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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 ACTS OF 1934
For the fiscal year ended June 30, 2002

[   ]  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
(State or other jurisdiction of
incorporation or organization) |  | 88-0104066
(I.R.S. Employer
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 $592,836,000 as of August 15, 2002.

The number of shares of Common Stock, $0.10 par value, outstanding as of August
15, 2002, according to the records of registrants registrar and transfer agent,
was 48,749,867.

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 our fiscal year and are incorporated by reference
into Part III of this Form 10-K.





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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | ITEM 1. BUSINESS                                                                             
|              | ITEM 3. LEGAL PROCEEDINGS                                                                    
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                
|              | ITEM 6. SELECTED FINANCIAL DATA                                                              
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|              | ITEM 11. EXECUTIVE COMPENSATION                                                              
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|              | ITEM 14. CONTROLS AND PROCEDURES                                                             
|PART IV      
|              | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES   
|EXHIBIT 10.35
|EXHIBIT 21   
|EXHIBIT 23.1 
|EXHIBIT 99.1 



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002




PART I




ITEM 1. BUSINESS

General

Alliance Gaming 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 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. We are among the market leaders in each of our business units.
Operating under the name
Bally Gaming and Systems, we are a worldwide leader in
designing, manufacturing and distributing gaming machines, having marketed over
70,000 gaming machines during the past five years. We also design, integrate
and sell highly specialized computerized monitoring systems that provide
casinos with networked accounting and security services for their gaming
machines with over 210,000 game monitoring units (GMUs) installed worldwide.
We also own, operate and service an installed base of over 9,000 slot and video
gaming machines that are located mostly in non-casino venues in Nevada and
Louisiana (Route Operations). We are the largest route operator of gaming
machines in Nevada and the second largest in Louisiana. We also own and operate
a dockside casino in Vicksburg, Mississippi, and a locals casino in Sparks,
Nevada, which together have approximately 24 table games and 1,500 gaming
devices (collectively, Casino Operations). In addition, operating under the
Bally Wulffname, we are a leading supplier of wall-mounted gaming machines and
amusement games in Germany, having sold over 55,000 wall machines and amusement
games during the last five years. Further information about our business units
is contained in the notes to the Consolidated Financial Statements.

We were incorporated in Nevada on September 30, 1968, under the name Advanced
Patent Technology. We changed our name to Gaming and Technology, Inc., in 1983,
to United Gaming, Inc., in 1988 and to Alliance Gaming Corporation on December
19, 1994. We conduct our gaming operations through directly and indirectly
owned subsidiaries. The terms the Company, we, and our as used herein
refer to Alliance Gaming Corporation and subsidiaries unless the context
otherwise requires. Our 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 Bally Gaming and Systems business unit consists of three
separate divisions: Gaming Products, Gaming Operations and Gaming Systems. The
following table sets forth the percentages of revenues provided by each of the
Bally Gaming and Systems divisions for the periods indicated:

|                    |  |                        |     |      |  |      |     |   |  |  |     |  
|------------------- |  | ---------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                    |  | Percentage of Revenues
|                    |  | Years ended June 30,  
|                    |  |                       
|Revenue by division |  | 2000                   |     | 2001 |  | 2002
|                    |  |                        |     |      |  |     
|Gaming Products     |  |                        | 55  | %    |  |      | 53  | % |  |  | 47  | %
|Gaming Operations   |  |                        | 15  |      |  |      | 18  |   |  |  | 24  |  
|Gaming Systems      |  |                        | 30  |      |  |      | 29  |   |  |  | 29  |  
|                    |  |                        |     |      |  |      |     |   |  |  |     |  
|                    |  |                        | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                    |  |                        |     |      |  |      |     |   |  |  |     |  

Markets.We believe that the domestic installed base of traditional gaming
devices now exceeds 650,000 units. The state of Nevada has the largest
installed base, totaling approximately 200,000 units as of June 30, 2002.

The gaming industry continues to expand in international markets. Our primary
international markets are Europe, Canada, Latin America and, to a lesser
extent, the Far East and the Caribbean. We conduct our business in Canada
through our staff based in the United States. We also distribute gaming
machines, manufactured by Bally Gaming, through direct and indirect
subsidiaries: Bally Gaming International, GmbH (GmbH), from our sales office
in

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Hannover, Germany (soon to be relocated to Gratz, Austria), 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.

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, 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, our
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 our system, or (b) expand their casino floors or upgrade their
hardware or software 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.

Gaming Products.We design, manufacture and sell 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. Our video gaming
machines are designed to simulate various card games, video reel-spinning
games, and keno through a video display, and can offer the player the chance to
play a multitude of different games. New games and themes are introduced
periodically to satisfy customer demand and to compete with product designs
introduced by competitors. The gaming products created are a result of a
comprehensive product development effort. The development process includes
extensive testing of the new products in-house and on casino floors for
reliability and player appeal.

We introduced our ProSeries reel-type slot machines in late 1993 and our
multi-game touch screen machine, the Game Maker®, in late 1994. In March 1998,
we introduced the first major upgrade to the ProSeries and upgraded the Game
Maker® product line, to the V7200 platform that is capable of multi-line video
and multi-coin functionality. Revenues from sales of ProSeries machines were
approximately $23.6 million, $32.3 million and $36.4 million for the years
ended June 30, 2000, 2001 and 2002, respectively.

The V7200 can offer up to ten different video games within one gaming device,
or can be configured as a dedicated single title game. The games can be
selected by the casino from a game library that has over 200 games. The games
simulate various card games, keno and popular reel-spinning games. The V7200
machines are available in upright, bar top, slim-line and slant top cabinets.
Revenues from sales of V7200 machines (and its predecessor, the Game Maker®)
were approximately $23.6 million, $30.2 million and $30.4 million for the years
ended June 30, 2000, 2001 and 2002, respectively.

We commenced development of a new game platform in January 2000, with the
intent of creating enhanced audio and video capabilities for our video product
line. We engaged Microsoft to assist in the development of an NT based
graphics and audio package addition to the legacy V7000 game board. The result
was the Evolution platform, or EVO, that offers superior audio and graphic
capabilities on the wealth of Windows® based software and content programmers
available in the marketplace. This new game platform allows for the creation
of game content at much faster rates than before, thus reducing the time to
market for new products developed. The first EVO products were marketed in the
mid summer of 2002, with sales totaling $17.5 million for the fiscal year ended
June 30, 2002.

We typically offer a 90-day parts and labor warranty for new gaming machines
sold and are actively involved in customer service after the original
installation. We provide several after-sale, value-added services to our
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. Our historical warranty expense as
a percentage of revenues has been less than 1%.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

In addition, we sell and service used gaming machines and sell parts for
existing machines. We often accept 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 was approximately $3.7 million, $3.1 million and $4.8 million for the
years ended June 30, 2000, 2001 and 2002, respectively.

Gaming machines have a mechanical life that can exceed ten years. However, in
the established markets, our experience is that casino operators usually
replace gaming machines after a much shorter period. The factors that 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.

Gaming Operations.During the past three years, the proprietary gaming
operations division of Bally Gaming and Systems has moved to a full service
provider of gaming products by adding to its product line games which are
either linked on a wide-area progressive system, or are non-linked niche games,
which are gaming machines that generally offer complex features. These gaming
machines are placed in casinos and earn recurring revenues and cash flows for
us rather than being sold on a one-time basis. These gaming machines are more
profitable as a result of the recurring nature of the revenue derived from such
games, but they require us to invest capital in the cost of manufacturing the
gaming machines, obtaining intellectual property, and in purchasing signs and
seating. Gaming Operations generated revenues of approximately $20.8 million,
$28.4 million and $53.2 million the fiscal years ended June 30, 2000, 2001 and
2002, respectively.

We received regulatory approval from the Nevada Gaming Control Board of our
wide-area progressive jackpot system named Thrillions 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. Separate wide-area
progressives are being operated by us in Nevada, Mississippi and Native
American lands, and by a separate third-party trust arrangement in Atlantic
City.

The following was the installed base of wide-area progressive games:

|                  |  |             |  |            |       |                   |       |      |     |  |       | 
|----------------- |  | ----------- |  | ---------- | ----- | ----------------- | ----- | ---- | --- |  | ----- | 
|                  |  |             |  |            |       | Units Outstanding
|                  |  |             |  |            |       | As of June 30,   
|                  |  |             |  | Date       |       |                  
|                  |  |             |  | Introduced |       | 2001              |       | 2002
|                  |  |             |  |            |       |                   |       |     
|Betty Boop        |  | March 1999  |  |            | 1,035 |                   |       |      | 830 | 
|Blondie           |  | March 2001  |  |            | 420   |                   |       |      | 420 | 
|Millionaire 777's |  | June 2001   |  |            | 225   |                   |       |      | 565 | 
|Popeye            |  | August 2001 |  |            |      |                   |       |      | 470 | 
|                  |  |             |  |            |       |                   |       |      |     |  |       | 
|                  |  |             |  |            |       |                   | 1,680 |      |     |  | 2,285 | 
|                  |  |             |  |            |       |                   |       |      |     |  |       | 

We also offer a variety of non-linked daily fee games. These games have been
marketed under such titles as Playboy (Playboy and Rabbit Head Design are marks
of Playboy and used under license by Bally Gaming, Inc.), Bell Ringer®, Love
Meter, and 99 Bottles of Beer, all of which are approved in most major gaming
markets. We believe that games with such intellectual property features will
continue to gain floor space in casinos. The Thrillions system has been
designed to allow casinos to use their own branding for the product.
Currently, Park Place Entertainment utilizes the Thrillions system as a
platform for their own network of linked games for their properties in Nevada
and Mississippi markets, for which they pay a daily fee per game. We also earn
recurring revenues from gaming devices deployed at three horseracing facilities
under an agreement with the Delaware State Lottery Commission. As of June 30,
2002, we had an installed base of daily fee games totaling 1,350 units.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

System Products.We design, integrate, and sell 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 as well as player marketing information that 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 (i) hardware consisting of micro controller-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; (ii) firmware developed by us, which provides access to
the slot machines and players activity data gathered by the micro controller
hardware; and (iii) business applications software developed by us which
manages the slot machine and player activity information. This software
resides on Unix or PC based servers. We also provide software and hardware
support services, including maintenance, repair and training for purchasers of
our monitoring systems.

During 2002, we completed two strategic acquisitions in the systems area:
Casino Marketplace and Advanced Casino Systems Corporation. These acquisitions
bolstered our product offerings to include player marketing and promotions
software as well as a system that runs on an AS400 platform.

Product Development.We believe 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. We believe 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 $12.6 million, $11.0 million and $15.0 million
during the years ended June 30, 2000, 2001 and 2002, respectively. The increase
in research and development spending in the year ended June 30, 2002, is a
result of the EVO system development and advance product development efforts.

We develop our products for both the domestic and international market. Our
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 us. On an annual basis, we expect to
introduce more than ninety 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.

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 jurisdictions, but many jurisdictions outside
North America generally do not require approval. 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. The Nevada State Gaming Control Board and
the Nevada Gaming Commission must each approve new product platforms 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 Nevada State Gaming Control Board
staff can approve the product administratively. Each jurisdiction that requires
regulatory approval of new products has its own filing requirement and process.
Once products are approved by the gaming regulators, customers may 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. We do 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 micro controller
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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

architecture, which focuses development on achieving greater functionality,
product reliability, and ease of maintenance for the casino operator 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 design changes or for changes made by
various slot manufacturers with which Systems product must communicate and be
physically integrated. Software development results in (i) periodic product
releases that include new features that extend and enhance the SDS product;
(ii) periodic maintenance releases that enable casino operators to correct
problems or improve the usability of the system; and (iii) documentation needed
to install and use the system.

We have 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. We also offer other forms of cashless wagering for use on slot machines
and the SDS system. The bar-coded coupon products are approved in New Jersey,
Nevada and Native American jurisdictions. An extension to the bar-coded coupon
products called SDS Ticketing is in field trial in Nevada, Michigan, and is
approved for use in various Native America jurisdictions. It is also submitted
for approval in New Jersey and Mississippi. Our Casino Marketplace and SDS
products offer additional cashless capabilities that give casino operators the
option of allowing their slot players to move club account funds to the gaming
machine as well as deposit them back to the club account.

Sales and Marketing.Bally Gaming and Systems uses a direct sales force and,
to a lesser extent, an independent distributor network to distribute our
products. Bally Gaming and Systems North America sales staff consists of
approximately 32 people in offices in Nevada, New Jersey, Mississippi,
Illinois, California, Missouri and Florida.

Bally Gaming and Systems direct sales force generated approximately 93%, 81%
and 76% of new unit machine sales for the years ended June 30, 2000, 2001 and
2002, 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
we may terminate such agreements if certain performance standards are not met.
These independent distributors generated approximately 7%, 19% and 24% of new
gaming machine unit sales for the years ended June 30, 2000, 2001, and 2002,
respectively.

As of June 30, 2002, we had over 210,000 game monitoring units installed in 185
locations, of which approximately 99% are in the United States. Substantially
all Systems revenues are generated by our direct sales force.

For the year ended June 30, 2002, approximately 85% of our slot and video
gaming machine sales were on terms of 90 days or less. Approximately 15% of our
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 8% 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 we have
participated in the financing of other gaming-related equipment manufactured by
third parties in the emerging markets. For SDS sales, we generally offer
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, we offer our 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 us. 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. For the year
ended June 30, 2002, the ten largest customers (including corporate customers
with multiple casino properties) accounted for approximately 38% of the Bally
Gaming and Systems new unit sales, with the largest single customer accounting
for 13% of new units sales.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

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 to establish and compile
individual machine and player profitability and other demographic information.
All of this enables casinos to develop or enhance 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 our system or (b) expand
their casino floors or upgrade their hardware to a new product release. For the
year ended June 30, 2002, the ten largest computerized monitoring system
customers (which include certain multi-site casino operators that have
corporate agreements) accounted for approximately 71% of game monitoring unit
sales revenues. Due to the high initial costs of installing a computerized
monitoring system, customers for such systems generally do not 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. All assembly of game monitoring unit
products is performed in the Las Vegas facility.

In March 2000, we entered into an agreement with Multimedia Games, Inc. to
supply gaming devices for use in Class III and other markets. The agreement was
amended in April 2000 to include Class II markets. Multimedia also purchases
the rights to certain Bally themes, which entitles them to certain Bally
proprietary game themes. Multimedia redesigns these game themes to be
compatible with its operating system configurations. Sales of base gaming
devices to Multimedia totaled approximately $2.0 million and $10.7 million for
years ended June 30, 2001 and 2002, respectively, and sales of game themes
totaled $1.0 million for the year ended June 30, 2002.

Management believes our assembly operations allow for rapid generation of
different models to fill orders quickly and efficiently. Another major
advantage of the existing plant operation is that 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 to a particular customers design/feature request. Bally Gaming and
Systems produces products for individual customer orders, thereby reducing the
risk of a backlog of 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 our lines in each of our markets. The other major competitors are
AC Slot and Coin, Aristocrat, 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 Atronic,
Cirsa, Konami, Novomatic and Sega Enterprises Ltd. Many of these companies look
to expand their market share by decreasing our 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. Besides Bally Gaming, Acres
Gaming, IGT, Aristocrat and Mikohn offer wide-area progressive systems, and
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. The competition 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,
Aristocrat, Acres Gaming, and to a lesser extent, Gaming Systems International
and Mikohn. 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,

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

accuracy, and reliability are all key factors in determining a providers
success in selling its system. Management believes the future success of our
operations will be determined by our ability to bring new and innovative
products to the market while maintaining our 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 us as it relates to machines in arcades
operated by our two main German competitors.

Wall machine sales into the arcade market account for approximately 40% of the
total wall machine sales in Germany. During the first half of 2002, NSM, AG
sold their arcade operation leaving the largest competitor, Gauselmann, AG
operating around 200 arcades. Generally Gauselmann does not purchase wall
machines from Bally Wulff for their arcades. Management believes Bally Wulffs
share of the German wall machine market was approximately 21%, 30% and 20% for
the years ended June 30, 2000, 2001 and 2002, 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.

In August 2001, the regulators approved a change to the play parameters for
wall machines, reducing the time per play cycle from 15 seconds to 12 seconds,
an improvement of 25%. The sale of 12-second games totaled 4,670 units in 2002.
This change was petitioned by the arcade operators who believe that the
improved speed of play will attract players to wall machines and away from
other types of non-gaming amusement games.

The regulations regarding the useful life of a wall machine are under review,
and there is substantial pressure from the operators to increase the life. The
timing of such a change, if any, is not known, but if enacted would likely have
an adverse impact on Bally Wulff.

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 play costs up to 40 pfennigs (approximately $0.20 at the
exchange rate of $0.20=Euro 0.20 prevailing as of June 30, 2002, 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 (Euro 2.00 or approximately
$1.97 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

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 our
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:

|                                                                               |  |                        |     |      |  |      |     |   |  |  |     |  
|------------------------------------------------------------------------------ |  | ---------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                                                               |  | Percentage of Revenues
|                                                                               |  | Years ended June 30,  
|                                                                               |  |                       
|Product Line                                                                   |  | 2000                   |     | 2001 |  | 2002
|                                                                               |  |                        |     |      |  |     
|Sale of wall machines manufactured by Bally Wulff                              |  |                        | 40  | %    |  |      | 42  | % |  |  | 38  | %
|Leasing of wall machines manufactured by Bally Wulff                           |  |                        | 14  |      |  |      | 12  |   |  |  | 14  |  
|Entertainment and amusement machines and third party
wall machines distributed |  |                        | 42  |      |  |      | 42  |   |  |  | 47  |  
|Other (primarily used machines, parts and service)                             |  |                        | 4   |      |  |      | 4   |   |  |  | 1   |  
|                                                                               |  |                        |     |      |  |      |     |   |  |  |     |  
|                                                                               |  |                        | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                                                                               |  |                        |     |      |  |      |     |   |  |  |     |  

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 our 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 our competitors to assess their strengths and
weaknesses and then suggest ideas for new machines. We review these ideas 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 $2.7
million, $2.5 million and $2.6 million during the years ended June 30, 2000,
2001 and 2002, respectively.

Sales and Marketing.Bally Wulff sells virtually all of our products through
our direct sales force of approximately 55 individuals located in 20 regional
sales offices. Independent German distributors account for approximately 5% 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 Euro 2,250 to Euro 4,150 (approximately $2,220 to $4,100).
Due to price competition among the three largest manufacturers, selling prices
have declined since 1997. Management believes that such declines in prices have
reached bottom, and expects improvements in the future. For the year ended June
30, 2002, 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 6% 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

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 our sales, and management
expects this practice to increase during fiscal 2003. Leasing machines to
customers accounted for 14%, 12% and 14% of total revenues for the years ended
June 30, 2000, 2001 and 2002, respectively. In approximately 94% of our 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 has maintained their
relationship with Bally Wulff for over five years. For the year ended June 30,
2002, Bally Wulffs top ten customers accounted for approximately 7% of Bally
Wulffs revenues, while no single customer accounted for more than 2% of Bally
Wulffs revenues.

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. Our manufacturing facility consists of a four-story,
100,000-square foot building in Berlin, Germany. Bally Wulff purchases our 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 our manufacturing structure, Bally Wulff is capable of substantially
increasing our wall machine output without significant capital expenditures.
Bally Wulff continues to improve our 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.Bally Wulff and two of our competitors, NSM, AG and Gauselmann,
AG, dominate Germanys wall machine manufacturing industry. 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 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 our 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. Our 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, convenience stores and casinos
operated by third parties (local establishments). Our route operations
target Nevada residents who generally frequent local establishments close to
their homes.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

The following table sets forth certain historical data concerning our Nevada
route operations:

|                                           |  |                      |       |      |  |      |       |  |  |   |       | 
|------------------------------------------ |  | -------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                           |  | Years ended June 30,
|                                           |  |                     
|                                           |  | 2000                 |       | 2001 |  | 2002
|                                           |  |                      |       |      |  |     
|Average number of gaming machines operated |  |                      | 7,856 |      |  |      | 8,083 |  |  |   | 8,281 | 
|Average number of locations                |  |                      | 687   |      |  |      | 703   |  |  |   | 702   | 
|Average win per day per gaming machine     |  | $                    | 63.10 |      |  | $    | 67.75 |  |  | $ | 68.22 | 

At June 30, 2002, we operated approximately 8,350 machines on our Nevada route.
We have 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.

