95,820)           316,779
Other liabilities                                             7,370              2,330               (242)             9,458
                                                    ---------------    ---------------    ---------------    ---------------
        Total liabilities                                   443,242             46,420           (104,930)           384,732
                                                    ---------------    ---------------    ---------------    ---------------
Minority interest                                             1,983                 --                 --              1,983
Commitments and contingencies
Stockholders' equity (deficiency):
   Series E Special Stock                                    15,380                 --                 --             15,380
   Common Stock                                                 979             17,832            (17,832)               979
   Treasury stock                                              (522)                                                    (522)
   Additional paid-in capital                               129,991             68,700            (68,700)           129,991
   Accumulated other comprehensive loss                     (15,845)           (16,143)            16,002            (15,986)
   Retained earnings (accumulated deficit)                 (160,276)            16,932            (16,906)          (160,250)
                                                    ---------------    ---------------    ---------------    ---------------
       Total stockholders' equity (deficiency)              (30,293)            87,321            (87,436)           (30,408)
                                                    ---------------    ---------------    ---------------    ---------------
                                                    $       414,932    $       133,741    $      (192,366)   $       356,307
                                                    ===============    ===============    ===============    ===============
</TABLE>


           See accompanying unaudited notes.

                                      F-24
<PAGE>   78
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                          CONSOLIDATING BALANCE SHEETS
                                  June 30, 2000
                                   (In 000's)

<TABLE>
<CAPTION>

                                                                ASSETS

                                                                                                                Alliance
                                                                                                                 Gaming
                                                      Parent and            Non-                               Corporation
                                                     Guaranteeing       Guaranteeing        Eliminations          and
                                                     Subsidiaries       Subsidiaries                          Subsidiaries
                                                    ---------------    ---------------    ---------------    ---------------
<S>                                                 <C>                <C>                <C>                <C>
Current assets:
   Cash and cash equivalents                        $        19,528    $        12,516    $            --    $        32,044
   Short-term investments                                        --              2,000                 --              2,000
   Accounts and notes receivable, net                        44,889             41,603             (4,048)            82,444
   Inventories, net                                          18,452             13,567                 --             32,019
   Other current assets                                       8,831              2,367                 --             11,198
                                                    ---------------    ---------------    ---------------    ---------------
        Total current assets                                 91,700             72,053             (4,048)           159,705
                                                    ---------------    ---------------    ---------------    ---------------
Long-term notes receivable, net                             104,342                942           (101,241)             4,043
Leased equipment, net                                         9,618              7,341                 --             16,959
Property, plant and equipment, net                           42,152             34,671                 --             76,823
Excess of costs over net assets of acquired
   businesses, net                                           37,845             17,149                 --             54,994
Intangible assets, net                                       21,567                283                 --             21,850
Investments in subsidiaries                                  70,933                 --            (70,933)                --
Deferred tax assets                                           9,288              2,886                 --             12,174
Other assets, net                                            30,137            (21,486)            (3,912)             4,739
                                                    ---------------    ---------------    ---------------    ---------------
                                                    $       417,582    $       113,839    $      (180,134)   $       351,287
                                                    ===============    ===============    ===============    ===============

                                        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
   Accounts payable                                 $         8,232    $         2,135    $            --    $        10,367
   Accrued liabilities                                       20,743             12,707             (1,127)            32,323
   Current maturities of long-term debt                       4,488              3,498             (6,950)             1,036
                                                    ---------------    ---------------    ---------------    ---------------
        Total current liabilities                            33,463             18,340             (8,077)            43,726
                                                    ---------------    ---------------    ---------------    ---------------
Long term debt                                              421,328             23,897           (101,202)           344,023
Other liabilities                                            12,225                879               (132)            12,972
                                                    ---------------    ---------------    ---------------    ---------------
        Total liabilities                                   467,016             43,116           (109,411)           400,721
                                                    ---------------    ---------------    ---------------    ---------------
Minority interest                                             1,361                 --                 --              1,361
Commitments and contingencies
Stockholders' equity (deficiency):
   Series E Special Stock                                     4,624                 --                 --              4,624
   Common Stock                                               1,034             17,832            (17,832)             1,034
   Treasury stock                                              (508)                                                    (508)
   Additional paid-in capital                               141,130              7,862             (7,862)           141,130
   Accumulated other comprehensive loss                     (21,790)           (21,810)            21,810            (21,790)
   Retained earnings (accumulated deficit)                 (175,285)            66,839            (66,839)          (175,285)
                                                    ---------------    ---------------    ---------------    ---------------
       Total stockholders' equity (deficiency)              (50,795)            70,723            (70,723)           (50,795)
                                                    ---------------    ---------------    ---------------    ---------------
                                                    $       417,582    $       113,839    $      (180,134)   $       351,287
                                                    ===============    ===============    ===============    ===============
</TABLE>