We enter 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, we
do not pay rent, but rather receive 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
operators license that we hold. Under space lease arrangements, most common
with supermarkets and drug stores, we pay a fixed rental amount to the owner of
the local establishment and we receive all of the net win derived from the
gaming machines. Under space lease arrangements, only we (and not the
establishment owner) are required to hold a gaming license. Most of the local
establishments serviced by us are restricted by law to operating no more than
15 gaming machines.

Revenue-sharing arrangements accounted for approximately 84%, 80%, and 82% of
revenues and 74%, 77%, and 78% of installed machines, respectively, in our
Nevada route operations for the years ended June 30, 2000, 2001 and 2002. At
June 30, 2002, the weighted average remaining term of our revenue sharing
arrangements was approximately 3.0 years. Space lease arrangements accounted
for approximately 16%, 20%, and 17% of revenues and 26%, 23%, and 22% of
installed machines, respectively, in our Nevada route operations for the years
ended June 30, 2000, 2001 and 2002. At June 30, 2002, the weighted average
remaining term of our space leases was 2.7 years.

We have historically been able to renew or replace revenues from expiring
agreements with revenues generated by renewal or replacement contracts. We have
emphasized return on investment rather than increasing market share in renewing
or entering into new contracts and have undertaken a systematic review process
to adjust our 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, we believe that
we are able to differentiate ourselves from our competitors because we are a
full-service operation that provides our customers support for marketing
promotional allowances, and because we use our design capabilities to provide
electronic gaming machines with features customized to customers needs. We
developed and continue to implement a system called Gamblers Bonus. Gamblers
Bonus is a patented 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, we are able to provide
our 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 programs. Additionally, we are offering a series of games
available only to Gamblers Bonus members, and continue to enhance Gamblers
Bonus with new games and technology.

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, 2002, we had the Gamblers Bonus installed in over 4,000 gaming machines at
approximately 406 locations or 49% of the installed base of gaming machines. We
believe Gamblers Bonus will continue to improve both the revenues and operating
efficiencies of our Nevada route operations and has the potential to create
additional opportunities in the route operations segment of the gaming
industry.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Customers.We have a diversified customer base with no one customer accounting
for more than 3% of our revenues generated from Nevada route operations during
the year ended June 30, 2002, although approximately 7% of such revenues were
generated through an affiliated group of such customers. The affiliated group
consists of eight partnerships each having one individual partner who is common
to all such partnerships. For the year ended June 30, 2002, the ten largest
customers accounted for approximately 14% of the Nevada route operations
revenues.

Assembly Operations.In years prior to 1998, our route operations manufactured
their own gaming machines for use in our Nevada route operations. These
machines represent approximately 34% of the gaming machines currently used in
the Nevada route operations at June 30, 2002. In July 1998, we received
regulatory approval to begin using the Bally Game Maker® platform for Gamblers
Bonus gaming machines deployed on the Nevada route. At June 30, 2002,
approximately 38% of the installed base of gaming machines on the Nevada route
was manufactured by Bally Gaming.

Competition.We are subject to substantial direct competition for our
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, Anchor Gaming,
ET&T, and Golden Gaming (formerly 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 our 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 our Nevada route operations expertise, in March 1992
we obtained a contract to operate video poker gaming machines in the greater
New Orleans, Louisiana area through a subsidiary, Video Services, Inc. (VSI).
We entered into an operating agreement which runs through April 2003 with Fair
Grounds Corporation and its affiliates, Jefferson Downs Corporation and Finish
Line Management Corporation (collectively, Fair Grounds), under which we are
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 us to match any third
party offer to operate the machines after April 2003. We operate the game rooms
where the video poker machines are located for each of the nine facilities
owned by Fair Grounds, for which we receive a percentage of the revenue
generated by the machines. As of June 30, 2002, we had approximately 700 video
poker machines in Louisiana.

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, we own 49% of the common stock
of VSI and three prominent members of the Louisiana business and legal
community own the remaining 51%. We, however, own all the voting stock of VSI
and all of VSIs officers and directors are Company employees. We have a 71%
interest in dividends of VSI in the event dividends are declared. We 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 we are entitled to receive
60% of any SVS dividends. Under the terms of our contract with Fair Grounds,
we 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.

We are prohibited by the Louisiana Act from engaging in both the manufacture
and operation of video poker gaming in Louisiana and, therefore, we do not
manufacture our own video poker machines for use in Louisiana.

Sales and Marketing.VSI has developed an extensive marketing program under
the name The Rockin Horse Game Room 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 players club, direct
mailings and offerings of a wide range of prizes. We intend to expand our
operations selectively in the greater New Orleans area by increasing the number
of video poker machines in certain of our existing locations as demand
warrants. We continue to

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

investigate the addition of new locations under our current contract with the
Fair Grounds in areas where competitive factors are favorable. Under the
Louisiana Act, racetracks and OTBs are permitted to install an unlimited number
of video poker machines while truck stops and taverns may install only limited
numbers of such machines.

Competition.The racetrack and OTB locations where we operate video poker
machines compete with three riverboat casinos, one land based casino,
thirty-two truck stops and approximately 1,730 tavern locations with liquor
licenses throughout the New Orleans area. Each truck stop 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. The riverboats and land based casino are permitted to have live
table games and an unlimited number of gaming machines, including slot
machines.

Casino Operations

Overview.

Rainbow Casino.The Rainbow Hotel Casino located in Vicksburg, Mississippi,
began operations in July 1994. The facility includes a 33,000-square foot
casino, with 977 gaming devices and 16 table games as well as a 250-seat
restaurant/buffet and 20,000-square foot conference center. The facility also
includes the 89-room Rainbow Hotel, which is owned and operated by a third
party. Rainbow Casino is marketed as a locals casino and draws our customers
principally from within a 75-mile radius of Vicksburg. The Vicksburg casino
market generated approximately $240 million in gaming revenue in the twelve
months ended June 30, 2002, representing a growth rate of 5%.

We are the general partners of Rainbow Casino Vicksburg Partnership, L.P.
(RCVP) the limited partnership that operates the Rainbow Casino. The limited
partner, Rainbow Corporation, an independent third party is entitled to receive
10% of the net available cash flows after debt service and other items, as
defined (which amount increases to 20% of such amount for the proportional
revenues above $35.0 million) each year through December 31, 2010. The Company
holds the remaining economic interest in the partnership.

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, 2002 operated approximately 530 gaming
devices, 8 table games, and live 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 primarily to the local market.

Sales and Marketing.Our casinos target the mid-level gaming customers in the
market. We promote our casinos primarily through direct mail, 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 our 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 success of marketing programs. Many of Rail City Casinos competitors
include large casino-hotels that offer more amenities, as well as smaller
casinos and taverns that appeal to local area residents. The Rainbow Casino
faces substantial direct competition for gaming customers from the three other
gaming facilities in Vicksburg as well as other gaming operations through out
Mississippi.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Patents, Copyrights and Trade Secrets

Bally Gaming, Inc., is the copyright owner (or has licenses to use) game
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. Together with our subsidiaries, we have 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, Inc., is obligated under several patent agreements to pay
royalties ranging from approximately $5 to $300 per applicable game depending
on the components in the gaming machines. In addition, we have 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, 2000, 2001, and 2002 was $3.4 million,
$3.5 million, and $2.8 million, respectively.

Employees and Labor Relations

As of June 30, 2002, we and our subsidiaries employed approximately 2,500
persons, including approximately 1,475 persons in Nevada, 60 persons in
Louisiana, 500 persons in Mississippi, 45 persons in various other states and
420 persons in Germany. These employees are not covered by collective
bargaining agreements. 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. We believe we have satisfactory
relationships with our employees.

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 we operate and may expand our 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 our gaming
businesses. A change in the make-up of our 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. Our gaming, manufacturing, distributing, and slot route operations
(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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

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 our gaming-related operations.

We are registered with the Nevada Commission as a publicly traded corporation
(a Registered Corporation). Our direct and indirect subsidiaries that
manufacture or distribute gaming devices or 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, we are required periodically to submit
detailed financial and operating reports to the Nevada Gaming Authorities and
furnish any other information the Nevada Gaming Authorities 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
otherwise 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
systems meet 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 or material involvement with us, 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
licensing, the 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 Intermediary Companies, the Corporate Licensees, or us
the companies involved would have to sever all relationships with that person.
In addition, the Nevada Commission may require the Intermediary Companies, the
Corporate Licensees or us to terminate the employment of any person

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

who refuses to file appropriate applications. Licensing and suitability
determinations are not subject to judicial review in Nevada.

We and the Corporate Licensees that hold non-restricted licenses are
required to submit detailed financial and operating reports to the Nevada
Commission. A non-restricted license is a license for an operation consisting
of sixteen 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
non-restricted 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 non-restricted 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 of
our security to file applications, be investigated, and be found suitable to
own our securities 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 percent 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 percent of any class of a Registered Corporations voting
securities apply to the Nevada Commission for a finding of suitability within
thirty 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 percent,
but not more than 15 percent (nineteen percent if such additional ownership
results from a stock repurchase program conducted by the Registered
Corporation, subject to certain conditions), 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 Registered Corporations
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 thirty days after being ordered to do so by the Nevada
Commission or the chairman of the Nevada Board may be found unsuitable. The
same 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

We are subject to disciplinary action if, after we receive 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, we (i) pay
that person any dividend or interest upon voting securities of the Company;
(ii) allow that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person; (iii) pay remuneration in any
form to that person for services rendered or otherwise; or (iv) fail 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.

We are 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. We are 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.

We may not make a public offering of our securities without the prior approval
of the Nevada Commission if the securities or proceeds there from 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.

Changes in control of the Company through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct
whereby a person or entity acquires 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 the 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 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

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 conduct their operations. 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 who is 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 $25,000 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 are 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 investigative 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 our gaming operations in
Louisiana, have 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, 2004, and are subject to renewal for
five-year terms thereafter. Annual fees must be paid on or before July 1 in
each year regardless of the license expiration date.

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 license is deemed a pure and absolute privilege and
issuance, condition, denial, suspension or revocation of a license 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

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 percent ownership of, or interest in income or profits 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 has an application pending to renew our license as a manufacturer
of devices under the Louisiana Gaming Law. In the past, a manufacturer would
have to obtain a separate permit to do business with video poker, riverboat,
and land-based casino licensees. However, recent changes have been enacted to
Louisianas Gaming Law to allow manufacturers to apply for and obtain one
permit to be able to conduct business in the different gaming venues.

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, but primarily the
licensing and regulatory control of the Mississippi Gaming Commission (the
Mississippi Commission).

The Mississippi Gaming Control Act (the Mississippi Act), which legalized
dockside casino gaming in Mississippi, 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 are based on declarations of public policy that are
concerned with, among other things: (i) the prevention of unsavory or
unsuitable persons from having direct or indirect involvement with gaming at
any time or in any capacity; (ii) the establishment and maintenance of
responsible accounting practices and procedures; (iii) the maintenance of
effective controls over the financial practices of licensees, including
establishment of minimum procedures for internal fiscal affairs and
safeguarding of assets and revenues, providing for reliable record keeping and
requiring the filing of periodic reports with the Mississippi Commission; (iv)
the prevention of cheating and fraudulent practices; (v) providing a source of
state and local revenues through taxation and licensing fees; and (vi) ensuring
that gaming licensees, to the extent practicable, employ Mississippi residents.
The regulations are subject to amendment and interpretation by the Mississippi
Commission. We believe our compliance with the licensing procedures and
regulatory requirements of the Mississippi Commission will not affect the
marketability of our securities. Changes in Mississippi law or regulations may
limit or otherwise materially affect the types of gaming that may be conducted,
and such changes, if enacted, could have an adverse effect on us and our
Mississippi gaming operations.

The Mississippi Act provides for legalized dockside gaming in each of the
fourteen counties that border the Gulf Coast or the Mississippi River, but only
if the voters in the county have not voted to prohibit gaming in that county.
Currently, dockside gaming is permissible in nine of the fourteen eligible
counties in the state and gaming operations have commenced in seven 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 to a site on the Big Black River in
Warren County near Interstate 20 between Jackson and Vicksburg, Mississippi,
where the Rainbow Casino is located. The Mississippi Commission ruled that the
site was unsuitable, and the Mississippi Supreme Court upheld the Commissions
decision. The landowner and the license applicant have filed a petition for
rehearing, which is pending before the

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Mississippi Supreme Court. The Mississippi Act 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.

The Mississippi Act permits substantially all traditional casino games and
gaming devices. The Company, RCVP, Bally Gaming, Inc. (BGI), and their
affiliates are subject to the licensing and regulatory control of the
Mississippi Commission. We are registered under the Mississippi Act as a
publicly traded corporation (a Registered Corporation) and holding company of
RCVP and BGI. As a Registered Corporation, we are required periodically to
submit detailed financial and operating reports to the Mississippi Commission
and furnish any other information the Mississippi Commission may require. If we
are unable to continue to satisfy the registration requirements of the
Mississippi Act, we and our affiliates cannot own or operate gaming facilities
or continue to act as a manufacturer and distributor in Mississippi. No person
may become a stockholder of, or receive any percentage of profits from, a
licensed subsidiary of a Registered Corporation or a holding company without
first obtaining licenses and approvals from Mississippi Commission. We and our
affiliates have obtained the necessary licenses and approvals from the
Mississippi Commission. 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 and a wide-area progressive operator
license to operate its progressive slot system. Such licenses are issued by the
Mississippi Commission subject to certain conditions, including continued
compliance with all applicable state laws and regulations.

There are no limitations on the number of licenses that may be issued in
Mississippi. Gaming and manufacturer and distributor licenses are not
transferable, are issued for a three-year period (and may be renewed for two
additional three-year periods) 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 and its wide-area progressive operator license.

Certain of our officers and employees and the officers, directors, and certain
key employees of our licensed subsidiaries must be found suitable or be
licensed by the Mississippi Commission. We believe we have obtained, applied
for, or are in the process of applying for all necessary findings of
suitability with respect to such persons affiliated with us, 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 us 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 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.

Determinations of suitability or questions pertaining to licensing are not
subject to judicial review in Mississippi. At anytime, Mississippi Commission
has the power to investigate and require the finding of suitability of any
record or beneficial stockholder of the Company. The Mississippi Act requires
any person who acquires more than 5 percent of any class of voting securities
of a Registered Corporation, as reported to the Securities and Exchange
Commission (SEC), 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 percent of any class of voting
securities of a Registered Corporation, as reported to the SEC, must apply for
a finding of suitability by the Mississippi Commission. The Mississippi
Commission generally has exercised its discretion to require a finding of
suitability of any beneficial owner of more than 5 percent of any class of
voting securities of a Registered Corporation. However, the Mississippi
Commission has adopted a policy that permits certain institutional investors to
own beneficially up to 15 percent of a class of voting securities of a
Registered Corporation 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Any record or beneficial stockholder required to apply for a finding of
suitability must pay all investigative fees and costs of the Mississippi
Commission in connection with the 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 Mississippi Commission may be found unsuitable.
The same restrictions apply to a record owner if the record owner, after
request, fails to identify the beneficial owner. Any person found unsuitable
and who holds, directly or indirectly, any beneficial ownership of such
securities beyond such time as the Mississippi Commission prescribes may be
guilty of a misdemeanor. We may be subject to disciplinary action if, after
receiving notice that a person is suitable to be a stockholder or to have any
other relationship with us or our Mississippi gaming subsidiaries, the company
involved: (i) pays the unsuitable person any dividend or other distribution on
that persons voting securities; (ii) recognizes the exercise, directly or
indirectly, of any voting rights conferred 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 a fair market value.

We may be required to disclose to the Mississippi Commission on request the
identities of the holders of any of our debt or other securities. In addition,
under the Mississippi Act, the Mississippi Commission may in its discretion
require the holders of any debt security of a Registered Corporation to file an
application, be investigated, and be found suitable to own the debt security if
the Mississippi Commission has reason to believe that the ownership would be
inconsistent with the declared policies of the state of Mississippi. 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. If the Mississippi
Commission determines that a person is unsuitable to own a debt security, then
the Registered Corporation may be sanctioned, including the loss of its
approvals, if without the prior approval of the Mississippi Commission it: (i)
pays to the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by the unsuitable person in
connection with those 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.

RCVP and BGI must maintain in Mississippi a current ledger with respect to the
ownership of their equity securities, and we 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 class of our equity
securities. The ledger and stockholder lists must be available for inspection
by the Mississippi Commission 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 Mississippi Commission. A failure to
make such disclosure may be grounds for finding the record holder unsuitable.
We 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 Corporation bear a legend indicating that the securities are subject
to the Mississippi Act and the regulations of the Mississippi Commission. We
have received from the Mississippi Commission a waiver of this legend
requirement. The Mississippi Commission has the power to impose additional
restrictions on the holders of our securities at any time.

Substantially all material loans, leases, sales of securities and similar
financing transactions by a Registered Corporation or 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. A Registered Corporation 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Under the regulations of the Mississippi Commission, a Mississippi gaming
subsidiary may not guarantee a security issued by an affiliated company
pursuant to a public offering, or pledge its assets to secure payment or
performance of the obligations evidenced by the security issued by the
affiliated company, without the prior approval of the Mississippi Commission.
A pledge of the stock of a Mississippi gaming subsidiary and the foreclosure of
such a pledge are ineffective without the prior approval of the Mississippi
Commission. Moreover, restrictions on the transfer of an equity security issued
by a Mississippi gaming subsidiary and agreements not to encumber such
securities are ineffective without the prior approval of the Mississippi
Commission.

Changes in control of the Company through merger, consolidation, acquisition of
assets, management or consulting agreements, or act or conduct by a person by
which he or she obtains control, may not occur without the prior approval of
the Mississippi Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Mississippi Commission in a variety of stringent
standards prior to assuming control of the Registered Corporation. 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
Registered Corporations 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 a Registered Corporation may make exceptional repurchases of
voting securities (such as repurchases that treat holders differently) in
excess of the current market price and before a corporate acquisition opposed
by management may be consummated. Mississippis gaming regulations also require
prior approval by the Mississippi Commission of a plan or recapitalization
proposed by a Registered Corporations board of directors in response to a
tender offer made directly to the stockholders for the purpose of acquiring
control of the Registered Corporation.

Neither we nor any of our subsidiaries 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. We have
previously obtained a waiver of foreign gaming approval from the Mississippi
Commission for operations in other states 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 determined that we or a licensed gaming
subsidiary violated a gaming law or regulation, the Mississippi Commission
could limit, condition, suspend, or revoke our approvals and the license of the
subsidiary. In addition, we, the licensed subsidiary, and the persons involved
could be subject to substantial fines for each separate violation. Because of
such violations, the Mississippi Commission could seek to appoint a supervisor
to operate our casino facilities. Limitation, conditioning or suspension of any
gaming license or approval or the appointment of a supervisor could (and
revocation of any gaming license or approval would) materially adversely affect
us and RCVPs gaming operations or BGIs manufacturer, distributor, and
wide-area progressive 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 on 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 gaming devices 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

less payouts to customers as winnings), and the current maximum tax rate
imposed is 8 percent of gaming receipts in excess of $134,000 per month. The
foregoing license fees we pay are allowed as a credit against our Mississippi
income tax liability paid for the year. The gross revenue fee imposed by the
City of Vicksburg, Mississippi, where RCVPs casino operations are located,
equals approximately 4 percent of gaming receipts.

The Mississippi Commissions regulations require as a condition of licensing or
license renewal that an existing licensed gaming establishments plan include a
500-car parking facility in close proximity to the casino complex and
infrastructure facilities that amount to at least 25% of the casino cost. We
believe the Rainbow Casino is in compliance with this requirement. The
Mississippi Commission adopted a change to this regulation increasing the
infrastructure requirement to 100 percent; 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.

In recent years, certain anti-gaming groups proposed for adoption, through the
initiative and referendum process, certain amendments to the Mississippi
Constitution that would prohibit gaming in the state. The proposals were
declared illegal by the Mississippi courts on constitutional and procedural
grounds. The latest ruling was appealed to the Mississippi Supreme Court, which
affirmed the decision of the lower court. If another such proposal were to be
offered and if a sufficient number of signatures were to be gathered to place a
legal initiative on the ballot, it is possible for the voters of Mississippi to
consider such a proposal in November 2003. While we are unable to predict
whether such an initiative will appear on a ballot or the likelihood of such an
initiative being approved by the voters, if such an initiative were passed and
gaming were prohibited in Mississippi, it would have a significant adverse
effect on us and our Mississippi gaming operations.

The sale of alcoholic beverages by the Rainbow Casino owned and 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 RCVPs operations. Certain officers and managers of RCVP 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 Casino Control
Commission (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). In May 2002, BGIs CSI license was renewed by the New
Jersey Commission for a period of four years, the maximum renewal period
permitted by law. We are a holding company of BGI, as that term is defined by
the Casino Control Act, and thus are a qualifier in connection with BGIs CSI
license and have been approved as such by the New Jersey Commission.

The New Jersey Commission requires the officers, directors, key personnel,
financial sources, and stockholders (in particular those with holdings in
excess of 5 percent) of a CSI license holder and its holding and intermediary
companies to qualify in accordance with the Casino Control Act. BGI is required
to notify the New Jersey Commission of any appointment, nomination, election,
resignation, termination, incapacitation, or death of any person or entity
otherwise required to qualify pursuant to the Casino Control Act. 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

given that such a tax will not be imposed in the future. Any such tax could
have a material adverse effect on our businesses, financial conditions, or
results of operations.

Germany.German legislative authorities regulate and monitor the wall machine
industry to ensure certain manufacturing standards and the fairness of each
machine to users. The most significant legislation presently affecting the wall
machine industry prescribes licensing procedures and governs 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. After receiving governmental licensing approval for a machine, 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
eighteen 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. As
from March 1, 2002, these regulations limit game payouts to ten times the
maximum stake of Euro 0.20, or Euro 2.00 (approximately $1.97), per game,
require a minimum payout percentage, prescribe a minimum duration of twelve
seconds per game, 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 (fifteen 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.

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 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 percent 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 percent.
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.
In Berlin, Germanys capital and largest city, the monthly leisure tax is Euro
307 (approximately $303) per machine.

German tax authorities perform quadrennial audits of corporate tax returns.
During fiscal 2002, Bally Wulff reached an agreement with the tax authorities
on issues for the open tax years 1992 to 1995. Bally Wulff made a $0.3 million
payment for taxes, interest and penalties for those years.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Additional Jurisdictions.We, in the ordinary course of our business,
routinely consider business opportunities to expand our gaming operations into
additional jurisdictions. Although the laws and regulations of the various
jurisdictions in which we operate or into which we may expand our 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, distribution and operation of gaming machines as well as for the
officers, directors, major stockholders, and key personnel of such companies.

We and our 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 we do business. We and the
holders of our securities may be subject to the provisions of the gaming laws
of each jurisdiction where we or our 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,
and other foreign gaming jurisdictions in which Bally Gaming
International, Inc.
(BGII) and its subsidiaries are licensed or conduct business.

Holders of common stock of an entity licensed to manufacture and sell gaming
machines, and in particular those with holdings in excess of 5 percent, 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 investigative and approval process
can take three to six months to complete under normal circumstances.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

ITEM 2. PROPERTIES

The following table sets forth information regarding our leased properties
(exclusive of space leases in connection with our gaming device routes) as of
June 30, 2002, all of which are fully utilized unless otherwise noted (in
000s):

|                        |  |                                             |  |             |         |          |  |        |     | 
|----------------------- |  | ------------------------------------------- |  | ----------- | ------- | -------- |  | ------ | --- | 
|                        |  |                                             |  |             |         |          |  | Annual
|                        |  |                                             |  | Building    |         | Rental  
|Location                |  | Use                                         |  | Square Feet |         | Payments
|                        |  |                                             |  |             |         |         
|Las Vegas, NV           |  | Nevada route operations                     |  |             | 18,500  |          |  | $      | 245 | 
|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                               |  |             | 5,000   |          |  |        | 51  | 
|Westchester, IL         |  | Sales offices                               |  |             | 4,900   |          |  |        | 26  | 
|Dania, FL               |  | Sales offices                               |  |             | 3,400   |          |  |        | 7   | 
|Temecula, CA            |  | Sales offices                               |  |             | 2,000   |          |  |        | 19  | 
|Elko, NV                |  | Sales office and route operations           |  |             | 4,200   |          |  |        | 9   | 
|Atlantic City, NJ       |  | Administrative offices                      |  |             | 750     |          |  |        | 10  | 
|San Juan, PR            |  | Sales offices                               |  |             | 1,000   |          |  |        | 12  | 
|Las Vegas, NV           |  | Warehousing                                 |  |             | 86,300  |          |  |        | 515 | 
|Las Vegas, NV           |  | Warehousing                                 |  |             | 15,000  |          |  |        | 113 | 
|Berlin, Germany         |  | Administrative offices and manufacturing    |  |             | 122,000 |          |  |        | 541 | 
|Hannover, Germany       |  | Administrative offices and warehousing      |  |             | 20,100  |          |  |        | 190 | 
|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     |          |  |        | 9   | 
|Las Vegas, NV (1)       |  | Ground lease                                |  |             | -       |          |  |        | 365 | 
|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   |          |  |        | 65  | 
|Metairie, LA            |  | OTB operation                               |  |             | 5,500   |          |  |        | 59  | 
|LaPlace, LA             |  | OTB operation                               |  |             | 2,500   |          |  |        | 105 | 
|Harahan, LA             |  | OTB operation                               |  |             | 2,300   |          |  |        | 72  | 
|Sparks, NV              |  | Warehousing                                 |  |             | 3,600   |          |  |        | 23  | 
|Absecon, NJ             |  | Direct mail office                          |  |             | 5,300   |          |  |        | 63  | 
|Egg Harbor
Township, NJ |  | General and research and development office |  |             | 15,500  |          |  |        | 257 | 
|Gulfport, MS            |  | General office                              |  |             | 600     |          |  |        | 9   | 
|Biloxi, MS              |  | General office                              |  |             | 266     |          |  |        | 4   | 
|Las Vegas, NV           |  | General office                              |  |             | 917     |          |  |        | 72  | 
|Palm Springs, CA        |  | General office                              |  |             | 410     |          |  |        | 12  | 



---

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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

The following table sets forth information regarding properties owned by us as
of June 30, 2002, all of which are fully utilized unless otherwise noted:

|                    |  |                                              |  |             |         |          |  | 
|------------------- |  | -------------------------------------------- |  | ----------- | ------- | -------- |  | 
|                    |  |                                              |  |             |         | Building
|Location            |  | Use                                          |  | Square Feet
|                    |  |                                              |  |            
|Las Vegas, NV       |  | Administrative offices and
manufacturing (a) |  |             | 150,000 |         
|Reno/Sparks, NV     |  | Casino (a)                                   |  |             | 35,000  |         
|Vicksburg, MS       |  | Casino                                       |  |             | 33,000  |         
|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                                 |  |             |        |         

(a)  These facilities are mortgaged collateral for our Credit Facility. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.

In addition, we lease 20 bar and tavern properties that have been subleased to
other operators in connection with our 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 6 months to 8 years with monthly
payments ranging from approximately $2,500 to $13,000.

In addition to the principal facilities, we have 17 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 $14,700.

See Note 7 to the Consolidated Financial Statements for information as to our
lease commitments with respect to the foregoing rental properties. We believe
our facilities are suitable for our needs and we have 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. In June 2002, the
Federal district court denied the plaintiffs motion for class action
certification. Plaintiffs appeal of that decision is pending. Management
believes the plaintiffs lawsuit to be without merit. We will continue to
pursue all legal defenses available to us.

We are also a party to various lawsuits relating to routine matters incidental
to our 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 us.

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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002




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

Not applicable.




PART II




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

The Common Stock is traded on the Nasdaq 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. The prices shown below
have been adjusted to reflect the two-for-one stock split effective April 9,
2002, for shareholders of record on April 3, 2002. These prices reflect
inter-dealer prices, without retail mark-up or markdown or commissions and may
not necessarily represent actual transactions.

|                                |             |  |                |       |     |  |   |       | 
|------------------------------- | ----------- |  | -------------- | ----- | --- |  | - | ----- | 
|                                |             |  | Price Range of
|                                |             |  | Common Stock  
|                                |             |  |               
|                                |             |  | High           |       | Low
|                                |             |  |                |       |    
|Fiscal Year Ended June 30, 2001 |             |  |                |       |     |  |   |      
|                                | 1st Quarter |  | $              | 0.97  |     |  | $ | 0.42  | 
|                                | 2nd Quarter |  |                | 2.75  |     |  |   | 0.87  | 
|                                | 3rd Quarter |  |                | 4.85  |     |  |   | 2.10  | 
|                                | 4th Quarter |  |                | 9.95  |     |  |   | 4.54  | 
|Fiscal Year Ended June 30, 2002 |             |  |                |       |     |  |   |      
|                                | 1st Quarter |  | $              | 9.90  |     |  | $ | 5.50  | 
|                                | 2nd Quarter |  |                | 14.93 |     |  |   | 7.03  | 
|                                | 3rd Quarter |  |                | 17.14 |     |  |   | 13.72 | 
|                                | 4th Quarter |  |                | 15.25 |     |  |   | 11.65 | 

As of August 1, 2002, we had approximately 1,170 holders of record of our
Common Stock.

There is currently no established public trading market for our Series E
Special Stock.

We have never declared or paid cash dividends on our Common Stock. The
indenture for the Companys 10% Senior Subordinated Notes (the Indenture) and
the loan agreement for our bank credit facility each restrict our ability to
pay any dividends or make any other payment or distribution of any of our
Restricted Subsidiaries Equity Interests (as defined). We intend to follow a
policy of retaining earnings, if any, to finance growth of our business and do
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 our profitability,
our ability to pay dividends under the terms of the Indenture and our financial
condition, capital requirements, statutory and contractual restrictions, future
prospects and other factors deemed relevant.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002




ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data has been derived from our audited
consolidated financial statements. 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,         
|                                                           |                                           |   |                                     
|                                                           |                                           |   | 1998                                 |         | 1999 |   | 2000    |         | 2001 |   | 2002 (3)
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |         
|                                                           |                                           |   | (In 000's, except per share amounts)
|Statements of Operations Data                              |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|Revenues:                                                  |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|                                                           | Gaming equipment and systems              |   | $                                    | 109,597 |      |   | $       | 127,810 |      |   | $        | 135,180 |   |   | $       | 160,890 |   |   | $       | 223,021 |  
|                                                           | Wall machines and amusement games         |   |                                      | 98,611  |      |   |         | 90,834  |      |   |          | 68,952  |   |   |         | 72,228  |   |   |         | 74,721  |  
|                                                           | Route operations                          |   |                                      | 148,507 |      |   |         | 175,854 |      |   |          | 202,480 |   |   |         | 221,505 |   |   |         | 223,989 |  
|                                                           | Casino operations                         |   |                                      | 60,657  |      |   |         | 60,691  |      |   |          | 68,053  |   |   |         | 73,499  |   |   |         | 72,371  |  
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|                                                           |                                           |   | 417,372                              |         |      |   | 455,189 |         |      |   | 474,665  |         |   |   | 528,122 |         |   |   | 594,102 |        
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|Costs and expenses:                                        |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|                                                           | Cost of gaming equipment and systems      |   |                                      | 61,684  |      |   |         | 69,721  |      |   |          | 75,508  |   |   |         | 77,423  |   |   |         | 98,720  |  
|                                                           | Cost of wall machines and amusement games |   |                                      | 54,241  |      |   |         | 54,035  |      |   |          | 43,301  |   |   |         | 39,243  |   |   |         | 37,243  |  
|                                                           | Cost of route operations                  |   |                                      | 114,645 |      |   |         | 137,692 |      |   |          | 161,062 |   |   |         | 178,103 |   |   |         | 177,447 |  
|                                                           | Cost of casino operations                 |   |                                      | 25,930  |      |   |         | 27,011  |      |   |          | 27,933  |   |   |         | 32,541  |   |   |         | 32,193  |  
|                                                           | Selling, general and administrative       |   |                                      | 86,318  |      |   |         | 101,113 |      |   |          | 101,740 |   |   |         | 98,635  |   |   |         | 118,514 |  
|                                                           | Research and development                  |   |                                      | 15,778  |      |   |         | 17,190  |      |   |          | 15,318  |   |   |         | 13,576  |   |   |         | 17,613  |  
|                                                           | Depreciation and amortization             |   |                                      | 22,838  |      |   |         | 23,104  |      |   |          | 26,788  |   |   |         | 27,745  |   |   |         | 31,852  |  
|                                                           | Unusual items                             |   |                                      | (325    | )    |   |         |        |      |   |          | 2,164   |   |   |         | 6,489   |   |   |         | 24,129  |  
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|                                                           |                                           |   | 381,109                              |         |      |   | 429,866 |         |      |   | 453,814  |         |   |   | 473,755 |         |   |   | 537,711 |        
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|Operating income                                           |                                           |   | 36,263                               |         |      |   | 25,323  |         |      |   | 20,851   |         |   |   | 54,367  |         |   |   | 56,391  |        
|Other income (expense)                                     |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|                                                           | Interest expense, net                     |   |                                      | (27,787 | )    |   |         | (30,836 | )    |   |          | (33,654 | ) |   |         | (33,764 | ) |   |         | (26,894 | )
|                                                           | Rainbow royalty                           |   |                                      | (587    | )    |   |         |        |      |   |          |        |   |   |         |        |   |   |         |        |  
|                                                           | Rainbow Royalty Buyout (1)                |   |                                      | (19,000 | )    |   |         |        |      |   |          |        |   |   |         |        |   |   |         |        |  
|                                                           | Minority interest                         |   |                                      | (2,002  | )    |   |         | (2,053  | )    |   |          | (2,155  | ) |   |         | (2,165  | ) |   |         | (1,935  | )
|                                                           | Other, net                                |   |                                      | 1,025   |      |   |         | (431    | )    |   |          | 924     |   |   |         | (3,345  | ) |   |         | 410     |  
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|Income (loss) before income taxes                          |                                           |   | (12,088                              | )       |      |   | (7,997  | )       |      |   | (14,034  | )       |   |   | 15,093  |         |   |   | 27,972  |        
|Income tax provision                                       |                                           |   | (3,185                               | )       |      |   | (830    | )       |      |   | (1,001   | )       |   |   | (611    | )       |   |   | 35,877  |        
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|Income (loss) before extraordinary item                    |                                           |   | (15,273                              | )       |      |   | (8,827  | )       |      |   | (15,035  | )       |   |   | 14,482  |         |   |   | 63,849  |        
|Extraordinary loss without tax benefit                     |                                           |   | (42,033                              | )       |      |   |        |         |      |   |         |         |   |   |        |         |   |   |        |        
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|Net income (loss)                                          |                                           |   | (57,306                              | )       |      |   | (8,827  | )       |      |   | (15,035  | )       |   |   | 14,482  |         |   |   | 63,849  |        
|Special stock dividends                                    |                                           |   | (3,551                               | )       |      |   | (1,697  | )       |      |   |         |         |   |   |        |         |   |   |        |        
|Premium on repurchase/redemption of
Series B Special Stock |                                           |   | (16,553                              | )       |      |   |        |         |      |   |         |         |   |   |        |         |   |   |        |        
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|Net income (loss) applicable to common shares              |                                           | $ | (77,410                              | )       |      | $ | (10,524 | )       |      | $ | (15,035  | )       |   | $ | 14,482  |         |   | $ | 63,849  |        
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|Basic earnings (loss) per share (2)                        |                                           | $ | (2.12                                | )       |      | $ | (0.27   | )       |      | $ | (0.37    | )       |   | $ | 0.35    |         |   | $ | 1.38    |        
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        
|Diluted earnings (loss) per share (2)                      |                                           | $ | (2.12                                | )       |      | $ | (0.27   | )       |      | $ | (0.37    | )       |   | $ | 0.34    |         |   | $ | 1.34    |        
|                                                           |                                           |   |                                      |         |      |   |         |         |      |   |          |         |   |   |         |         |   |   |         |        

29



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

ITEM 6. SELECTED FINANCIAL DATA (Continued)

|                                                            |  |                                      |         |      |  |      |         |      |  |          |         |   |  |   |         |   |  |   |         | 
|----------------------------------------------------------- |  | ------------------------------------ | ------- | ---- |  | ---- | ------- | ---- |  | -------- | ------- | - |  | - | ------- | - |  | - | ------- | 
|                                                            |  | Fiscal Years Ended June 30,         
|                                                            |  |                                     
|                                                            |  | 1998                                 |         | 1999 |  | 2000 |         | 2001 |  | 2002 (3)
|                                                            |  |                                      |         |      |  |      |         |      |  |         
|                                                            |  | (In 000's, except per share amounts)
|Balance Sheet Data                                          |  |                                      |         |      |  |      |         |      |  |          |         |   |  |   |         |   |  |   |         | 
|Cash and cash equivalents and
securities available for sale |  | $                                    | 23,487  |      |  | $    | 16,930  |      |  | $        | 34,044  |   |  | $ | 54,845  |   |  | $ | 63,404  | 
|Working capital                                             |  |                                      | 119,480 |      |  |      | 108,661 |      |  |          | 115,979 |   |  |   | 112,669 |   |  |   | 173,047 | 
|Total assets                                                |  |                                      | 366,837 |      |  |      | 356,307 |      |  |          | 351,287 |   |  |   | 371,017 |   |  |   | 459,880 | 
|Total long term debt,
including current maturities          |  |                                      | 325,953 |      |  |      | 318,706 |      |  |          | 345,059 |   |  |   | 340,100 |   |  |   | 342,264 | 
|Total stockholders equity (deficiency)                     |  |                                      | (23,748 | )    |  |      | (30,408 | )    |  |          | (50,795 | ) |  |   | (39,205 | ) |  |   | 45,986  | 



---

|(1) |  | Represents royalty fee related to the HFS financing at the Rainbow
Casino. We repurchased this royalty obligation from HFS on August 12,
1997.                                                                                                                                                                                                                                                                
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The earnings per share amounts have been restated for all periods
presented to reflect the two-for-one stock splits effective August 21,
2001 and April 9, 2002.                                                                                                                                                                                                                                              
|   
|   
|   
|   
|(3) |  | In fiscal 2002 we recorded a non-cash charge to write down goodwill and
other long-lived assets related to Bally Wulff, totaling $24.1 million
(included in unusual items) and a tax benefit resulting from the reduction
of previously recorded valuation reserves against net deferred tax assets,
primarily net operating loss carry forwards, totaling $37 million
(included in the income tax provision).




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

Liquidity and Capital Resources

As of June 30, 2002, we had $63.4 million in cash and cash equivalents, and
$25.0 million in unborrowed availability on our revolving credit facility
(which can be increased by $15.0 million at our discretion any time until
December 31, 2002). In addition we had net working capital of approximately
$173.0 million, an increase of approximately $60.4 million from June 30, 2001,
which is explained in the working capital section below. Consolidated cash and
cash equivalents at June 30, 2002, includes approximately $23.8 million of cash
utilized in Casino and Route Operations and held in vaults, cages or change
banks. Pursuant to various state gaming regulations, we maintain restricted
cash accounts to ensure availability of funds to pay wide-area progressive
jackpot awards, which totaled approximately $7.1 million at June 30, 2002.