           See accompanying unaudited notes.

                                      F-25
<PAGE>   79
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     CONSOLIDATING STATEMENTS OF OPERATIONS

                            Year ended June 30, 1998
                                   (In 000's)

<TABLE>
<CAPTION>

                                                                                                                Alliance
                                                                                                                 Gaming
                                                      Parent and           Non-                                Corporation
                                                     Guaranteeing       Guaranteeing                              and
                                                     Subsidiaries       Subsidiaries       Eliminations        Subsidiaries
                                                    ---------------    ---------------    ---------------    ---------------
<S>                                                 <C>                <C>                <C>                <C>
Revenues:
   Gaming equipment and systems                     $       104,141    $        13,455    $        (7,999)   $       109,597
   Wall machines and amusement games                             --             98,759               (148)            98,611
   Route operations                                         127,424             21,083                 --            148,507
   Casino operations                                         13,426             47,231                 --             60,657
                                                    ---------------    ---------------    ---------------    ---------------
                                                            244,991            180,528             (8,147)           417,372
                                                    ---------------    ---------------    ---------------    ---------------
Costs and expenses:
   Cost of gaming equipment and systems                      60,154              9,555             (8,025)            61,684
   Cost of wall machines and amusement games                     --             54,389               (148)            54,241
   Cost of route operations                                 101,052             13,593                 --            114,645
   Cost of casino operations                                  8,278             17,652                 --             25,930
   Selling, general and administrative                       47,066             39,252                 --             86,318
   Research and development                                  12,739              3,039                 --             15,778
   Depreciation and amortization                             14,181              8,657                 --             22,838
   Unusual items                                               (370)                45                 --               (325)
                                                    ---------------    ---------------    ---------------    ---------------
                                                            243,100            146,182             (8,173)           381,109
                                                    ---------------    ---------------    ---------------    ---------------

Operating income                                              1,891             34,346                 26             36,263

Earnings in consolidated subsidiaries                        22,844                 --            (22,844)                --

Other income (expense):
   Interest income                                            1,339                418               (944)               813
   Interest expense                                         (27,581)            (1,963)               944            (28,600)
   Rainbow royalty                                            4,884             (5,471)                --               (587)
   Rainbow royalty buyout                                   (19,000)                --                 --            (19,000)
   Minority interest                                         (2,002)                --                 --             (2,002)
   Other, net                                                 1,136               (111)                --              1,025
                                                    ---------------    ---------------    ---------------    ---------------

Income (loss) before income taxes                           (16,489)            27,219            (22,818)           (12,088)
Income tax (provision) benefit                                1,190             (4,375)                --             (3,185)
                                                    ---------------    ---------------    ---------------    ---------------

Net income (loss) before extraordinary item                 (15,299)            22,844            (22,818)           (15,273)
Extraordinary loss, without tax benefit                     (42,033)                --                 --            (42,033)
                                                    ---------------    ---------------    ---------------    ---------------
Net income (loss)                                           (57,332)            22,844            (22,818)           (57,306)

Special Stock dividends                                      (3,551)                --                 --             (3,551)
Premium on repurchase of Series B Special Stock             (16,553)                --                 --            (16,553)
                                                    ---------------    ---------------    ---------------    ---------------

Net income (loss) applicable to common shares       $       (77,436)   $        22,844    $       (22,818)   $       (77,410)
                                                    ===============    ===============    ===============    ===============
</TABLE>


                        See accompanying unaudited notes.