In June 2001, we completed a refinancing of our senior bank credit facility,
which now consists of a $190.0 million term loan, and a $25.0 million revolving
credit facility (which can be increased by $15.0 million at our discretion any
time during the term of the agreement). Proceeds from the term loan were used
to repay our existing bank term loans and credit facility, totaling $166.0
million, repay certain gaming equipment operating leases totaling $13.0
million, and to pay transaction fees and expenses. The new term loan has a 1%
per year mandatory principal amortization, with a 5.5 year maturity. The
revolving credit facility commitment decreases ratably over the 5 year term of
the commitment. There is no borrowing base collateral requirement for the
revolving credit facility. As of June 30, 2002, there were no borrowings
outstanding on the revolving credit facility. The bank loan contains certain
financial and operational covenants, however there are no borrowing base
requirements. As of June 30, 2002, we are in compliance with all covenants.

30



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Management believes that cash flows from operating activities, cash and cash
equivalents held and the up to $40.0 million revolving credit facility
commitment will provide us with sufficient capital resources and liquidity. At
June 30, 2002, we had no material commitments for capital expenditures.

Working Capital

The following table presents the components of consolidated working capital at
June 30, 2001 and 2002:

|                                                   |                           |                     |         |                     |         |      |         |        |         |   |        |       |        | 
|-------------------------------------------------- | ------------------------- | ------------------- | ------- | ------------------- | ------- | ---- | ------- | ------ | ------- | - | ------ | ----- | ------ | 
|                                                   |                           |                     |         | Balance at June 30, |         |      |         |       
|                                                   |                           |                     |         |                     |         |      |         |       
|                                                   |                           |                     |         | 2001                |         | 2002 |         | Change
|                                                   |                           |                     |         |                     |         |      |         |       
|Cash, cash equivalents, and short term investments |                           | $                   | 54,845  |                     |         | $    | 63,404  |        |         | $ | 8,559  |      
|Accounts and notes receivable, net                 |                           |                     | 79,369  |                     |         |      | 96,832  |        |         |   | 17,463 |      
|Inventories, net                                   |                           |                     | 35,082  |                     |         |      | 42,997  |        |         |   | 7,915  |      
|Deferred tax assets                                |                           |                     |        |                     |         |      | 27,605  |        |         |   | 27,605 |      
|Other current assets                               |                           |                     | 10,814  |                     |         |      | 13,975  |        |         |   | 3,161  |      
|                                                   |                           |                     |         |                     |         |      |         |        |         |   |        |      
|Total current assets                               |                           |                     | 180,110 |                     |         |      | 244,813 |        |         |   | 64,703 |      
|Accounts payable                                   |                           |                     | 19,531  |                     |         |      | 15,894  |        |         |   | (3,637 | )    
|Jackpot liabilities                                |                           |                     | 1,264   |                     |         |      | 5,915   |        |         |   | 4,651  |      
|Accrued liabilities                                |                           |                     | 45,714  |                     |         |      | 45,841  |        |         |   | 127    |      
|Current maturities of long-term debt               |                           |                     | 932     |                     |         |      | 4,116   |        |         |   | 3,184  |      
|                                                   |                           |                     |         |                     |         |      |         |        |         |   |        |      
|                                                   | Total current liabilities |                     |         | 67,441              |         |      |         | 71,766 |         |   |        | 4,325 |       
|                                                   |                           |                     |         |                     |         |      |         |        |         |   |        |      
|                                                   |                           | Net working capital |         | $                   | 112,669 |      |         | $      | 173,047 |   |        | $     | 60,378 | 
|                                                   |                           |                     |         |                     |         |      |         |        |         |   |        |      

The primary fluctuations contributing to the increase in working capital were:
(i) a net increase in accounts receivable resulting from an increase in sales,
primarily in the Bally Gaming and Systems and Bally Wulff business units; (ii)
an increase in inventory due to a larger backlog of sales; (iii) an increase in
accrued liabilities resulting from timing of deferred revenue recognition for
certain system installations and an increase in progressive jackpot
liabilities; (iv) a decrease in accounts payable resulting from timing of
payments for inventory purchases; (v) an increase in deferred tax assets
resulting from the non-cash reduction of certain valuation reserves; and (vi)
the impact of foreign exchange fluctuations between the dollar and the euro
dollar on all working capital categories.

Cash Flow

During the year ended June 30, 2002, cash provided from operating activities
totaled $55.0 million, a decrease of $13.5 million compared to the prior year
period. During 2002 our Bally Gaming and Systems business unit experienced a
significant growth in revenue and backlog of sales orders that caused a
corresponding use of working capital, including increases in both inventories
and receivables.

During the year ended June 30, 2002, we used $50.8 million of cash in investing
activities resulting primarily from capital expenditures totaling $16.3
million, costs incurred to produce participation games totaling $15.1 million,
net cash used in the acquisition of CMP and ACSC totaling $15.3 million, and
payments for gaming rights totaling $3.5 million.

During the year ended June 30, 2002, cash flow from financing activities
included $6.7 million of cash provided from the exercise of stock options,
offset by principal payments on other long term debt totaling $2.4 million and
$0.7 million to pay capitalized bank fees.

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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

amount financed. Accordingly, we have greater exposure to the financial
condition of our 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 our sales and also provides lease
financing to our customers. Lease terms are generally for periods of six and
twelve months, but are also available for terms up to 43 months.

Euro Currency Conversion

Our Bally Wulff subsidiary uses the euro as its functional currency. The euro
currency replaced the deutschemark as well as most other European currencies
after a phase in period, which began January 1, 1999 and was fully adopted in
January 2002.

Results of Operations

The following table presents our earnings before interest, taxes, depreciation
and amortization (EBITDA) and operating income by business unit:

|                                          |                             |   |                      |        |      |   |         |        |  |   |         |         | 
|----------------------------------------- | --------------------------- | - | -------------------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------- | 
|                                          |                             |   | Years ended June 30,
|                                          |                             |   |                     
|                                          |                             |   | 2000                 |        | 2001 |   | 2002   
|                                          |                             |   |                      |        |      |   |        
|EBITDA by business unit:                  |                             |   |                      |        |      |   |         |        |  |   |         |        
|Bally Gaming and Systems                  |                             | $ | 12,385               |        |      | $ | 36,066  |        |  | $ | 57,408  |        
|Wall Machines and Amusement Games         |                             |   | 3,583                |        |      |   | 10,459  |        |  |   | 13,155  |        
|Route Operations                          |                             |   | 24,503               |        |      |   | 24,786  |        |  |   | 27,539  |        
|Casino Operations                         |                             |   | 25,954               |        |      |   | 27,558  |        |  |   | 24,630  |        
|Corporate expenses                        |                             |   | (14,688              | )      |      |   | (10,268 | )      |  |   | (10,360 | )      
|                                          |                             |   |                      |        |      |   |         |        |  |   |         |        
|                                          | EBITDA before unusual items |   |                      | 51,737 |      |   |         | 88,601 |  |   |         | 112,372 | 
|Unusual items                             |                             |   | (4,098               | )      |      |   | (6,489  | )      |  |   | (24,129 | )      
|                                          |                             |   |                      |        |      |   |         |        |  |   |         |        
|                                          | Total EBITDA                |   | $                    | 47,639 |      |   | $       | 82,112 |  |   | $       | 88,243  | 
|                                          |                             |   |                      |        |      |   |         |        |  |   |         |        
|Operating income (loss) by business unit: |                             |   |                      |        |      |   |         |        |  |   |         |        
|Bally Gaming and Systems                  |                             | $ | (693                 | )      |      | $ | 27,039  |        |  | $ | 47,172  |        
|Wall Machines and Amusement Games         |                             |   | (4,219               | )      |      |   | 4,904   |        |  |   | 7,942   |        
|Route Operations                          |                             |   | 15,162               |        |      |   | 15,482  |        |  |   | 15,470  |        
|Casino Operations                         |                             |   | 23,805               |        |      |   | 25,258  |        |  |   | 22,498  |        
|Corporate expenses/unusual items          |                             |   | (13,204              | )      |      |   | (18,316 | )      |  |   | (36,691 | )      
|                                          |                             |   |                      |        |      |   |         |        |  |   |         |        
|                                          | Total Operating Income      |   | $                    | 20,851 |      |   | $       | 54,367 |  |   | $       | 56,391  | 
|                                          |                             |   |                      |        |      |   |         |        |  |   |         |        

We believe that the analysis of EBITDA is a useful adjunct to operating income,
net income, cash flow and other GAAP measurement. However, this information
should not be construed as an alternative to net income (loss) or any other
GAAP measure of performance as an indicator of our performance or to
GAAP-defined cash flows generated by 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.

2002 Compared with 2001

Bally Gaming and Systems

For the year ended June 30, 2002, the Bally Gaming and Systems business unit
reported revenues of $223.0 million, an increase of 39% compared to revenues of
$160.9 million in the prior year. Gaming Products sales totaled $105.6 million,
an increase of 22% compared to $86.6 million in the prior year. New unit sales
totaled 13,200 units, a 26% increase compared to 10,500 in the prior year.
Bally Gaming performs contract manufacturing of base gaming devices for several
other gaming equipment companies, including Multimedia Games. Such base games,
which generally do not contain a Bally game theme or other intellectual
property, are produced at substantially lower cost

32



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

due to Multimedia providing several of the components, and are therefore sold
at reduced prices. Excluding such contract manufactured games, the average
domestic new-unit selling price was $6,650, a slight decrease of 1% compared to
the prior year. Bally Systems reported revenues of $64.2 million, an increase
of 40% compared to $45.9 million in the prior year. Bally Systems reported
record shipments of 40,550 games monitoring units, compared to 32,700 units in
the prior year. The Bally Systems revenue growth was primarily a result of
continued strength in new system installations and higher levels of recurring
hardware and software support revenues resulting from the larger base of
installed systems. Gaming Operations reported revenues of $53.2 million, an
increase of 87% compared to $28.4 million in the prior year. The increased
revenues were driven by an increase in the installed base of recurring revenue
units, which total approximately 3,635 units as of June 30, 2002, compared to
approximately 3,180 units at June 30, 2001, and an increase in the revenue per
unit of the wide-area progressive games.

For the year ended June 30, 2002, the overall gross margin percentage for Bally
Gaming and Systems improved to 56% compared to 52% in the prior year. The
improvement was due to improved margin contribution for gaming machines sales
as a result of the improved fixed cost absorption rate resulting from the
increased volume of new unit sales.

The Bally Gaming and Systems business unit reported operating income of $47.2
million, compared to an operating income of $27.0 million in the prior year.
The increase in operating income resulted primarily from increases in revenues
and improved margins, as well as the reduced overhead cost structure. Research
and development costs totaled $15.0 million, an increase of 36% compared to the
prior year.

Wall Machines and Amusement Games

For the year ended June 30, 2002, Wall Machines and Amusement Games reported
revenues of $74.7 million, an increase of 4% compared to revenues of $72.2
million in the prior year. The revenues increased as a result of an 11%
increase in the average selling price of new wall machines, and a 30% increase
in the number of leased wall machines offset by a 21% decrease in the units
sold. The conversion to the euro currency has now been completed, and the sale
of euro denominated games and conversion kits had a positive impact on the
current year. Management believes it is likely that customers will continue to
migrate to leasing games versus the purchase of machines, which should further
grow our base of recurring rental revenues in the face of a slowdown in new
unit sales.

The Wall Machines and Amusement Games business unit continued our leasing
program whereby new wall machines and certain amusement games are leased to
customers pursuant to operating leases. The leases provide a stream of revenues
and cash flows over their terms, which range from six months to three and one
half years. As of June 30, 2002, a total of 7,450 machines were deployed in the
leasing program compared to 6,400 at June 30, 2001, an increase of 17%.

For the year ended June 30, 2002, gross profit margin increased to 50% from 45%
in the prior year. This increase was primarily due to strong demand on
conversion kits and their installation, an increase in the average new
unit-selling price, offset by a decrease in the number of units sold, which
negatively impacted the fixed cost absorption rate. Wall Machines and Amusement
Games reported an operating income of $7.9 million excluding the write down of
goodwill and other long-lived assets, compared to operating income of $4.9
million in the prior year.

Route Operations

For the year ended June 30, 2002, the Route Operations business unit reported
total revenues of approximately $224.0 million, an increase of 1% compared to
revenues of $221.5 million in the prior year. Revenues from the Nevada route
operations increased to approximately $208.9 million or 2% over the prior year.
This improvement was attributable to an increase in the average net win per
gaming machine per day of 1% to $68.30 from $67.75 in the prior year and a 2%
increase in the weighted average number of gaming machines during the year to
8,270 units as compared to 8,080 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, 2002, the Gamblers Bonus
product was installed in over 4,000 gaming machines at approximately 406
locations statewide or 49% of the installed base of gaming machines. Revenues
from route operations in Louisiana totaled $15.1 million, a decrease of 8%
compared to the prior year. This decrease was

33



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

primarily the result of a decline in the net win per gaming machine per day of
11% to $59.17 from $66.53 in the prior year offset by a 2% increase in the
number of units deployed, which resulted from the opening of one new OTB with
70 games.

For the year ended June 30, 2002, cost of revenues for Route Operations,
totaled as a percentage of revenues, decreased to 79% from 80% in the prior
year. This improvement is the result of reduced game rental costs, which
resulted from the payoff of high cost game leases in June 2001. For the year
ended June 30, 2002, the operating income for Route Operations business unit
has remained constant at $15.5 million.

Casino Operations

For the year ended June 30, 2002, the Casino Operations business unit reported
revenues of $72.4 million, a decrease of 2% compared to revenues of $73.5
million in the prior year. This revenue decrease is due to a 4% decrease in
revenues at the Rainbow Casino offset by a 6% revenue increase at the Rail City
Casino. Rainbow Casino revenue decrease was attributable to a 6% decrease in
the net win per day to $141, and offset by a 3% increase in the average number
of gaming machines. This decline is a result of the significant competitive
pressure in the market that is growing at less than its historical norm. The
revenue improvement at the Rail City Casino was attributable to a 6% increase
in the average number of gaming machines and an increase in the average gaming
machine net win per day of 2% to $86 from $84 in the prior year. For the year
ended June 30, 2002, the cost of revenues for Casino Operations as a percentage
of revenues has remained constant at 45%.

Unusual Items

During the fiscal year ended June 30, 2002, we recorded the following unusual
items:



| |  | A $24.1 million non-cash write down of goodwill and other long-lived assets related
to Bally Wulff in Germany as a result of valuation reviews performed in accordance
with FASB No. 142 Goodwill and Other Intangibles and the newly adopted FASB No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets. These write downs
were driven by our concern that there have been further delays in the passage of
proposed regulatory changes that would have been favorable to this industry and a
substantial slowdown in the demand for our products in Germany due to weakening
economic conditions.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | A tax benefit resulting from the reduction of previously recorded valuation reserves
against net deferred tax assets, primarily net operating loss carry forwards,
totaling $37.0 million which is included in the income tax provision in the
accompanying consolidated statement of operations. The recording of this tax benefit
was based on our conclusion that we had now met the more likely than not criteria
for recovery of our net deferred tax assets as required by FASB No. 109.                                                                                                                        

During the fiscal year ended June 30, 2001, we recorded the following unusual item:



| |  | Unusual charge of $6.5 million for costs and expenses incurred to terminate the
agreement to sell the Nevada Route Operations.
|- |  | ------------------------------------------------------------------------------------------------------------------------------

Interest Income and Expense and Income Taxes

Interest expense (net of interest income) for the year ended June 30, 2002,
totaled $26.9 million, compared to the net interest expense of $33.8 million in
the prior year. The decrease is a result of a lower interest rates on the bank
credit facility.

We recorded an income tax provision of $1.1 million excluding the one-time tax
benefit of $37 million related to the reduction of deferred tax valuation
reserves in the year ended June 30, 2002, compared to a provision of $0.6
million in the prior year. The current year tax provision represents primarily
estimated state income taxes and a provision for German income taxes of $0.5
million.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Significant Accounting Policies and Estimates

We prepare our Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States of America. Certain of our
accounting policies, including valuations utilized in asset impairment tests,
acquisitions accounting, revenue recognition, allowance for doubtful accounts,
reserves for inventory, and deferred tax reserves require that we apply
significant judgment in defining the appropriate assumptions for calculating
financial estimates. These judgments are subject to an inherent degree of
uncertainty. There can be no assurance that the actual results will not differ
from our estimates. Additional discussion of our accounting policies is
discussed in the notes to our Consolidated Financial Statements.

2001 Compared with 2000

Bally Gaming and Systems

For the year ended June 30, 2001, the Bally Gaming and Systems business unit
reported revenues of $160.9 million, an increase of 19% compared to revenues of
$135.2 million in the prior year. Gaming Products sales totaled $86.6 million,
an increase of 16% compared to $74.9 million in the prior year. New unit sales
totaled 10,500 units, a 20% increase compared to 8,700 in the prior year
period. The average new unit-selling price increased 7% from the prior year to
$6,700. Bally Systems reported revenues of $45.9 million compared to $40.2
million in the prior year. Systems reported shipments of 32,700 SDS units, a 7%
decrease compared to 35,300 units in the prior year. This decrease was
primarily a result of comparisons to the record year 2000, which included
certain Y2K related replacements as well as several larger sales as a result of
mergers and acquisitions which took place in the casino operator market, which
activity declined in fiscal year 2001. Gaming Operations reported revenues of
$28.4 million, an increase of 41% compared to the prior year. The increased
revenues were driven by an increase in the installed base of recurring revenue
units, which total approximately 3,200 units as of June 30, 2001, compared to
approximately 2,700 units at June 30, 2000, and an increase in the revenue per
unit as a result of the increased number of higher revenue wide-area
progressive games deployed compared to the lower revenue daily-fee games.

For the year ended June 30, 2001, the overall gross margin percentage for Bally
Gaming and Systems improved to 52% compared to 46% in the prior year. The
improvement was due primarily to a change in product mix to higher margin
gaming machines and greater revenues from higher margin recurring revenue
machines.

Bally Gaming and Systems reported operating income of $27.0 million, compared
to an operating loss of $(0.7) million in the prior year. The increase in
operating income resulted primarily from increases in revenues and improved
margins, as well as the reduced overhead cost structure. Research and
development costs totaled $11.0 million, a decrease of 13% compared to the
prior year. The reduction in research and development costs results from the
comparison to the prior year, which included incremental costs related to the
development of the wide-area progressive network.

Wall Machines and Amusement Games

For the year ended June 30, 2001, Wall Machines and Amusement Games reported
revenues of $72.2 million, an increase of 5% compared to revenues of $68.9
million in the prior year. The increase in revenues resulted primarily from a
46% increase in the number of new wall machine units sold, a 34% increase in
the selling price of new wall machines, excluding those sold in the prior year
as part of a new single-site progressive jackpot system, and a 29% increase in
the number of leased wall machines. The currency translation impact of the
fluctuation of the German mark versus the U.S. dollar decreased revenues by
$6.9 million during the current year.

The Wall Machines and Amusement Games business unit continued our leasing
program whereby new wall machines and certain amusement games are leased to
customers pursuant to operating leases. The leases provide a stream of revenues
and cash flows over their term, which range from six months to three and one
half years. As of June 30, 2001, a total of 6,400 machines were deployed in the
leasing program compared to 5,500 at June 30, 2000, an increase of 15%.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

For the year ended June 30, 2001, gross profit margin increased to 46% from 37%
in the prior year. The gross margin increase resulted primarily from an
increase in the number of units sold which impacted the fixed cost absorption
rate, as well as improvements in the average new unit selling price, offset by
lower margins on the sale of used wall machines and amusement games. Wall
Machines and Amusement Games reported operating income of $4.9 million,
compared to operating loss of ($4.2) million in the prior year period.