                                      F-26
<PAGE>   80
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     CONSOLIDATING STATEMENTS OF OPERATIONS
                            Year ended June 30, 1999
                                   (In 000's)

<TABLE>
<CAPTION>

                                                                                                                Alliance
                                                                                                                 Gaming
                                                      Parent and           Non-                               Corporation
                                                     Guaranteeing       Guaranteeing                              and
                                                     Subsidiaries       Subsidiaries       Eliminations        Subsidiaries
                                                    ---------------    ---------------    ---------------    ---------------
<S>                                                 <C>                <C>                <C>                <C>
Revenues:
   Gaming equipment and systems                     $       124,022    $        12,416    $        (8,628)   $       127,810
   Wall machines and amusement games                             --             91,178               (344)            90,834
   Route operations                                         154,171             21,683                 --            175,854
   Casino operations                                         14,549             49,133                 --             63,682
                                                    ---------------    ---------------    ---------------    ---------------
                                                            292,742            174,410             (8,972)           458,180
                                                    ---------------    ---------------    ---------------    ---------------
Costs and expenses:
   Cost of gaming equipment and systems                      67,726             10,623             (8,628)            69,721
   Cost of wall machines and amusement games                     --             54,046                (11)            54,035
   Cost of route operations                                 123,444             14,248                 --            137,692
   Cost of casino operations                                  8,644             18,367                 --             27,011
   Selling, general and administrative                       63,032             41,405               (333)           104,104
   Research and development                                  13,947              3,243                 --             17,190
   Depreciation and amortization                             14,996              8,108                 --             23,104
                                                    ---------------    ---------------    ---------------    ---------------
                                                            291,789            150,040             (8,972)           432,857
                                                    ---------------    ---------------    ---------------    ---------------

Operating income                                                953             24,370                 --             25,323

Earnings in consolidated subsidiaries                        14,875                 --            (14,875)                --

Other income (expense):
   Interest income                                              960                427               (838)               549
   Interest expense                                         (30,495)            (1,728)               838            (31,385)
   Rainbow royalty                                            5,679             (5,679)                --                 --
   Minority interest                                         (2,053)                --                 --             (2,053)
   Other, net                                                   221               (652)                --               (431)
                                                    ---------------    ---------------    ---------------    ---------------

Income (loss) before income taxes                            (9,860)            16,738            (14,875)            (7,997)
Income tax (provision) benefit                                1,033             (1,863)                --               (830)
                                                    ---------------    ---------------    ---------------    ---------------

Net income (loss)                                            (8,827)            14,875            (14,875)            (8,827)

Special Stock dividends                                      (1,697)                --                 --             (1,697)
                                                    ---------------    ---------------    ---------------    ---------------

Net income (loss) applicable to common shares       $       (10,524)   $        14,875    $       (14,875)   $       (10,524)
                                                    ===============    ===============    ===============    ===============
</TABLE>


                        See accompanying unaudited notes.

                                      F-27
<PAGE>   81
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     CONSOLIDATING STATEMENTS OF OPERATIONS

                            Year ended June 30, 2000
                                   (In 000's)

<TABLE>
<CAPTION>

                                                                                                               Alliance
                                                                                                                Gaming
                                                     Parent and              Non-                             Corporation
                                                     Guaranteeing       Guaranteeing                               and
                                                     Subsidiaries       Subsidiaries       Eliminations        Subsidiaries
                                                    ---------------    ---------------    ---------------    ---------------
<S>                                                 <C>                <C>                <C>                        <C>
Revenues:
   Gaming equipment and systems                     $       132,261    $        20,926    $       (18,007)           135,180
   Wall machines and amusement games                             --             69,122               (170)            68,952
   Route operations                                         183,244             19,236                 --            202,480
   Casino operations                                         17,715             53,753                 --             71,468
                                                    ---------------    ---------------    ---------------    ---------------
                                                            333,220            163,037            (18,177)           478,080
                                                    ---------------    ---------------    ---------------    ---------------
Costs and expenses:
   Cost of gaming equipment and systems                      74,445             19,070            (18,007)            75,508
   Cost of wall machines and amusement games                     --             43,301                 --             43,301
   Cost of route operations                                 148,587             12,475                 --            161,062
   Cost of casino operations                                  8,932             19,001                 --             27,933
   Selling, general and administrative                       64,115             41,210               (170)           105,155
   Research and development                                  12,642              2,676                 --             15,318
   Depreciation and amortization                             17,942              8,846                 --             26,788
   Unusual items, net                                        (1,891)             4,055                 --              2,164
                                                                       ---------------    ---------------    ---------------
                                                            324,772            150,634            (18,177)           457,229
                                                                       ---------------    ---------------    ---------------