Route Operations

For the year ended June 30, 2001, the Route Operations business unit reported
total revenues of approximately $221.5 million, an increase of 9% compared to
revenues of $202.5 million in the prior year. Revenues from the Nevada route
operations increased to approximately $205.1 million or 12% over the prior
year. This improvement was attributable to an increase in the average net win
per gaming machine per day of 7% to $67.74 from $63.30 in the prior year and a
4% increase in the weighted average number of gaming machines during the
current year to 8,000 units as compared to 7,800 units in the prior year.
Gamblers Bonus, a cardless player club and player tracking system, continued
to have a favorable impact on the net win per day. As of June 30, 2001, the
Gamblers Bonus product was installed in over 3,860 gaming machines at
approximately 377 locations statewide or 47% of the installed base of gaming
machines. Revenues from route operations in Louisiana totaled $16.4 million, a
decrease of 15% compared to the prior year. This decrease was primarily the
result of a decline in the net win per gaming machine per day of 14% to $66.53
from $77.50 in the prior year and the average number of machines remaining
constant at 680, resulting from the loss of two locations due to parish gaming
referendums. These declines are reflective of the competitive market resulting
from the significant increase in the number of truck stop casinos in the
metropolitan New Orleans area.

For the year ended June 30, 2001, cost of revenues for Route Operations totaled
as a percentage of revenues, increased to 81% from 80% 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. As part of
recently completed refinancing the company repaid all of the gaming equipment
leases, which prospectively will eliminate approximately $5.8 million of yearly
game rental cost and increase depreciation by approximately $4.0 million per
year.

For the fiscal year ended June 30, 2001, the Route Operations business unit
reported operating income of $15.5 million, an increase of 2% compared to
operating income of $15.2 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, 2001, the Casino Operations business unit reported
revenues of $73.5 million, an increase of 8% compared to revenues of $68.1
million in the prior year. This improvement is due to an 8% increase in
revenues at the Rainbow Casino and a 9% increase in revenues at the Rail City
Casino. The improvement at the Rainbow Casino was attributable to a 9% increase
in the average number of gaming machines and a 2% increase in the net win per
day to $151, 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 8% to $84 from $78 in the prior year and a 2% increase in the average number
of gaming machines.

For the year ended June 30, 2001, the cost of revenues for Casino Operations as
a percentage of revenues, improved to 44% compared to 41% 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Unusual Items

During the fiscal year ended June 30, 2001, we recorded the following unusual
item:



| |  | Unusual charge of $6.5 million for costs and expenses incurred to terminate the agreement to
sell the Nevada Route Operations.
|- |  | ------------------------------------------------------------------------------------------------------------------------------

During the fiscal year ended June 30, 2000, we 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 us for staff reductions at the Bally Gaming and
Systems, Wall Machine and Amusement Games, and at our 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.                                                                                                                                                                                                                                                                                                                                                                                                                                   

Interest Income and Expense and Income Taxes

Interest expense (net of interest income) for the year ended June 30, 2001,
totaled $33.8 million, and compared to the net interest expense of $33.7
million in the prior year. The slight increase is a result of slightly higher
interest rates offset by an increase in interest income and lower average debt
balances outstanding. During the fiscal year 2001, we paid down our previously
existing revolving credit facility by approximately $23.0 million and reduced
other long-term debt by $2.8 million. On June 22, 2001, we refinanced our
senior bank debt by entering into a new $190 million term loan facility and a
$25 million revolving credit facility. Proceeds from the new loan were used to
repay the existing bank loans ($166 million), repay certain operating leases
($13 million) and pay transaction fees and expenses.

We recorded an income tax provision of $0.6 million in the year ended June 30,
2001, compared to a provision of $1.0 million in the prior year. The decrease
in the current year provision is due primarily to income tax refund of $0.6
million offset by state income taxes. At June 30, 2002, we had net operating
income carry forwards for federal income tax purposes of approximately $101
million which are available to offset future federal taxable income, if any,
expiring in the years 2008 through 2021. At June 30, 2001, we had foreign tax
credit carry forwards of approximately $6.6 million and alternative minimum tax
credit (AMT) carry forwards of approximately $0.9 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.

Contractual Commitments

We are committed to make future payments pursuant to various contracts and
agreements. A summary of those contractual obligations is as follows (in
$000s):

|                                 |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |  |  |   |         |  |  |   |        |  |  |   |         | 
|-------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | ----- | ------- |  |  | - | ------- |  |  | - | ------ |  |  | - | ------- | 
|                                 |  | 2003 |        | 2004 |  | 2005 |        | 2006 |  | 2007 |        | Thereafter |  | Total
|                                 |  |      |        |      |  |      |        |      |  |      |        |            |  |      
|Debt:                            |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |  |  |   |         |  |  |   |        |  |  |   |         | 
|Term Loan Facility               |  | $    | 1,900  |      |  | $    | 1,900  |      |  | $    | 1,900  |            |  | $     | 183,825 |  |  | $ |        |  |  | $ |       |  |  | $ | 189,525 | 
|10% Sr. Subordinated Notes       |  |      |        |      |  |      |       |      |  |      |       |            |  |       |        |  |  |   | 149,584 |  |  |   |       |  |  |   | 149,584 | 
|Other Debt                       |  |      | 2,216  |      |  |      | 717    |      |  |      | 153    |            |  |       | 69      |  |  |   |        |  |  |   |       |  |  |   | 3,155   | 
|                                 |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |  |  |   |         |  |  |   |        |  |  |   |         | 
|                                 |  |      | 4,116  |      |  |      | 2,617  |      |  |      | 2,053  |            |  |       | 183,894 |  |  |   | 149,584 |  |  |   |       |  |  |   | 342,264 | 
|Other commitments:               |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |  |  |   |         |  |  |   |        |  |  |   |         | 
|Net minimum rentals (a)          |  |      | 20,980 |      |  |      | 15,900 |      |  |      | 12,924 |            |  |       | 9,494   |  |  |   | 7,636   |  |  |   | 12,597 |  |  |   | 79,531  | 
|Other commercial
commitments (b) |  |      | 500    |      |  |      | 500    |      |  |      | 500    |            |  |       | 500     |  |  |   | 500     |  |  |   |       |  |  |   | 2,500   | 
|                                 |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |  |  |   |         |  |  |   |        |  |  |   |         | 
|Total commitments                |  | $    | 25,596 |      |  | $    | 19,017 |      |  | $    | 15,477 |            |  | $     | 193,888 |  |  | $ | 157,720 |  |  | $ | 12,597 |  |  | $ | 424,295 | 
|                                 |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |  |  |   |         |  |  |   |        |  |  |   |         | 

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002



| | (a) |  | Represents primarily the multi-year agreements our Route Operations
business unit has with convenience stores, bar and tavern owners which
give us the right to operate our gaming devices at the locations in
future periods.                                                                                                                                                                                 
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Pursuant to various agreements, we are obligated to pay certain
royalty payments to third parties, which range from $5 to $300 per
gaming device sold. With the exception of the fixed $0.5 million annual
license fee owed for the use of the Bally trademark, we have not
scheduled out the royalty fees that may be owed in the future as they
are dependent on the types of games to be sold in the future.

The payment obligations in the above table are based on the contractually
scheduled due dates. The only payment acceleration that could be demanded of us
would generally be in the event of a default under the Bank Credit Agreement or
Senior Note Indenture that was not cured within the provisions set forth in
those agreements. Pursuant to our Bank Credit Agreement, in certain
circumstances we can enter into guarantee agreements on behalf of customers to
third party creditors up to a maximum of $25.0 million, however we have not
entered into any such guarantees as of June 30, 2002.

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 our 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 is 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

As of June 30, 2002, the aggregate outstanding principal amount of our
long-term indebtedness including current maturities was $342.3 million. We also
have available up to $40.0 million in unborrowed commitment under our revolving
credit facility.

Our credit facility and indenture contain a number of significant covenants
that, among other things, restrict our ability and certain of our 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 our 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 our ability to
finance our future operations or capital needs or engage in other business
activities that may be in our interest. In addition, the bank credit facility
also requires us to maintain compliance with certain financial ratios. Our
ability to comply with such ratios may be affected by events beyond our
control. A breach of any of these covenants or our inability 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 us to apply all of our available cash to repay such
borrowings or to prevent us 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 we were unable to repay any such borrowings when due,
the lenders could proceed against our collateral. If the indebtedness under the
bank credit facility or the Notes were to be accelerated, there can be no
assurance that our assets would be sufficient to repay such indebtedness in
full.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Our obligation 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 our future operations including the following: (i)
the portion of our cash flow from operations which will be dedicated to the
payment of principal and interest on our indebtedness will not be available for
other purposes; (ii) certain of our borrowings are at variable rates of
interest, which could result in higher expense in the event of increases in
interest rates; (iii) we may be more vulnerable to downturns in our business or
in the general economy and may be restricted from making acquisitions,
introducing new technologies or exploiting business opportunities; and (iv) our
ability to obtain additional financing in the future for working capital,
capital expenditures, general corporate or other purposes may be impaired.
Additionally, our ability to meet our debt service obligations and to reduce
our total debt will be dependent upon our future performance, which will be
subject to general economic and regulatory conditions and to financial,
business and other factors affecting our operation, many of which are beyond
our control.

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

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 we do. 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, Aristocrat and, to a lesser extent, Acres Gaming, Inc., Gaming Systems
International, Inc., and Mikohn Gaming Corporation. 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 our operations will be determined by our 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 our 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 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Route Operations.The competition for obtaining and renewing route contracts
in Nevada is high and continues to intensify. Such competition has, over time,
reduced our gross profit margins for such operations. In addition, such
competition has required us 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 costs. Notwithstanding our business
strategy of emphasizing profitability rather than market share, the future
success of our Route Operations will continue to be dependent to some extent on
our ability and willingness to provide such financial inducements. Although we
have 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 we will be able to obtain new route
contracts or renew or extend our route contracts upon their expiration or
termination, or that, if renewed or extended, the terms will be as favorable to
us. In Louisiana, our 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.

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 our operations comes
from larger casinos focusing on the local market. Our 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
our casinos.

Product Development

Our future success depends to a large extent upon our 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
our products and force us to attempt to respond quickly with our own competing
products. Response speed is lower in jurisdictions requiring product approvals
prior to commercialization. Our plan with respect to the introduction of more
sophisticated technology into the electronic gaming machine market is designed
to lead to an increase in market share and profitability for us. 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 we are developing a number of new products, there can be no guarantee
of commercial acceptance of any of our products.

The gaming industry is employing new technology in many new areas, and we and
our competitors continue to file for patents protecting such technologies.
Although we are 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 continues to deploy 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 we 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
we 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. We 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 our

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

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

Management believes that customer financing terms and leasing have become
increasingly important competitive factors 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 such equipment normally collateralizes these
financings, the resale value of the collateral in the event of default may be
less than the amount financed. Accordingly, we have greater exposure to the
financial condition of our 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 our sales and also
provides lease financing to our customers. Lease terms are generally for six
months, but are also available for terms up to 43 months.

Foreign Operations

Our 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, 2002, Bally Gaming and Systems has $21.6 million of receivables from
countries outside of the United States most of which are denominated in U.S.
dollars. We do not generally enter into foreign exchange contracts to hedge our
exposure to foreign exchange rate fluctuations.

Dependence on Key Personnel

Our success 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
our 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 we operate 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 our 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 those licenses, registrations, findings of
suitability, permits, or approvals will be given or renewed in the future or
that we will obtain the licenses necessary to operate in emerging markets.

Our 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 our products and
services.

We currently have 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 we operate gaming machines in OTBs in the greater New Orleans area. These
operations also depend on the financial viability of the racetrack and the
OTBs, which is beyond our control. See Business-Gaming Regulations and
Licensing.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

Additionally, there can be no assurance that any regulatory agency will not
enact new rules or change regulations that would negatively impact our ability
to operate or our 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 us.
Sales of Bally Wulffs products in Germany are generally subject to value added
taxes (V.A.T.). German tax authorities perform quadrennial audits of
corporate tax returns. During fiscal 2002, Bally Wulff reached an agreement
with the tax authorities on issues for the open tax years 1992 to 1995. Bally
Wulff made a $0.3 million payment for taxes, interest and penalties for those
years.

We pay and expect to continue to pay substantial taxes and fees in Nevada,
Louisiana and Mississippi and expect to pay substantial taxes and fees in any
other jurisdiction in which we conduct 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 us 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 us 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, we must offer to repay
all borrowings under the bank credit facility or obtain the consent of our
lenders under the credit agreement to the purchase of Senior Subordinated
Notes. If we do not obtain such consent or repay such borrowings, we will
remain prohibited from purchasing Senior Subordinated Notes. In such case, our
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 we 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 we will be able to comply with all
of our obligations under the new credit facility, the indenture, and our other
indebtedness on the occurrence of a change of control.

Currency Rate Fluctuations

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

Market risks

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

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

42



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

The results of the sensitivity analysis at June 30, 2002, are as follows:

Interest Rate Risk:

We had total debt as of June 30, 2002, of $342.3 million, of which $190.0
million are Term Loans with interest rates tied to LIBOR. These Term Loans are
broken into individual loans with varying terms from one to six months. The
interest rate for each loan is set on the borrowing date and is effective for
the term outstanding. If the LIBOR rates were to increase or decrease by 100
basis points, with all other factors remaining constant, earnings would
decrease or increase by approximately $1.9 million on a pre-tax basis.

Foreign Currency Exchange Rate Risk:

Our German subsidiaries currently utilize the euro dollars as our functional
currency. Prior to January 2002, the German deutschemark was used. A 10%
fluctuation in the exchange rate against the U.S. dollar, would result in a
corresponding change in earnings reported in the consolidated group, of
approximately $0.9 million. Such a change in the German euro dollar would
result in a charge to accumulated other comprehensive income (loss), which is a
component of stockholders equity, of approximately $3.6 million, all other
factors remaining constant.

Estimates

Our 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. QUANTITATIVE 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

Our 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 May 15, 2002, Alliance Gaming Corporation (the Company) dismissed
Arthur Andersen LLP as our independent accounting firm.

The report of Arthur Andersen LLP on our consolidated statement of operations,
stockholders equity (deficiency) and cash flows for the years ending June 30,
2001 and 2000, did not contain an adverse opinion or disclaimer of opinion, and
was not qualified or modified as to uncertainty, audit scope, or accounting
principles.

There were no disagreements between the Company and Arthur Andersen 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 Arthur Andersen, would have caused it to make a reference to
the subject matter of the disagreement in connection with our reports on the
financial statements for such periods within the meaning of Item 304 (a)(1)(iv)
of Regulation S-K.

Effective May 15, 2002, the Company engaged the firm of Deloitte & Touche LLP
as independent accountants. Our Board of Directors approved the selection of
Deloitte & Touche LLP as independent accountants upon the recommendation of our
Audit Committee.

43



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002




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 our 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 our 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 our 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 our fiscal year covered by this
report.




ITEM 14. CONTROLS AND PROCEDURES

Not Applicable.




PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Documents filed as part of this report:

|   |  |                                                                                                               |  |      
|-- |  | ------------------------------------------------------------------------------------------------------------- |  | -----
|   |  |                                                                                                               |  | Page 
|   |  |                                                                                                               |  |      
|1. |  | Financial Statements:                                                                                         |  |      
|   |  | Independent Auditors Report                                                                                  |  | F - 1
|   |  | Report of Independent Public Accountants                                                                      |  | F - 2
|   |  | Consolidated Balance Sheets as of June 30, 2001 and 2002                                                      |  | F - 3
|   |  | Consolidated Statements of Operations for the Years Ended June 30, 2000, 2001 and 2002                        |  | F - 4
|   |  | Consolidated Statements of Stockholders Equity (Deficiency) for the Years Ended June 30,
2000, 2001 and 2002 |  | F - 5
|   |  | Consolidated Statements of Cash Flows for the Years Ended June 30, 2000, 2001 and 2002                        |  | F - 6
|   |  | Notes to Consolidated Financial Statements                                                                    |  | F - 7
|2. |  | Consolidated Supplemental Schedules:
Not applicable.                                                          |  |      
|3. |  | Exhibits:                                                                                                     |  |      

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

|        |  |                                                                                                                                                                                                                                                                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                         
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                         
|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 Form S-4 dated
May 9, 1996).
|       
|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     |  | Loan Agreement among Alliance Gaming Corporation, Bally Wulff Vertriebs
GmbH, Bally Wulff Automaten GmbH and various lenders, and Bank of America,
N.A. (Administrative Agent), dated June 22, 2001 (incorporated herein by
reference).                                                                                                                 
|       
|4.3     |  | 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).                                                                                                                                                                         
|       
|4.4     |  | 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).                                                                                                              
|       
|4.5     |  | 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).                                                                                                                                                         
|       
|4.6     |  | Form of Right Certificate (attached as Exhibit B to the Rights Agreement)
(incorporated herein by reference to Form 8-A dated
March 10, 1998).                                                                                                                                                                                                          
|       
|4.7     |  | 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).                                                                                                                                                                              
|       
|10.1    |  | Alliance Gaming Corporation 1996 Long Term Incentive Plan (incorporated
herein by reference to the Companys Form S-8 filed August 12, 1997
Registration Number 333-34077).*                                                                                                                                                                            

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.2    |  | 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).
|       
|10.3    |  | 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).                                                                                                                                                                                                                                                 
|       
|10.4    |  | 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).*                                                                                                                                                                                                                                                                                                                                                                                          
|       
|10.5    |  | 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).                                                                                                                                                                                                                                                                                
|       
|10.6    |  | 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).                                                                                                                                                                                                                                                                                                                                   
|       
|10.7    |  | 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).                                                                                                                                                                                                                                                                                                                                                                                         
|       
|10.8    |  | Selling Stockholder Letter Agreement dated as of March 20, 1995
(incorporated herein by reference to Alliances Form S-3 Registration
Number 33-58233).                                                                                                                                                                                                                                                                                                                                                                                                                           
|       
|10.9    |  | 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).                                                                                                                                                                                                                                                                                                             
|       
|10.10   |  | 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).                                                                                                                                                                                                                                                                                                                     
|       
|10.11   |  | 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).                                                                                                                                                                                                                                                                                                               
|       
|10.12   |  | 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).                                                                                                                                                                                                                                                                                                               
|       
|10.13   |  | 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).                                                                                                                                                                                                                      

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

|        |  |                                                                                                                                                                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                          
|10.14   |  | 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).                                                                                                                           
|       
|10.15   |  | 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).                                                                          
|       
|10.16   |  | 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).                                                                
|       
|10.17   |  | 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).                                                                                                                                      
|       
|10.18   |  | 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).                                                                                                                                      
|       
|10.19   |  | 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).                                                                                                                          
|       
|10.20   |  | 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).                      
|       
|10.21   |  | 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).
|       
|10.22   |  | 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).  
|       
|10.23   |  | 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).             
|       
|10.24   |  | 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 December 31, 1996).*                                                                                                   
|       
|10.25   |  | 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 December 31, 1996).*                                                                                                  
|       
|10.26   |  | 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).*                                                                                                                    
|       
|10.27   |  | 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).*                                                                                                                   

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

|        |  |                                                                                                                                                                                                               
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                               
|Number  |  | Description                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                               
|10.28   |  | Agreement, between the Company and Kirkland Investment Corporation dated
July 1, 1997 (incorporated by reference to the Companys Annual Report on
Form 10-K dated June 30, 1997).                            
|       
|10.29   |  | Amendment Number 1 to the agreement between the Company and Kirkland
Investment Corporation dated July 1, 1997 (incorporated by reference to
the Companys Annual Report on Form 10-K dated
June 30, 1997).   
|       
|10.30   |  | Amended and Restated Employment Agreement, effective April 24, 2001,
between the Company and Robert L. Miodunski (incorporated by reference to
the Companys Annual Report on Form 10-K dated
June 30, 2001). 
|       
|10.31   |  | 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).       
|       
|10.32   |  | 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).           
|       
|10.33   |  | 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).
|       
|10.34   |  | Alliance Gaming Corporation 2001 Long-Term Incentive Plan (incorporated
herein by reference to the Companys Form S-8 filed January 22, 2002
Registration Number 33-81154).                                   
|       
|10.35   |  | Employment Agreement dated July 14, 2000 between the Company and Mark
Lerner (incorporated herein by reference to the Companys Annual Report on
Form 10-K dated June 30, 2002).*                             
|       
|21      |  | Subsidiaries of the Registrant.                                                                                                                                                                               
|       
|23.1    |  | Consent of Deloitte & Touche LLP                                                                                                                                                                              
|       
|99.1    |  | Certification of Chief Executive Officer and Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of
the Sarbanes-Oxley Act of 2002.                               
|       
|*       |  | Management contract or compensatory plan or arrangement.                                                                                                                                                      

ITEM 15 (continued).