Operating income                                              8,448             12,403                 --             20,851

Earnings in consolidated subsidiaries                         2,402                 --             (2,402)                --

Other income (expense):
   Interest income                                              571                537               (643)               465
   Interest expense                                         (32,829)            (1,933)               643            (34,119)
   Rainbow royalty                                            6,173             (6,173)                --                 --
   Minority interest                                         (2,155)                --                 --             (2,155)
   Other, net                                                 1,406               (482)                --                924
                                                    ---------------    ---------------    ---------------    ---------------

Income (loss) before income taxes                           (15,984)             4,352             (2,402)           (14,034)
Income tax (provision) benefit                                  949             (1,950)                --             (1,001)
                                                    ---------------    ---------------    ---------------    ---------------

Net income (loss) applicable to common shares       $       (15,035)   $         2,402    $        (2,402)   $       (15,035)
                                                    ===============    ===============    ===============    ===============
</TABLE>


           See accompanying unaudited notes.


                                      F-28
<PAGE>   82

                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                            Year ended June 30, 1998
                                   (In 000's)

<TABLE>
<CAPTION>

                                                                                                                  Alliance
                                                                                                                   Gaming
                                                                  Parent and        Non-                         Corporation
                                                                 Guaranteeing    Guaranteeing                        and
                                                                 Subsidiaries    Subsidiaries     Eliminations   Subsidiaries
                                                                 ------------    ------------    --------------  -------------
<S>                                                              <C>             <C>             <C>             <C>
Cash flows from operating activities:
   Net income (loss)                                             $    (57,332)   $     22,844    $    (22,818)   $    (57,306)
   Adjustments to reconcile net income (loss)
     to net cash provided by (used in) operating activities:
        Depreciation and amortization                                  14,181           8,657              --          22,838
        Amortization of debt discounts                                     44              --              --              44
        Extraordinary item                                             42,033              --              --          42,033
        Write down of other assets                                      2,447              --            (118)          2,329
        (Gain) loss on sale of assets                                     185             (52)             --             133
        Provision for losses on (recovery of) receivables              (8,278)          1,084              --          (7,194)
        Other                                                            (140)             (3)             92             (51)
    Net change in operating assets and liabilities:
        Accounts and notes receivable                                  (4,795)          3,318           3,423           1,946
        Inventories                                                    (8,870)           (200)           (151)         (9,221)
        Other current assets                                           (1,100)         (1,912)             --          (3,012)
        Intercompany accounts                                         (17,688)           (430)         18,118              --
        Accounts payable                                               (2,563)         (1,158)            (72)         (3,793)
        Accrued liabilities                                             6,150          (3,022)           (534)          2,594
                                                                 ------------    ------------    ------------    ------------
           Net cash provided by (used in) operating activities        (35,726)         29,126          (2,060)         (8,660)
Cash flows from investing activities:
   Additions to property, plant and equipment                         (11,534)         (4,007)             --         (15,541)
   Proceeds from disposal of property, plant and equipment                (88)            143              --              55
   Additions to long-term assets                                       (9,263)         (5,873)          5,503          (9,633)
                                                                 ------------    ------------    ------------    ------------
        Net cash used in investing activities                         (20,885)         (9,737)          5,503         (25,119)
                                                                 ------------    ------------    ------------    ------------
Cash flows from financing activities:
   Refinancing fees and expenses                                      (32,752)             --              --         (32,752)
   Capitalized debt issuance costs                                    (11,456)             --              --         (11,456)
   Proceeds from long-term debt                                       309,318              --          (5,584)        303,734
   Reduction of long-term debt                                       (179,348)         (2,540)          2,141        (179,747)
   Net change in credit lines                                          22,738           2,660              --          25,398
   Redemption of Series B Special Stock                               (77,568)             --              --         (77,568)
   Proceeds from exercise of stock options                                855              --              --             855
   Dividends received (paid)                                           16,971         (16,971)             --              --
                                                                 ------------    ------------    ------------    ------------
        Net cash provided by (used in) financing activities            48,758         (16,851)         (3,443)         28,464
                                                                 ------------    ------------    ------------    ------------

Effect of exchange rate changes on cash                                    --            (122)             --            (122)

Cash and cash equivalents:
   Increase (decrease) for period                                      (7,853)          2,416              --          (5,437)
   Balance, beginning of period                                        16,462          12,462              --          28,924
                                                                 ------------    ------------    ------------    ------------
   Balance, end of period                                        $      8,609    $     14,878    $         --    $     23,487
                                                                 ============    ============    ============    ============
</TABLE>

                        See accompanying unaudited notes.

                                      F-29
<PAGE>   83
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                            Year ended June 30, 1999
                                   (In 000's)

<TABLE>
<CAPTION>

                                                                                                                 Alliance
                                                                                                                  Gaming
                                                                 Parent and        Non-                         Corporation
                                                                Guaranteeing    Guaranteeing                       and
                                                                Subsidiaries    Subsidiaries    Eliminations    Subsidiaries
                                                                ------------    ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>             <C>
Cash flows from operating activities:
   Net loss                                                           (8,827)   $     14,875    $    (14,875)   $     (8,827)
   Adjustments to reconcile net income (loss)
     to net cash provided by (used in) operating activities:
        Depreciation and amortization                                 14,996           8,108              --          23,104
        Amortization of debt discounts                                    52              --              --              52
        Write down of other assets                                       814              14              --             828
        (Gain) loss on sale of assets                                    246             (21)             --             225
        Provision for losses on receivables                            1,539           1,635              --           3,174
        Other                                                           (690)           (580)             99          (1,171)
    Net change in operating assets and liabilities:
        Accounts and notes receivable                                  1,761          (1,002)         (2,312)         (1,553)
        Inventories                                                   (8,304)         (5,345)             --         (13,649)
        Other current assets                                            (510)             81              --            (429)
        Intercompany accounts                                        (20,947)          6,111          14,836              --
        Accounts payable                                               7,331            (391)             --           6,940
        Accrued liabilities                                             (689)            873            (323)           (139)
                                                                ------------    ------------    ------------    ------------
          Net cash provided by (used in) operating activities        (13,228)         24,358          (2,575)          8,555
Cash flows from investing activities:
   Additions to property, plant and equipment                         (8,286)         (3,469)             --         (11,755)
   Proceeds from disposal of property, plant and equipment               279              77              --             356
   Proceeds from sale/leaseback transaction                            5,240              --              --           5,240
   Additions to long-term assets                                      (5,684)         (5,034)          4,775          (5,943)
                                                                ------------    ------------    ------------    ------------
        Net cash used in investing activities                         (8,451)         (8,426)          4,775         (12,102)
                                                                ------------    ------------    ------------    ------------
Cash flows from financing activities:
   Proceeds from long-term debt                                        4,775              --          (4,775)             --
   Reduction of long-term debt                                        (4,350)         (3,314)          2,575          (5,089)
   Net change in credit lines                                         (9,800)          7,723              --          (2,077)
   Purchase of common stock for treasury                                (522)             --              --            (522)
   Proceeds from exercise of stock options and warrants                4,778              --              --           4,778
   Dividends received (paid)                                          24,253         (24,253)             --              --
                                                                ------------    ------------    ------------    ------------
        Net cash provided by (used in) financing activities           19,134         (19,844)         (2,200)         (2,910)
                                                                ------------    ------------    ------------    ------------

Effect of exchange rate changes on cash                                    1            (101)             --            (100)

Cash and cash equivalents:
   Decrease for period                                                (2,544)         (4,013)             --          (6,557)
   Balance, beginning of period                                        8,609          14,878              --          23,487
                                                                ------------    ------------    ------------    ------------
   Balance, end of period                                       $      6,065    $     10,865    $         --    $     16,930
                                                                ============    ============    ============    ============
</TABLE>


                       See accompanying unaudited notes.