(b)  Reports on Form 8-K:

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

(d)  See Item 14(a)(2) above.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002




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 our
behalf by the undersigned, thereunto duly authorized.

|                            |  |                         
|--------------------------- |  | ------------------------
|ALLIANCE GAMING CORPORATION |  | DATED: September 26,2002

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

|                                           |  |                                                                                                        |  |                  
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------ |  | -----------------
|Name                                       |  | Title                                                                                                  |  | Date             
|                                           |  |                                                                                                        |  |                  
|/s/ Robert L. MiodunskiRobert L. Miodunski |  | President and Chief Executive Officer
(Principal Executive Officer)                                    |  | September 26,2002
|                                          
|/s/ Robert L. SaxtonRobert L. Saxton       |  | Sr. Vice President, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer) |  | September 26,2002
|                                          
|/s/ Jacques AndreJacques Andre             |  | Director                                                                                               |  | September 26,2002
|                                          
|/s/ Anthony DiCesareAnthony DiCesare       |  | Director                                                                                               |  | September 26,2002
|                                          
|/s/ Joel KirschbaumJoel Kirschbaum         |  | Director                                                                                               |  | September 26,2002
|                                          
|/s/ David RobbinsDavid Robbins             |  | Director and Chairman of the Board                                                                     |  | September 26,2002
|                                          
|/s/ Morton TopferMorton Topfer             |  | Director                                                                                               |  | September 26,2002
|                                          
|/s/ Kevin VernerKevin Verner               |  | Director                                                                                               |  | September 26,2002

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2002

CERTIFICATIONS

I, Robert L. Miodunski, certify that:

1. I have reviewed this annual report on Form 10-K of Alliance Gaming
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

Date: September 26, 2002



---

Robert L. Miodunski
Director, President and
Chief Executive Officer


I, Robert L. Saxton, certify that:

1. I have reviewed this annual report on Form 10-K of Alliance Gaming
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

Date: September 26, 2002



---

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


50



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of

Alliance Gaming Corporation:

We have audited the accompanying consolidated balance sheets of Alliance Gaming
Corporation and Subsidiaries as of June 30, 2001 and 2002 and the related
consolidated statements of operations, stockholders equity (deficiency) and
cash flows for the years then ended. 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. The consolidated financial statements of Alliance Gaming Corporation as
of June 30, 2000, and for the year then ended were audited by other auditors
who have ceased operations. Those auditors expressed an unqualified opinion on
those consolidated financial statements in their report dated August 15, 2001.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Alliance Gaming Corporation and
Subsidiaries as of June 30, 2001 and 2002, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.

As discussed above, the consolidated financial statements of Alliance Gaming
Corporation and Subsidiaries as of June 30, 2000, and for the year then ended
were audited by other auditors who have ceased operations. As discussed in Note
1, these consolidated financial statements have been revised to reflect the
effects of a 2-for-1 stock split, effective April 9, 2002. We audited the
earnings per share adjustments to reflect the 2-for-1 stock split in the 2000
consolidated financial statements. As described in Note 12, these consolidated
financial statements have also been revised to reflect the transitional
disclosures required by Statement of Financial Accounting Standards No. 142
Goodwill and Other Intangible Assets, which was adopted by the Company on
July 1, 2001. Our audit procedures with respect to the disclosures in Note 12
included agreeing the adjustments to earnings per share representing
amortization expense to the Companys records obtained from management and
recalculating the related per share effects. In our opinion, the adjustments
and disclosures described above are appropriate and the adjustments have been
properly applied. We did not audit or review or apply any procedures to the
2000 consolidated financial statements of the Company other than with respect
to such adjustments and disclosures described above; accordingly, we do not
express an opinion or any other form of assurance on the 2000 consolidated
financial statements taken as a whole.

DELOITTE & TOUCHE LLP
Las Vegas, Nevada
July 24, 2002

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##### Table of Contents



This is a copy of the report previously issued by
Arthur Andersen LLP. The report has not been reissued
by Arthur Andersen LLP nor has Arthur Andersen LLP
provided a consent to the inclusion of its report in
this Annual Report on Form 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Alliance Gaming Corporation:

We have audited the accompanying consolidated balance sheets of Alliance Gaming
Corporation and Subsidiaries as of June 30, 2000 and 2001 and the related
consolidated statements of operations, stockholders deficiency and cash flows
for the years then ended. 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, 2000 and 2001, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States.

Arthur Andersen LLP

Las Vegas, Nevada
August 15, 2001

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##### Table of Contents



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

|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |          |        |         |         | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ------ | -------- | ------- | -------- | ------ | ------- | ------- | 
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        | June 30, |         | June 30,
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        | 2001     |         | 2002    
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|ASSETS                                           
|Current assets:                                   |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  |                                                                                                              | Cash and cash equivalents                                                                    |                                                                                                                                 | $                                       | 54,845 |          |         | $        | 63,404 |        
|                                                  |                                                                                                              | Accounts and notes receivable, net of allowance for doubtful accounts
of $15,591 and $15,695 |                                                                                                                                 |                                         | 79,369 |          |         |          | 96,832 |        
|                                                  |                                                                                                              | Inventories, net of reserves of $7,128 and $7,814                                            |                                                                                                                                 |                                         | 35,082 |          |         |          | 42,997 |        
|                                                  |                                                                                                              | Deferred tax assets, net                                                                     |                                                                                                                                 |                                         |       |          |         |          | 27,605 |        
|                                                  |                                                                                                              | Other current assets                                                                         |                                                                                                                                 |                                         | 10,814 |          |         |          | 13,975 |        
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 | Total current assets                    |        |          | 180,110 |          |        |         | 244,813 | 
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  | Long-term notes receivable, net of allowance for doubtful accounts
of $410 and $456                          |                                                                                              |                                                                                                                                 | 1,433                                   |        |          |         | 2,389    |       
|                                                  | Leased gaming equipment, net of accumulated depreciation of $14,986 and $9,931                               |                                                                                              |                                                                                                                                 | 22,677                                  |        |          |         | 17,892   |       
|                                                  | Property, plant and equipment, net of accumulated depreciation and amortization
of $74,245 and $63,313       |                                                                                              |                                                                                                                                 | 88,412                                  |        |          |         | 91,982   |       
|                                                  | Excess of costs over net assets of acquired businesses,
net of accumulated amortization of $7,433 and $6,517 |                                                                                              |                                                                                                                                 | 49,514                                  |        |          |         | 47,713   |       
|                                                  | Intangible assets, net of accumulated amortization of $20,693 and $25,148                                    |                                                                                              |                                                                                                                                 | 22,212                                  |        |          |         | 32,512   |       
|                                                  | Deferred tax assets, net                                                                                     |                                                                                              |                                                                                                                                 | 2,764                                   |        |          |         | 18,240   |       
|                                                  | Other assets, net of reserves of $1,826 and $1,818                                                           |                                                                                              |                                                                                                                                 | 3,895                                   |        |          |         | 4,339    |       
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  |                                                                                                              | $                                                                                            | 371,017                                                                                                                         |                                         |        | $        | 459,880 |         
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
|Current liabilities:                              |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  |                                                                                                              | Accounts payable                                                                             |                                                                                                                                 | $                                       | 19,531 |          |         | $        | 15,894 |        
|                                                  |                                                                                                              | Accrued liabilities                                                                          |                                                                                                                                 |                                         | 45,714 |          |         |          | 45,841 |        
|                                                  |                                                                                                              | Jackpot liabilities                                                                          |                                                                                                                                 |                                         | 1,264  |          |         |          | 5,915  |        
|                                                  |                                                                                                              | Current maturities of long term debt                                                         |                                                                                                                                 |                                         | 932    |          |         |          | 4,116  |        
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 | Total current liabilities               |        |          | 67,441  |          |        |         | 71,766  | 
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  | Long term debt, net                                                                                          |                                                                                              |                                                                                                                                 | 339,168                                 |        |          |         | 338,148  |       
|                                                  | Other liabilities                                                                                            |                                                                                              |                                                                                                                                 | 2,313                                   |        |          |         | 2,747    |       
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 | Total liabilities                       |        |          | 408,922 |          |        |         | 412,661 | 
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  | Minority interest                                                                                            |                                                                                              |                                                                                                                                 | 1,300                                   |        |          |         | 1,233    |       
|                                                  | Commitments and contingencies                                                                                |                                                                                              |                                                                                                                                 |                                         |        |          |         |          |       
|                                                  | Stockholders equity (deficiency):                                                                           |                                                                                              |                                                                                                                                 |                                         |        |          |         |          |       
|                                                  |                                                                                                              |                                                                                              | Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value;
120 shares and 115 shares issued and outstanding |                                         |        | 12       |         |          |        | 12      |        
|                                                  |                                                                                                              |                                                                                              | Common Stock, $.10 par value; 100,000,000 shares authorized;
21,776,000 and 49,227,000 shares issued                            |                                         |        | 2,178    |         |          |        | 4,927   |        
|                                                  |                                                                                                              |                                                                                              | Treasury stock at cost, 513,000 shares                                                                                          |                                         |        | (501     | )       |          |        | (501    | )      
|                                                  |                                                                                                              |                                                                                              | Additional paid-in capital                                                                                                      |                                         |        | 147,828  |         |          |        | 157,866 |        
|                                                  |                                                                                                              |                                                                                              | Accumulated other comprehensive income (loss)                                                                                   |                                         |        | (27,919  | )       |          |        | (19,364 | )      
|                                                  |                                                                                                              |                                                                                              | Accumulated deficit                                                                                                             |                                         |        | (160,803 | )       |          |        | (96,954 | )      
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 | Total stockholders equity (deficiency) |        |          | (39,205 | )        |        |         | 45,986  | 
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         
|                                                  |                                                                                                              | $                                                                                            | 371,017                                                                                                                         |                                         |        | $        | 459,880 |         
|                                                  |                                                                                                              |                                                                                              |                                                                                                                                 |                                         |        |          |         |         

See accompanying notes to consolidated financial statements.

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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000s, except per share amounts)

|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |         |  
|---------------------------------------------------------------- | ----------------------------------------- | - | -------------------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                 |                                           |   | Years Ended June 30,
|                                                                 |                                           |   |                     
|                                                                 |                                           |   | 2000                 |         | 2001 |   | 2002   
|                                                                 |                                           |   |                      |         |      |   |        
|Revenues:                                                        |                                           |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 | Gaming equipment and systems              |   | $                    | 135,180 |      |   | $       | 160,890 |   |   | $       | 223,021 |  
|                                                                 | Wall machines and amusement games         |   |                      | 68,952  |      |   |         | 72,228  |   |   |         | 74,721  |  
|                                                                 | Route operations                          |   |                      | 202,480 |      |   |         | 221,505 |   |   |         | 223,989 |  
|                                                                 | Casino operations                         |   |                      | 68,053  |      |   |         | 73,499  |   |   |         | 72,371  |  
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 |                                           |   | 474,665              |         |      |   | 528,122 |         |   |   | 594,102 |        
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        
|Costs and expenses:                                              |                                           |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 | Cost of gaming equipment and systems      |   |                      | 75,508  |      |   |         | 77,423  |   |   |         | 98,720  |  
|                                                                 | Cost of wall machines and amusement games |   |                      | 43,301  |      |   |         | 39,243  |   |   |         | 37,243  |  
|                                                                 | Cost of route operations                  |   |                      | 161,062 |      |   |         | 178,103 |   |   |         | 177,447 |  
|                                                                 | Cost of casino operations                 |   |                      | 27,933  |      |   |         | 32,541  |   |   |         | 32,193  |  
|                                                                 | Selling, general and administrative       |   |                      | 101,740 |      |   |         | 98,635  |   |   |         | 118,514 |  
|                                                                 | Research and development costs            |   |                      | 15,318  |      |   |         | 13,576  |   |   |         | 17,613  |  
|                                                                 | Depreciation and amortization             |   |                      | 26,788  |      |   |         | 27,745  |   |   |         | 31,852  |  
|                                                                 | Unusual items, net                        |   |                      | 2,164   |      |   |         | 6,489   |   |   |         | 24,129  |  
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 |                                           |   | 453,814              |         |      |   | 473,755 |         |   |   | 537,711 |        
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        
|Operating income                                                 |                                           |   | 20,851               |         |      |   | 54,367  |         |   |   | 56,391  |        
|Other income (expense):                                          |                                           |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 | Interest income                           |   |                      | 465     |      |   |         | 1,043   |   |   |         | 1,370   |  
|                                                                 | Interest expense                          |   |                      | (34,119 | )    |   |         | (34,807 | ) |   |         | (28,264 | )
|                                                                 | Minority interest                         |   |                      | (2,155  | )    |   |         | (2,165  | ) |   |         | (1,935  | )
|                                                                 | Other, net                                |   |                      | 924     |      |   |         | (3,345  | ) |   |         | 410     |  
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        
|Income (loss) before income taxes                                |                                           |   | (14,034              | )       |      |   | 15,093  |         |   |   | 27,972  |        
|Income tax provision                                             |                                           |   | (1,001               | )       |      |   | (611    | )       |   |   | 35,877  |        
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        
|Net income (loss) applicable to common shares                    |                                           | $ | (15,035              | )       |      | $ | 14,482  |         |   | $ | 63,849  |        
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        
|Basic earnings (loss) per share                                  |                                           | $ | (0.37                | )       |      | $ | 0.35    |         |   | $ | 1.38    |        
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        
|Diluted earnings (loss) per share                                |                                           | $ | (0.37                | )       |      | $ | 0.34    |         |   | $ | 1.34    |        
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        
|Weighted average common shares outstanding                       |                                           |   | 40,884               |         |      |   | 41,236  |         |   |   | 46,281  |        
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        
|Weighted average common and common share equivalents outstanding |                                           |   | 40,884               |         |      |   | 42,228  |         |   |   | 47,507  |        
|                                                                 |                                           |   |                      |         |      |   |         |         |   |   |         |        

See accompanying notes to consolidated financial statements.

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##### Table of Contents



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

(In 000s)

|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         |         |  
|------------------------------------------------------------------------------ | -------------------------- |  | ------------ |  | -------- | - | -------- |  | ------- | - | ------------- | - | ------------- | - | ------- | - | ------------ | - | ------------- | - |  | - | ----------- | - |  | - | -------- | - | ----- | - | ------- | ------- | -
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   | Accumulated |   |  |   |          |   | Total
|                                                                               |                            |  | Common Stock |  | Series E |   |          |  |         |   | Additional    |   | Other         |   |         |   |              |   | Stockholders'
|                                                                               |                            |  |              |  | Special  |   | Treasury |  | Paid-in |   | Comprehensive |   | Accum.        |   | Equity 
|                                                                               |                            |  | Shares       |  | Dollars  |   | Stock    |  | Stock   |   | Capital       |   | Income (loss) |   | Deficit |   | (Deficiency)
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |             
|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 | )      
|Foreign currency translation
adjustment                                        |                            |  |             |  |          |   |         |  |         |   |              |   |               |   |        |   |              |   |              |   |  |   | (5,804      | ) |  |   |         |   |       |   | (5,804  | )      
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         |        
|                                                                               | Total comprehensive loss   |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         | (20,839 | )
|Treasury shares issued upon exercise
of options                                |                            |  |             |  |          |   |         |  |         |   |              |   |               |   | 14      |   |              |   | (4            | ) |  |   |            |   |  |   |         |   |       |   | 10      |        
|Issuance of Special Stock                                                      |                            |  |             |  |          |   |         |  |         |   | 442           |   |               |   |        |   |              |   |              |   |  |   |            |   |  |   |         |   |       |   | 442     |        
|Common shares issued upon
conversion of Special Stock                          |                            |  | 544          |  |          |   | 55       |  |         |   | (11,198       | ) |               |   |        |   |              |   | 11,143        |   |  |   |            |   |  |   |         |   |       |   |        |        
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         |        
|Balances at June 30, 2000                                                      |                            |  | 10,335       |  |          | $ | 1,034    |  |         | $ | 4,624         |   |               | $ | (508    | ) |              | $ | 141,130       |   |  | $ | (21,790     | ) |  | $ | (175,285 | ) |       | $ | (50,795 | )      
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         |        
|Net income                                                                     |                            |  |             |  |          |   |         |  |         |   |              |   |               |   |        |   |              |   |              |   |  |   |            |   |  |   | 14,482   |   |       |   | 14,482  |        
|Foreign currency translation
adjustment                                        |                            |  |             |  |          |   |         |  |         |   |              |   |               |   |        |   |              |   |              |   |  |   | (6,129      | ) |  |   |         |   |       |   | (6,129  | )      
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         |        
|                                                                               | Total comprehensive income |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         | 8,353   |  
|Repurchases of common stock for
treasury                                       |                            |  |             |  |          |   |         |  |         |   |              |   |               |   | (436    | ) |              |   |              |   |  |   |            |   |  |   |         |   |       |   | (436    | )      
|Shares issued upon exercise
of options                                         |                            |  | 329          |  |          |   | 33       |  |         |   |              |   |               |   | 443     |   |              |   | 3,197         |   |  |   |            |   |  |   |         |   |       |   | 3,673   |        
|Common shares issued upon
conversion of Special Stock                          |                            |  | 224          |  |          |   | 22       |  |         |   | (4,612        | ) |               |   |        |   |              |   | 4,590         |   |  |   |            |   |  |   |         |   |       |   |        |        
|Effect of 2-for-1 stock split                                                  |                            |  | 10,888       |  |          |   | 1,089    |  |         |   |              |   |               |   |        |   |              |   | (1,089        | ) |  |   |            |   |  |   |         |   |       |   |        |        
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         |        
|Balances at June 30, 2001                                                      |                            |  | 21,776       |  |          | $ | 2,178    |  |         | $ | 12            |   |               | $ | (501    | ) |              | $ | 147,828       |   |  | $ | (27,919     | ) |  | $ | (160,803 | ) |       | $ | (39,205 | )      
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         |        
|Net income                                                                     |                            |  |             |  |          |   |         |  |         |   |              |   |               |   |        |   |              |   |              |   |  |   |            |   |  |   | 63,849   |   |       |   | 63,849  |        
|Foreign currency translation
adjustment                                        |                            |  |             |  |          |   |         |  |         |   |              |   |               |   |        |   |              |   |              |   |  |   | 8,555       |   |  |   |         |   |       |   | 8,555   |        
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         |        
|                                                                               | Total comprehensive income |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         | 72,404  |  
|Shares issued upon exercise
of options and warrants
before 2-for-1 stock split |                            |  | 2,809        |  |          |   | 283      |  |         |   |              |   |               |   |        |   |              |   | 6,246         |   |  |   |            |   |  |   |         |   |       |   | 6,529   |        
|Common shares issued upon
2-for-1 stock split                                  |                            |  | 24,585       |  |          |   | 2,461    |  |         |   |              |   |               |   |        |   |              |   | (2,461        | ) |  |   |            |   |  |   |         |   |       |   |        |        
|Tax benefit of employee stock
option exercises                                 |                            |  |             |  |          |   |         |  |         |   |              |   |               |   |        |   |              |   | 6,081         |   |  |   |            |   |  |   |         |   |       |   | 6,081   |        
|Shares issued upon exercise
of options and warrants
after 2-for-1 stock split  |                            |  | 57           |  |          |   | 5        |  |         |   |              |   |               |   |        |   |              |   | 172           |   |  |   |            |   |  |   |         |   |       |   | 177     |        
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         |        
|Balances at June 30, 2002                                                      |                            |  | 49,227       |  |          | $ | 4,927    |  |         | $ | 12            |   |               | $ | (501    | ) |              | $ | 157,866       |   |  | $ | (19,364     | ) |  | $ | (96,954  | ) |       | $ | 45,986  |        
|                                                                               |                            |  |              |  |          |   |          |  |         |   |               |   |               |   |         |   |              |   |               |   |  |   |             |   |  |   |          |   |       |   |         |        

See accompanying notes to consolidated financial statements.