                                      F-30
<PAGE>   84
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                            Year ended June 30, 2000
                                   (In 000's)

<TABLE>
<CAPTION>

                                                                                                                 Alliance
                                                                                                                   Gaming
                                                                Parent and          Non-                        Corporation
                                                                Guaranteeing    Guaranteeing                        and
                                                                Subsidiaries    Subsidiaries    Eliminations    Subsidiaries
                                                                ------------    ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>             <C>
Cash flows from operating activities:
    Net income (loss)                                           $    (15,035)   $      2,402    $     (2,402)   $    (15,035)
    Adjustments to reconcile net income (loss)
     to net cash provided by (used in) operating activities:
         Depreciation and amortization                                17,942           8,846              --          26,788
        Amortization of debt discounts                                    52              --              --              52
        Write down of other assets                                       411              --              --             411
        (Gain) loss on sale of assets                                 (4,152)             (6)             --          (4,158)
        Provision for losses on receivables                            5,077           2,850              --           7,927
        Other                                                            395            (154)            110             351
    Net change in operating assets and liabilities:
        Accounts and notes receivable                                 (8,935)          4,427           4,638             130
        Inventories                                                      992          (4,437)             --          (3,445)
        Other current assets                                            (335)         (1,576)             --          (1,911)
        Intercompany accounts                                            275           5,037          (5,312)             --
        Accounts payable                                              (6,451)           (419)             --          (6,870)
        Accrued liabilities                                           (6,961)           (432)            194          (7,199)
                                                                ------------    ------------    ------------    ------------
          Net cash provided by (used in) operating activities        (16,725)         16,538          (2,772)         (2,959)
Cash flows from investing activities:
   Additions to property, plant and equipment                         (6,883)         (6,129)             --         (13,012)
   Proceeds from disposal of assets                                    4,263              53              --           4,316
   Proceeds from sale/leaseback transaction                            3,169              --              --           3,169
   Additions to long-term assets                                      (4,305)             --              --          (4,305)
                                                                ------------    ------------    ------------    ------------
        Net cash used in investing activities                         (3,756)         (6,076)             --          (9,832)
                                                                ------------    ------------    ------------    ------------
Cash flows from financing activities:
   Proceeds from long-term debt                                           --              --              --              --
   Reduction of long-term debt                                        (5,939)         (3,300)          2,772          (6,467)
   Net change in credit lines                                         29,750           4,911              --          34,661
   Purchase of common stock for treasury                                  --              --              --              --
   Proceeds from exercise of stock options and warrants                   10              --              --              10
   Dividends received (paid)                                          10,948         (10,948)             --              --
                                                                ------------    ------------    ------------    ------------
        Net cash provided by (used in) financing activities           34,769          (9,337)          2,772          28,204
                                                                ------------    ------------    ------------    ------------

Effect of exchange rate changes on cash                                   --            (299)             --            (299)

Cash and cash equivalents:
   Decrease for period                                                14,288             826              --          15,114
   Balance, beginning of period                                        5,240          11,690              --          16,930
                                                                ------------    ------------    ------------    ------------
   Balance, end of period                                       $     19,528    $     12,516    $         --    $     32,044
                                                                ============    ============    ============    ============
</TABLE>


                       See accompanying unaudited notes.

                                      F-31
<PAGE>   85
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    YEARS ENDED JUNE 30, 1998, 1999 AND 2000

BASIS OF PRESENTATION

These notes to consolidating financial statements should be read in conjunction
with the consolidated financial statements and notes thereto. Certain
reclassifications have been made to prior years' financial statements to conform
with the current year presentation.

DEBT AND LINES OF CREDIT

Long-term debt and lines of credit at June 30, 1999 consist of the following:


<TABLE>
<CAPTION>

                                                                                                                 Alliance
                                                                                                                  Gaming
                                                                 Parent and        Non-                         Corporation
                                                                Guaranteeing    Guaranteeing     Elimina-           and
                                                                Subsidiaries    Subsidiaries       tions        Subsidiaries
                                                                ------------    ------------    ------------    ------------
                                                                                         (in 000's)
<S>                                                             <C>             <C>             <C>             <C>
10% Senior Subordinated Notes due
    2007, net of unamortized discount                           $  149,298      $               $               $  149,298
Term loan facilities:
   Tranche B Term Loan                                              72,380                                          72,380
   Tranche C Term Loan                                              38,744                                          38,744
   Delayed Draw Term Facility                                       24,372                                          24,372
Revolving Credit Facility                                           12,900          19,300                          32,200
Intercompany notes payable                                          96,701           6,666        (103,367)             --
Other                                                                                1,712                           1,712
                                                                ------------    ------------    ------------    ------------
                                                                   394,395          27,678        (103,367)        318,706
Less current maturities                                              6,175           3,299          (7,547)          1,927
                                                                ------------    ------------    ------------    ------------
Long-term debt, less current
           maturities                                           $  388,220      $   24,379      $  (95,820)     $  316,779
                                                                ============    ============    ============    ============
</TABLE>


Long-term debt and lines of credit at June 30, 2000 consist of the following :

<TABLE>
<CAPTION>

                                                                                                  Alliance
                                                                                                   Gaming
                                           Parent and            Non-                            Corporation
                                           Guaranteeing      Guaranteeing       Elimina-              and
                                           Subsidiaries      Subsidiaries         tions          Subsidiaries
                                          -------------     -------------     -------------      -------------
                                                                        (in 000's)
<S>                                       <C>               <C>               <C>                <C>
10% Senior Subordinated Notes due
    2007, net of unamortized discount     $   149,351      $                  $                  $  149,351
Term loan facilities:
   Tranche B Term Loan                         70,641                                                70,641
   Tranche C Term Loan                         37,776                                                37,776
   Delayed Draw Term Facility                  23,789                                                23,789
Revolving Credit Facility                      40,000           22,360                               62,360
Intercompany notes payable                    104,256            3,939           (108,195)               --
Other                                              --            1,142                                1,142
                                          -------------     -------------     -------------      -------------
                                              425,813           27,441           (108,195)          345,059
Less current maturities                         8,508            3,498            (10,970)            1,036
                                          -------------     -------------     -------------      -------------
Long-term debt, less current
   maturities                             $   417,305       $   23,943        $   (97,225)       $  344,023
                                          =============     =============     =============      =============
</TABLE>

                                      F-32
<PAGE>   86
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES

The federal, foreign and state income tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities as
of June 30, 1999 are as follows:

<TABLE>
<CAPTION>

                                                                                                    Alliance
                                                                                                      Gaming
                                             Parent and            Non-                            Corporation
                                            Guaranteeing       Guaranteeing         Elimina-           and
                                            Subsidiaries       Subsidiaries          tions         Subsidiaries
                                           -------------      -------------      -------------     -------------
                                                                         (in 000's)
<S>                                        <C>                <C>                <C>               <C>
Deferred tax assets:
   Net operating loss carry forwards       $   17,668         $                  $                 $   17,668
   Foreign tax credit carry forwards            7,527                                                   7,527
   Inventory obsolescence reserves              2,564               743                                 3,307
   Bad debt reserves                            2,694                 3                                 2,697
   Accruals not currently deductible
      for tax purposes                          3,046               327                                 3,373
   Refinancing costs being amortized
     for tax purposes                          10,683                                                  10,683
   Other                                        2,003             6,167                                 8,170
                                           -------------      -------------      -------------     -------------
Total gross deferred tax assets                46,185             7,240                                53,425
Less:  Valuation allowance                    (42,063)           (2,380)                              (44,443)
                                           -------------      -------------      -------------     -------------
Deferred tax assets                        $    4,122         $   4,860          $     --          $    8,982
                                           -------------      -------------      -------------     =============