F-5



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In 000s)

|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |         |   |   |         |  
|------------------------------------- | ---------------------------------------------------------------------------------- |  | ------------------------------------------ | ------------------------------------------------------- | - | -------------------- | ------- | -------- | - | ---- | ------- | ------- | - | - | ------- | -
|                                      |                                                                                    |  |                                            |                                                         |   | Years Ended June 30,
|                                      |                                                                                    |  |                                            |                                                         |   |                     
|                                      |                                                                                    |  |                                            |                                                         |   | 2000                 |         | 2001     |   | 2002
|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |     
|Cash flows from operating activities: |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|                                      | Net income (loss)                                                                  |  | $                                          | (15,035                                                 | ) |                      | $       | 14,482   |   |      | $       | 63,849  |  
|                                      |                                                                                    |  | Adjustments to reconcile net income (loss) |                                                         |   |                      |         |          |   |      |         |         |   |   |        
|                                      |                                                                                    |  |                                            | to net cash provided by (used in) operating activities: |   |                      |         |          |   |      |         |         |   |   |         |  
|                                      |                                                                                    |  |                                            | Depreciation and amortization                           |   |                      | 26,788  |          |   |      | 27,745  |         |   |   | 31,852  |  
|                                      |                                                                                    |  |                                            | Amortization of debt discounts                          |   |                      | 52      |          |   |      | 154     |         |   |   | 79      |  
|                                      |                                                                                    |  |                                            | Write off of deferred financing costs                   |   |                      |        |          |   |      | 3,164   |         |   |   |        |  
|                                      |                                                                                    |  |                                            | Write down of other assets                              |   |                      | 411     |          |   |      | 117     |         |   |   |        |  
|                                      |                                                                                    |  |                                            | Write down of goodwill and other long-lived assets      |   |                      |        |          |   |      |        |         |   |   | 24,129  |  
|                                      |                                                                                    |  |                                            | Deferred income tax                                     |   |                      | (26     | )        |   |      | 502     |         |   |   | (43,081 | )
|                                      |                                                                                    |  |                                            | (Gain) loss on sale of assets                           |   |                      | (4,158  | )        |   |      | 808     |         |   |   | 447     |  
|                                      |                                                                                    |  |                                            | Provision for losses on receivables                     |   |                      | 7,927   |          |   |      | 3,825   |         |   |   | 4,036   |  
|                                      |                                                                                    |  |                                            | Other                                                   |   |                      | 377     |          |   |      | 1,358   |         |   |   | 6,219   |  
|                                      | Change in operating assets and liabilities, net of effects of
businesses acquired: |  |                                            |                                                         |   |                      |         |          |   |      |         |         |  
|                                      |                                                                                    |  |                                            | Accounts and notes receivable                           |   |                      | 130     |          |   |      | (2,791  | )       |   |   | (13,793 | )
|                                      |                                                                                    |  |                                            | Inventories                                             |   |                      | 9,002   |          |   |      | (8,304  | )       |   |   | (12,103 | )
|                                      |                                                                                    |  |                                            | Other current assets                                    |   |                      | (1,911  | )        |   |      | 2,239   |         |   |   | (165    | )
|                                      |                                                                                    |  |                                            | Accounts payable                                        |   |                      | (6,870  | )        |   |      | 9,376   |         |   |   | (5,809  | )
|                                      |                                                                                    |  |                                            | Accrued liabilities                                     |   |                      | (7,199  | )        |   |      | 15,859  |         |   |   | (658    | )
|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|                                      |                                                                                    |  |                                            | Net cash provided by operating activities               |   |                      | 9,488   |          |   |      | 68,534  |         |   |   | 55,002  |  
|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|Cash flows from investing activities: |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|                                      | Additions to property, plant and equipment                                         |  |                                            | (13,012                                                 | ) |                      |         | (11,702  | ) |      |         | (16,300 | )
|                                      | Additions to participation gaming devices                                          |  |                                            | (12,447                                                 | ) |                      |         | (11,682  | ) |      |         | (15,099 | )
|                                      | Acquisitions, net of cash acquired                                                 |  |                                            |                                                        |   |                      |         |         |   |      |         | (15,333 | )
|                                      | Proceeds from disposal of assets                                                   |  |                                            | 4,316                                                   |   |                      |         | 258      |   |      |         | 88      |  
|                                      | Acquisition of assets formerly under operating leases                              |  |                                            |                                                        |   |                      |         | (13,040  | ) |      |         |        |  
|                                      | Proceeds from sale/leaseback transactions                                          |  |                                            | 3,169                                                   |   |                      |         |         |   |      |         |        |  
|                                      | Additions to other long-term assets                                                |  |                                            | (4,305                                                  | ) |                      |         | (3,297   | ) |      |         | (4,202  | )
|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|                                      |                                                                                    |  |                                            | Net cash used in investing activities                   |   |                      | (22,279 | )        |   |      | (39,463 | )       |   |   | (50,846 | )
|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|Cash flows from financing activities: |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|                                      | Capitalized debt issuance costs                                                    |  |                                            |                                                        |   |                      |         | (6,969   | ) |      |         | (662    | )
|                                      | Proceeds from issuance of long-term debt                                           |  |                                            |                                                        |   |                      |         | 190,000  |   |      |         |        |  
|                                      | Payoff of debt from refinancing                                                    |  |                                            |                                                        |   |                      |         | (166,058 | ) |      |         |        |  
|                                      | Reduction of long-term debt                                                        |  |                                            | (6,467                                                  | ) |                      |         | (2,811   | ) |      |         | (2,351  | )
|                                      | Net change in revolving credit facility                                            |  |                                            | 34,661                                                  |   |                      |         | (23,303  | ) |      |         |        |  
|                                      | Purchase of common stock for treasury                                              |  |                                            |                                                        |   |                      |         | (436     | ) |      |         |        |  
|                                      | Proceeds from exercise of stock options and warrants                               |  |                                            | 10                                                      |   |                      |         | 3,673    |   |      |         | 6,706   |  
|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|                                      |                                                                                    |  |                                            | Net cash provided by (used in) financing activities     |   |                      | 28,204  |          |   |      | (5,904  | )       |   |   | 3,693   |  
|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|                                      | Effect of exchange rate changes on cash                                            |  |                                            | (299                                                    | ) |                      |         | (366     | ) |      |         | 710     |  
|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|                                      | Cash and cash equivalents:                                                         |  |                                            |                                                         |   |                      |         |          |   |      |         |         |  
|                                      |                                                                                    |  |                                            | Increase (decrease) for year                            |   |                      | 15,114  |          |   |      | 22,801  |         |   |   | 8,559   |  
|                                      |                                                                                    |  |                                            | Balance, beginning of year                              |   |                      | 16,930  |          |   |      | 32,044  |         |   |   | 54,845  |  
|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        
|                                      |                                                                                    |  |                                            | Balance, end of year                                    |   | $                    | 32,044  |          |   | $    | 54,845  |         |   | $ | 63,404  |  
|                                      |                                                                                    |  |                                            |                                                         |   |                      |         |          |   |      |         |        

See accompanying notes to consolidated financial statements.

F-6



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2000, 2001 and 2002



|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 under the operating name Bally Wulff,
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 to 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 $20.8 million and $23.8 million at June 30,
2001 and 2002, respectively, 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 that totaled approximately $2.1 million
and $7.1 million at June 30, 2001 and 2002, respectively.
|  
|   |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Cost elements included for work-in-process
and finished goods include raw materials, freight, direct labor and
manufacturing overhead.                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Inventories, net of reserves, consist of the following (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                |                   |   |        |        |      |   |        |        | 
|--------------- | ----------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                |                   |   | 2001   |        | 2002
|                |                   |   |        |        |     
|Raw materials   |                   | $ | 15,222 |        |      | $ | 17,158 |       
|Work-in-process |                   |   | 1,774  |        |      |   | 936    |       
|Finished goods  |                   |   | 18,086 |        |      |   | 24,903 |       
|                |                   |   |        |        |      |   |        |       
|                | Total inventories |   | $      | 35,082 |      |   | $      | 42,997 | 
|                |                   |   |        |        |      |   |        |       



| |  | 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, 28-40 years; gaming
equipment, 4-7 years; furniture, fixtures and equipment, 3-7 years; and
leasehold improvements, 5-10 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



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | Property, plant and equipment consists of the following (in 000s):
| |  | -------------------------------------------------------------------

|                                               |                                          |   |         |        |      |   |         |        | 
|---------------------------------------------- | ---------------------------------------- | - | ------- | ------ | ---- | - | ------- | ------ | 
|                                               |                                          |   | 2001    |        | 2002
|                                               |                                          |   |         |        |     
|Land and land improvements                     |                                          | $ | 21,569  |        |      | $ | 22,143  |       
|Buildings and leasehold improvements           |                                          |   | 39,392  |        |      |   | 34,190  |       
|Gaming equipment                               |                                          |   | 72,284  |        |      |   | 80,855  |       
|Furniture, fixtures and equipment              |                                          |   | 29,412  |        |      |   | 18,107  |       
|Less accumulated depreciation and amortization |                                          |   | (74,245 | )      |      |   | (63,313 | )     
|                                               |                                          |   |         |        |      |   |         |       
|                                               | Total property, plant and equipment, net |   | $       | 88,412 |      |   | $       | 91,982 | 
|                                               |                                          |   |         |        |      |   |         |       



| |  | New accounting principles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 141, Business
Combinations (FASB No. 141) and No. 142, Goodwill and Other
Intangible Assets (FASB No. 142).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | FASB No. 141 establishes accounting and reporting standards for business
combinations and the related issues of allocations of purchase price to
assets and liabilities acquired. FASB No. 141 also requires all business
combinations to be accounted for under the purchase method. The Company
adopted FASB No. 141 effective July 1, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | FASB No. 142 revises the existing accounting standards for both goodwill
and intangible assets. Pursuant to FASB No. 142, amortization of existing
goodwill ceased as of July 1, 2001, and was replaced with a test for
impairment performed annually. The Company adopted the provisions of FASB
No. 142 effective July 1, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets (FASB No. 144). FASB No. 144 established a single
accounting model for the impairment or disposal of long-lived assets and
new standards for reporting discontinued operations. FASB No. 144
superseded Statement of Financial Accounting Standards No 121,
Accounting for the Impairment of Long-Lived Assets to Be Disposed Of
and APB Opinion No. 30, Reporting the Results of Operations  Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. The Company
adopted FASB No. 144 during the fiscal year ended June 30, 2002.                                                                                                
|
| |  | In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, Rescission of FASB Statements 4, 44, and 64,
Amendment of FASB Statement 13, and Technical Corrections as of April
2002 (FASB No. 145). The key provision of FASB No. 145 was to rescind
the existing rule that all gains or losses from the extinguishment of
debt should be classified as extraordinary items. Instead, such gains and
losses must be analyzed to determine if they meet the criteria for
extraordinary item classification based on the event being both unusual
and infrequent. We adopted FASB No. 145 effective June 30, 2002, and
reclassified a debt refinancing charge of $3.2 million from extraordinary
loss to other expense, incurred in the fiscal year ended June 30, 2001.                                                                                  
|
| |  | In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (FASB No. 146). FASB No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal
plan, as previously required under EITF Issue 94-3. Examples of costs
covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal
activity. FASB No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. We do not believe the
adoption will have a significant impact on our results of operations or
financial position.

F-8



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | 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 28 years, with an
average life of approximately 6 years, deferred issuance costs for
financings which are amortized over the life of the related financing,
and computer software and trademarks which are amortized over 9 years.
Deferred debt issuance costs are amortized and included in the
accompanying consolidated statements of operations in depreciation and
amortization expense.
|
| |  | Accrued liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Accrued liabilities consist of the following (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                        |                           |   |        |        |      |   |        |        | 
|--------------------------------------- | ------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                        |                           |   | 2001   |        | 2002
|                                        |                           |   |        |        |     
|Payroll and related costs               |                           | $ | 11,830 |        |      | $ | 16,998 |       
|Interest                                |                           |   | 6,452  |        |      |   | 7,397  |       
|Professional and consulting fees        |                           |   | 1,460  |        |      |   | 1,131  |       
|Sales, use, withholding and other taxes |                           |   | 1,230  |        |      |   | 1,459  |       
|Deferred revenues                       |                           |   | 5,966  |        |      |   | 7,439  |       
|Other                                   |                           |   | 18,776 |        |      |   | 11,417 |       
|                                        |                           |   |        |        |      |   |        |       
|                                        | Total accrued liabilities |   | $      | 45,714 |      |   | $      | 45,841 | 
|                                        |                           |   |        |        |      |   |        |       



| |  | Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles in the United States of
America 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 generally recognized at the time products are shipped and title has
passed to the customer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Revenue from sales of computerized monitoring systems is recognized in
accordance with the AICPAs Statement of Position 97-2 (SOP 97-2)
Software Revenue Recognition. In accordance with the provisions of SOP
97-2, the contracts for the sales of computerized monitoring units are
considered to have multiple elements because they include hardware,
software, installation supervision, training, and post-contract customer
support. Accordingly, revenues from the sale of systems are deferred and
begin to be recognized at the point when the system is deemed to be
functionally operational, and the residual method is used to recognize
revenue for the remaining elements as they are delivered, each having
vendor specific objective evidence of relative sales values.
Post-contract customer support revenues are recognized over the period of
the support agreement (generally one year).
|
| |  | 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 money wagered, on its share of net
winnings, or on the lease or rental rate                                                                                                                                                                                                                                                                                           

F-9



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | 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.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Promotional allowances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The Company accounts for promotional allowances and other cash based
incentives in accordance with EITF Issue 00-22, Accounting for Points
and certain other Time-Based or Volume-Based Sales Incentive Offers, and
Offers For Free Products or Service to be Delivered in the Future. EITF
00-22 requires that sales incentives such as cash rewards provided to
player club members be recorded as a reduction of revenue rather than as
an operating expense.                                                                                                                                                  
|
| |  | Unusual items                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The Company separately discloses certain income and expense items that
are unusual. 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.                                                                                                                                                                                                                                                                                                                    
|
| |  | Fiscal 2002:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |  |  | Non-cash write down of goodwill and other long-lived assets
related to Bally Wulff totaling $24.1 million (which is more fully
described in note 12).                                                                                                                                                         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A tax benefit resulting from the reduction of previously
recorded valuation reserves against net deferred tax assets,
primarily net operating loss carry forwards, totaling $37.0 million
which is included in the income tax provision in the accompanying
consolidated statement of operations (see note 5).



| |  | Fiscal 2001:
| |  | ------------



| |  |  | Costs and expenses incurred to terminate the agreement to
sell the Nevada Route Operations totaling $6.5 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  | Fiscal 2000:
| |  | ------------



| |  |  | 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 was 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.                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |  | 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 equity (deficiency). Gains and
losses on foreign currency transactions are included in the accompanying
consolidated statements of operations.

F-10



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | Stock split                                                                                                                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company recorded a 2-for-1 stock split, effective August 21, 2001 and
again on April 9, 2002. All share and per share information presented in
the Consolidated Financial Statements and notes thereto have been
presented to reflect the stock splits.
|
| |  | Earnings (loss) per share calculations                                                                                                                                                                                                                     
|
| |  | The following computation of basic and diluted earnings (loss) per share
from continuing operations, and income (loss) applicable to common shares
as adjusted for the stock splits, are as follows (in 000s except per
share amounts):                   

|                                                        |  |                             |         |      |  |      |        |  |  |   |        | 
|------------------------------------------------------- |  | --------------------------- | ------- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                        |  | Fiscal Years ended June 30,
|                                                        |  |                            
|                                                        |  | 2000                        |         | 2001 |  | 2002
|                                                        |  |                             |         |      |  |     
|Net Income (loss) applicable to common shares           |  | $                           | (15,035 | )    |  | $    | 14,482 |  |  | $ | 63,849 | 
|                                                        |  |                             |         |      |  |      |        |  |  |   |        | 
|Weighted average common shares
outstanding              |  |                             | 40,884  |      |  |      | 41,236 |  |  |   | 46,281 | 
|Effect of dilutive securities                           |  |                             |        |      |  |      | 992    |  |  |   | 1,226  | 
|                                                        |  |                             |         |      |  |      |        |  |  |   |        | 
|Weighted average common and
dilutive shares outstanding |  |                             | 40,884  |      |  |      | 42,228 |  |  |   | 47,507 | 
|                                                        |  |                             |         |      |  |      |        |  |  |   |        | 
|Income (loss) per basic share                           |  | $                           | (0.37   | )    |  | $    | 0.35   |  |  | $ | 1.38   | 
|                                                        |  |                             |         |      |  |      |        |  |  |   |        | 
|Income (loss) per diluted share                         |  | $                           | (0.37   | )    |  | $    | 0.34   |  |  | $ | 1.34   | 
|                                                        |  |                             |         |      |  |      |        |  |  |   |        | 



| |  | Diluted earnings per share represents the potential dilution that could
occur if all outstanding securities were exercised. Certain securities do
not have a dilutive effect because their exercise price exceeds the fair
market value of the underlying stock or because there is a net loss in
the period presented. Such securities are excluded from the diluted
earnings per share calculation and consist of the following (in 000s):
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       |  |                             |       |      |  |      |       |  |  |  |     | 
|---------------------- |  | --------------------------- | ----- | ---- |  | ---- | ----- |  |  |  | --- | 
|                       |  | Fiscal Years ended June 30,
|                       |  |                            
|                       |  | 2000                        |       | 2001 |  | 2002
|                       |  |                             |       |      |  |     
|Stock options          |  |                             | 3,246 |      |  |      | 1,366 |  |  |  | 817 | 
|Warrants               |  |                             | 1,858 |      |  |      | 1,429 |  |  |  |    | 
|Series E Special stock |  |                             | 450   |      |  |      |      |  |  |  |    | 
|                       |  |                             |       |      |  |      |       |  |  |  |     | 
|                       |  |                             | 5,554 |      |  |      | 2,795 |  |  |  | 817 | 
|                       |  |                             |       |      |  |      |       |  |  |  |     | 



| |  | 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, 2001 and 2002 for the Companys financial instruments, which
include accounts and notes receivable, accounts payable, and long term
debt, approximate fair value.                                                                                                                                                                               
|
| |  | 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