Deferred tax liabilities:
   Property and equipment, principally
     due to depreciation differences       $    2,650         $     699          $                 $    3,349
   Other                                        1,586             1,994                                 3,580
                                           -------------      -------------      -------------     -------------
Total gross deferred tax liabilities            4,236             2,693                                 6,929
                                           -------------      -------------      -------------     -------------
Net deferred tax assets (liabilities)      $     (114)        $   2,167          $     --          $    2,053
                                           =============      =============      =============     =============
</TABLE>

                                      F-33
<PAGE>   87
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The federal, foreign and state income tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities as
of June 30, 2000 are as follows:

<TABLE>
<CAPTION>

                                                                                                     Alliance
                                                                                                      Gaming
                                             Parent and              Non-                          Corporation
                                            Guaranteeing       Guaranteeing        Elimina-             and
                                            Subsidiaries       Subsidiaries         tions          Subsidiaries
                                           -------------      -------------      -------------     -------------
                                                                         (in 000's)
<S>                                          <C>                <C>                   <C>            <C>
Deferred tax assets:
   Net operating loss carry forwards         $ 26,250            $                    $              $ 26,250
   Foreign tax credit carry forwards            7,527                                                   7,527
   Inventory obsolescence reserves              2,447                499                                2,946
   Bad debt reserves                            3,800                  5                                3,805
   Accruals not currently deductible
      for tax purposes                          3,182                248                                3,430
   Refinancing costs being amortized
     for tax purposes                           8,582                                                   8,582
   Other                                        2,464              7,029                                9,493
                                             --------            -------              ----           --------
Total gross deferred tax assets                54,252              7,781                               62,033
Less:  Valuation allowance                    (44,964)            (4,895)                             (49,859)
                                             --------            -------              ----           --------
Deferred tax assets                          $  9,288            $ 2,886              $ --           $ 12,174
                                             ========            =======              ====           ========

Deferred tax liabilities:
   Property and equipment, principally
     due to depreciation differences         $  6,238            $   391              $              $  6,629
   Other                                        3,687                 --                                3,687
                                             --------            -------              ----           --------
Total gross deferred tax liabilities            9,925                391                               10,316
                                             --------            -------              ----           --------
Net deferred tax assets (liabilities)        $   (637)           $ 2,495              $ --           $  1,858
                                             ========            =======              ====           ========
</TABLE>

                                      F-34
<PAGE>   88
                  ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13.        RESERVES AND ALLOWANCES

           The following tables represent the activity for each of the fiscal
           years ended June 30, 1998, 1999 and 2000 for each of the valuation
           reserve and allowance accounts (in 000's):

<TABLE>
<CAPTION>

                                                  Balance at                                     Balance at
                                                 Beginning of                                      End of
                                                     Year        Additions     Deductions            Year
                                                     ----        ---------     ----------            ----
           <S>                                     <C>            <C>            <C>               <C>
           Allowance for doubtful accounts:
           Year ended June 30, 2000                $13,696         $7,405        $   893           $20,208
           Year ended June 30, 1999                 13,041          3,817          3,162            13,696
           Year ended June 30, 1998                 23,901          2,722         13,582(a)         13,041

           Inventory valuation allowance:
           Year ended June 30, 2000                $ 7,077         $2,837        $ 3,254           $ 6,660
           Year ended June 30, 1999                  6,797          2,273          1,993             7,077
           Year ended June 30, 1998                  8,856            355          2,414             6,797

           Other assets valuation reserve:
           Year ended June 30, 2000                $ 3,468         $   --        $ 1,655           $ 1,813
           Year ended June 30, 1999                  3,488             --             20             3,468
           Year ended June 30, 1998                  3,502             18             32             3,488
</TABLE>

----------

(a)        Includes the $6.0 million net reversal of bad debt reserves related
           to the resolution of certain receivables sold with recourse to
           General Electric Capital Corporation. Such amount was included in
           unusual items in the accompanying consolidated statement of
           operations.


                                      F-35