F-11



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|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 6% to 11%
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 2001 to August 2009.
|  
|   |  | The following table represents, at June 30, 2002, scheduled collections
of accounts and notes receivable (net of allowances for doubtful
accounts) by fiscal year (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                      |  |  |   |        | 
|--------------------- |  |  | - | ------ | 
|Years ending June 30, |  |  |   |       
|                      |  |  |   |       
|2003                  |  |  | $ | 96,832 | 
|2004                  |  |  |   | 1,482  | 
|2005                  |  |  |   | 606    | 
|2006                  |  |  |   | 201    | 
|2007                  |  |  |   | 71     | 
|Thereafter            |  |  |   | 29     | 
|                      |  |  |   |       
|Total                 |  |  | $ | 99,221 | 
|                      |  |  |   |       



|3. |  | DEBT AND REVOLVING CREDIT FACILITY                                                                 
|-- |  | ---------------------------------------------------------------------------------------------------
|  
|   |  | Long-term debt and lines of credit at June 30, 2001 and 2002 consisted of
the following (in 000s):

|                                                                                     |                                         |   |         |         |      |   |         |         | 
|------------------------------------------------------------------------------------ | --------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | 
|                                                                                     |                                         |   | 2001    |         | 2002
|                                                                                     |                                         |   |         |         |     
|Term Loan facility                                                                   |                                         | $ | 190,000 |         |      | $ | 189,525 |        
|Revolving credit facility                                                            |                                         |   |        |         |      |   |        |        
|10% Senior Subordinated Notes due 2007, net of
unamortized discount of $495 and $416 |                                         |   | 149,505 |         |      |   | 149,584 |        
|Other subordinated debt                                                              |                                         |   |        |         |      |   | 2,495   |        
|Other, secured by related equipment                                                  |                                         |   | 595     |         |      |   | 660     |        
|                                                                                     |                                         |   |         |         |      |   |         |        
|                                                                                     |                                         |   | 340,100 |         |      |   | 342,264 |        
|Less current maturities                                                              |                                         |   | 932     |         |      |   | 4,116   |        
|                                                                                     |                                         |   |         |         |      |   |         |        
|                                                                                     | Long-term debt, less current maturities |   | $       | 339,168 |      |   | $       | 338,148 | 
|                                                                                     |                                         |   |         |         |      |   |         |        



| |  | The Companys debt structure consists primarily of $190 million term loan
facility and a $25 million revolving credit facility (which can be
increased by $15 million at the Companys discretion) (collectively
referred to herein as the bank facility) and $150 million Senior
Subordinated Notes. The term loan has an interest rate of LIBOR plus
3.25% (or 5.4% as of June 30, 2002), has a 1% per year mandatory
principal amortization, and a 5.5 year maturity. The revolving credit
facility commitment decreases ratably over its 5 year commitment. As of
June 30, 2002, there were no borrowings outstanding on the revolving
credit facility. The bank facility loan contains certain customary
financial and operational covenants.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The bank facility is collateralized by substantially all domestic
property and is guaranteed by each domestic subsidiary of the U.S.
Borrower and German Subsidiaries (both as defined), other than the entity
that holds the Companys interest in its Louisiana and Mississippi
operations, and secured by both a U.S. and German Pledge Agreement (both
as defined). The bank facility contains a number of maintenance covenants
and other                                                                                                                                                                                                                                                                                                      

F-12



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | significant covenants that, among other things, restrict the ability of
the Company and the ability of certain of its subsidiaries to dispose of
assets, incur additional indebtedness, pay dividends or make other
distributions, enter into certain acquisitions, repurchase equity
interests or subordinated indebtedness, issue or sell equity interests of
the Companys subsidiaries, engage in mergers or acquisitions, or engage
in certain transactions with subsidiaries and affiliates, and that
otherwise restrict corporate activities. As of June 30, 2002, we are in
compliance with these covenants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Senior Subordinated Notes bear interest at 10%, are due in 2007, and
are general unsecured obligations of the Company, ranking subordinate in
right of payment to all Senior Debt (as defined) of the Company,
including indebtedness under the bank facility. The Senior Subordinated
Notes are fully and unconditionally guaranteed on a joint and several
senior subordinated basis by all existing and future domestic Restricted
Subsidiaries of the Company, subject to certain exceptions including the
partially-owned entities through which its Mississippi casino and
Louisiana route operations are conducted. The Subsidiary Guarantees are
general unsecured obligations of the Guarantors, ranking subordinate in
right of payment to all Senior Debt of the Guarantors. The Company will
be able to designate other current or future subsidiaries as Unrestricted
Subsidiaries under certain circumstances. Unrestricted Subsidiaries will
not be required to issue a Subsidiary Guarantee and will not be subject
to many of the restrictive covenants set forth in the Indenture pursuant
to which the Senior Subordinated Notes were issued. The Indenture for the
Companys Senior Subordinated Notes contains various covenants, including
limitations on incurrence of additional indebtedness, on restricted
payments and on dividend and payment restrictions on subsidiaries. The
Senior Subordinated Notes may be redeemed beginning in August 2002 at
105%, which decrease ratably over the remaining term. Upon the occurrence
of a Change of Control (as defined), the holders of the Senior
Subordinated Notes will have the right to require the Company to purchase
their notes at a price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest to the date of purchase. We are
also in compliance with the covenants contained in the Indenture for the
Senior Subordinated Notes.
|
| |  | Maturities of long-term debt, for each of the five fiscal years ending
subsequent to June 30, 2002 are as follows (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                      |  |  |   |         | 
|--------------------- |  |  | - | ------- | 
|Years ending June 30, |  |  |   |        
|                      |  |  |   |        
|2003                  |  |  | $ | 4,116   | 
|2004                  |  |  |   | 2,617   | 
|2005                  |  |  |   | 2,053   | 
|2006                  |  |  |   | 183,894 | 
|2007                  |  |  |   | 149,584 | 
|Thereafter            |  |  |   |        | 
|                      |  |  |   |        
|Total                 |  |  | $ | 342,264 | 
|                      |  |  |   |        



|4. |  | STOCKHOLDERS EQUITY, OPTIONS, WARRANTS AND RIGHTS                                                                                                                                                                                                                                                                                                                                                
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Stock Option Plans                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | In 1992, the Company created the 1991 Long Term Incentive Plan (the 1991
Plan) that, as amended, provides for the issuance of up to 3,428,000
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 3,428,000 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.
|  
|   |  | In December 2001, the Companys shareholders approved the 2001 Long-Term
Incentive Plan (the 2001 Plan), which provides for the issuance of up
to 2,000,000 shares of common stock to Company employees,                                                                                                                                                                                        

F-13



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | 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.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Transactions involving stock options are summarized as follows:                                                                                                                           

|                             |           |  |                     |            |                |   |                  |       | 
|---------------------------- | --------- |  | ------------------- | ---------- | -------------- | - | ---------------- | ----- | 
|                             |           |  | Options Outstanding
|                             |           |  |                    
|                             |           |  |                     |            |                |   | Weighted-Average
|                             |           |  | Shares              |            | Exercise Price
|                             |           |  |                     |            |               
|Balance, June 30, 1999       |           |  | 5,931,552           |            |                | $ | 3.13             |      
|                             | Granted   |  |                     | 1,947,912  |                |   |                  | 0.57  | 
|                             | Exercised |  |                     | (9,332     | )              |   |                  | 0.57  | 
|                             | Canceled  |  |                     | (1,360,064 | )              |   |                  | 0.68  | 
|                             |           |  |                     |            |                |   |                  |      
|Balance, June 30, 2000       |           |  | 6,510,068           |            |                |   | 2.51             |      
|                             | Granted   |  |                     | 932,572    |                |   |                  | 2.64  | 
|                             | Exercised |  |                     | (1,550,592 | )              |   |                  | 2.37  | 
|                             | Canceled  |  |                     | (993,696   | )              |   |                  | 3.25  | 
|                             |           |  |                     |            |                |   |                  |      
|Balance, June 30, 2001       |           |  | 4,898,352           |            |                |   | 2.43             |      
|                             | Granted   |  |                     | 1,058,370  |                |   |                  | 12.62 | 
|                             | Exercised |  |                     | (2,836,254 | )              |   |                  | 2.24  | 
|                             | Canceled  |  |                     | (36,496    | )              |   |                  | 4.04  | 
|                             |           |  |                     |            |                |   |                  |      
|Balance, June 30, 2002       |           |  | 3,083,972           |            |                | $ | 5.93             |      
|                             |           |  |                     |            |                |   |                  |      
|Exercisable at June 30, 2002 |           |  | 2,020,650           |            |                | $ | 3.52             |      
|                             |           |  |                     |            |                |   |                  |      



| |  | At June 30, 2002, the range of exercise prices (on a post-split basis),
for options outstanding was $0.47 to $14.50. The weighted average
remaining contractual life, by range of exercise price, for options
outstanding and exercisable at June 30, 2002 is as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          |  |                  |     |        |                     |       |                     |          |  |   |               |  |  |  |           |  |  |  | 
|------------------------- |  | ---------------- | --- | ------ | ------------------- | ----- | ------------------- | -------- |  | - | ------------- |  |  |  | --------- |  |  |  | 
|                          |  |                  |     |        | Options Outstanding |       | Options Exercisable
|                          |  |                  |     |        |                     |       |                    
|                          |  |                  |     |        | Weighted-Avg.       |       |                     |          |  |   | Weighted-Avg. |  |  |  |          
|Range of                  |  | Remaining        |     |        |                     |       |                     | Exercise |  |   |               | 
|Exercise Prices           |  | Contractual Life |     | Shares |                     | Price |                     | Shares  
|                          |  |                  |     |        |                     |       |                     |         
|$0.00
          - $1.00   |  |                  | 7.5 |        |                     |       | 474,562             |          |  | $ | 0.80          |  |  |  | 460,750   | 
|$1.01
          - $2.00   |  |                  | 7.8 |        |                     |       | 276,480             |          |  |   | 1.30          |  |  |  | 152,206   | 
|$2.01
          - $3.00   |  |                  | 4.6 |        |                     |       | 37,072              |          |  |   | 2.50          |  |  |  | 37,072    | 
|$3.01
          - $4.00   |  |                  | 4.3 |        |                     |       | 1,071,604           |          |  |   | 3.20          |  |  |  | 1,071,604 | 
|$4.01
          - $10.00  |  |                  | 8.8 |        |                     |       | 410,296             |          |  |   | 6.90          |  |  |  | 146,290   | 
|$12.00
          - $13.00 |  |                  | 9.5 |        |                     |       | 77,000              |          |  |   | 12.30         |  |  |  | 40,000    | 
|$13.01
          - $14.00 |  |                  | 9.4 |        |                     |       | 694,458             |          |  |   | 13.80         |  |  |  | 112,728   | 
|$14.01
          - $15.00 |  |                  | 9.9 |        |                     |       | 42,500              |          |  |   |              |  |  |  |          | 
|                          |  |                  |     |        |                     |       |                     |          |  |   |               |  |  |  |           | 
|All                       |  |                  | 7.1 |        |                     |       | 3,083,972           |          |  | $ | 3.52          |  |  |  | 2,020,650 | 
|                          |  |                  |     |        |                     |       |                     |          |  |   |               |  |  |  |           | 



| |  | 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.                                                                                                                                                           
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In 1998, the Company adopted FASB
No. 123 Accounting for Stock-Based
Compensation (FASB No. 123). Under FASB No. 123 companies may continue
to account for employee stock-based compensation under APB 25, but are
required to disclose historical pro-forma net income and earnings per
share that would have resulted from the use of the fair value method
described in FASB No. 123. Under the fair value method, compensation costs
are measured using an options pricing model and amortized over the life
of the option,

F-14



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | which is generally three years. The historical and proforma net income
(loss) and related per share data are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------

|                                   |                   |  |      |         |      |  |      |        |  |  |   |        | 
|---------------------------------- | ----------------- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                   |                   |  | 2000 |         | 2001 |  | 2002
|                                   |                   |  |      |         |      |  |     
|Net Income (loss):                 |                   |  |      |         |      |  |      |        |  |  |   |       
|                                   | As reported       |  | $    | (15,035 | )    |  | $    | 14,482 |  |  | $ | 63,849 | 
|                                   | Pro forma         |  |      | (17,845 | )    |  |      | 13,281 |  |  |   | 61,129 | 
|Earnings (loss) per diluted share: |                   |  |      |         |      |  |      |        |  |  |   |       
|                                   | Diluted           |  | $    | (0.37   | )    |  | $    | 0.34   |  |  | $ | 1.34   | 
|                                   | Pro forma diluted |  | $    | (0.44   | )    |  | $    | 0.32   |  |  | $ | 1.29   | 



| |  | The per share weighted-average fair value of stock options granted during
2000, 2001 and 2002 was $1.55, $2.57 and $6.79 respectively, on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 2000, 2001 and 2002: expected dividend
yield of 0%, risk free interest rates ranging from 3.5% to 6.0%, a
volatility factor of .74, .82, and .86 for 2000, 2001 and 2002,
respectively, and expected lives varying from 3 to 10 years.                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Upon the completion of the Bally
Gaming International, Inc. (BGII)
acquisition in 1996 the Company issued warrants to Gaming Systems
Advisors, L.P. (GSA) to purchase up to 2,857,144 shares of common stock
at $1.32 per share, with such warrants becoming exercisable in one-third
tranches only after the market price of the Companys common stock
reached $9.63, $11.38 and $13.13, respectively, for 30 consecutive
trading days. During fiscal year 2002, the Companys stock achieved these
price levels and the warrants were all exercised primarily through
cashless exercises.
|
| |  | In 1996, in conjunction with certain financing transactions, the Company
issued warrants to certain third parties for the purchase of up to
142,858 shares of Common Stock at $4.26 per share. These warrants vested
in fiscal year 2002 and were all exercised primarily through cashless
exercises.                                                                                                                                                                                                                                                                                           
|
| |  | Share Repurchase Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | In January 1999 the Companys Board of Directors approved a share
repurchase plan for up to 2.3 million (post-split) shares of its Common
Stock. Under the plan, subject to price and market conditions, purchases
of shares can be made from time to time in the open market or in
privately negotiated transactions using available cash. During the fiscal
years ended June 30, 2000, 2001 and 2002, the Company repurchased 0,
416,000, and 0 shares of common stock (post-split).                                                                                                            
|
| |  | Shares Reserved                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The following shares are reserved for options issued and available for
issue under the Companys stock plans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                     |       |  |           |           | 
|---------------------------------------------------- | ----- |  | --------- | --------- | 
|Stock options issued and currently outstanding       |       |  | 3,084,000 |          
|Stock options available for future issuance          |       |  | 1,385,000 |          
|Shares underlying Series E Special Stock outstanding |       |  | 2,000     |          
|                                                     |       |  |           |          
|                                                     | Total |  |           | 4,471,000 | 
|                                                     |       |  |           |          

F-15



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | 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.
|
| |  | 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 issued 113,160 shares of Series E Special Stock
to certain holders of the Companys 71/2% 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 111/2%, 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 3,076,000 shares of common stock (on a
post split basis). The Series E Special Stock is convertible into common
stock at a conversion price of $5.15 per share (equivalent to a
conversion rate of approximately 19.437 shares of common stock per share
of Series E Special Stock), subject to adjustment under certain
circumstances, and has a $100 liquidation preference per share. During
the fiscal year ended June 30, 2001, approximately 46,122 shares of
Series E Special Stock were converted into approximately 896,473 shares
of common stock (on a post split basis) and none were converted in fiscal
year 2002.                                                                                                                                                                                                                                                                                                      

F-16



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|5. |  | INCOME TAXES                                                                                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The components of the Companys income tax expense (benefit) for the years ended June 30, 2000, 2001 and 2002
are as follows (in 000s):

|                                 |         |   |       |     |      |   |      |      |   |   |         |         |  
|-------------------------------- | ------- | - | ----- | --- | ---- | - | ---- | ---- | - | - | ------- | ------- | -
|                                 |         |   | 2000  |     | 2001 |   | 2002
|                                 |         |   |       |     |      |   |     
|Current tax expense (benefit):   |         |   |       |     |      |   |      |      |   |   |         |        
|                                 | Federal |   | $     |    |      |   | $    | (588 | ) |   | $       | (292    | )
|                                 | Foreign |   |       | 280 |      |   |      | (8   | ) |   |         | 583     |  
|                                 | State   |   |       | 527 |      |   |      | 705  |   |   |         | 832     |  
|                                 |         |   |       |     |      |   |      |      |   |   |         |        
|                                 |         |   | 807   |     |      |   | 109  |      |   |   | 1,123   |        
|                                 |         |   |       |     |      |   |      |      |   |   |         |        
|Deferred tax expense (benefit):  |         |   |       |     |      |   |      |      |   |   |         |        
|                                 | Federal |   |       |    |      |   |      | (416 | ) |   |         | (36,461 | )
|                                 | Foreign |   |       | 194 |      |   |      | 918  |   |   |         | 711     |  
|                                 | State   |   |       |    |      |   |      |     |   |   |         | (1,250  | )
|                                 |         |   |       |     |      |   |      |      |   |   |         |        
|                                 |         |   | 194   |     |      |   | 502  |      |   |   | (37,000 | )      
|                                 |         |   |       |     |      |   |      |      |   |   |         |        
|Total provision for income taxes |         | $ | 1,001 |     |      | $ | 611  |      |   | $ | (35,877 | )      
|                                 |         |   |       |     |      |   |      |      |   |   |         |        



| |  | A reconciliation of the Companys income tax provision 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, 2000, 2001 and 2002 are as follows (in 000s):
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                      |  |      |        |      |  |      |        |   |  |   |         |  
|----------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                      |  | 2000 |        | 2001 |  | 2002
|                                                      |  |      |        |      |  |     
|Computed expected income tax expense (benefit) at 35% |  | $    | (4,911 | )    |  | $    | 5,283  |   |  | $ | 9,791   |  
|Permanent differences                                 |  |      | (1,874 | )    |  |      | (7,338 | ) |  |   | 3,647   |  
|Change in valuation allowance                         |  |      | 1,895  |      |  |      | 2,584  |   |  |   | (48,172 | )
|State income taxes, net of federal benefit            |  |      | 343    |      |  |      | 458    |   |  |   | (709    | )
|Other, net                                            |  |      | 5,548  |      |  |      | (376   | ) |  |   | (434    | )
|                                                      |  |      |        |      |  |      |        |   |  |   |         |  
|                                                      |  | $    | 1,001  |      |  | $    | 611    |   |  | $ | (35,877 | )
|                                                      |  |      |        |      |  |      |        |   |  |   |         |  



| |  | The major components of the deferred tax assets and liabilities as of June 30, 2001 and 2002 are presented
below (in 000s):
| |  | ----------------------------------------------------------------------------------------------------------------------------

|                                     |                                                                     |   |        |        |      |   |        |        | 
|------------------------------------ | ------------------------------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                     |                                                                     |   | 2001   |        | 2002
|                                     |                                                                     |   |        |        |     
|Deferred tax assets:                 |                                                                     |   |        |        |      |   |        |       
|                                     | Net operating loss carry forwards                                   |   | $      | 35,235 |      |   | $      | 31,839 | 
|                                     | Foreign tax credit carry forwards                                   |   |        | 6,639  |      |   |        | 949    | 
|                                     | Inventory obsolescence reserves                                     |   |        | 2,788  |      |   |        | 3,091  | 
|                                     | Bad debt reserves                                                   |   |        | 5,281  |      |   |        | 2,820  | 
|                                     | Accruals not currently deductible for tax purposes                  |   |        | 2,792  |      |   |        | 7,181  | 
|                                     | Refinancing costs being amortized for tax purposes                  |   |        | 6,480  |      |   |        | 4,378  | 
|                                     | Intangibles                                                         |   |        | 10,326 |      |   |        |       | 
|                                     | Other                                                               |   |        | 9,232  |      |   |        | 23,048 | 
|                                     |                                                                     |   |        |        |      |   |        |       
|Total gross deferred tax assets      |                                                                     |   | 78,773 |        |      |   | 73,306 |       
|Less: Valuation allowance            |                                                                     |   | 72,556 |        |      |   | 19,077 |       
|                                     |                                                                     |   |        |        |      |   |        |       
|Deferred tax assets                  |                                                                     | $ | 6,217  |        |      | $ | 54,229 |       
|                                     |                                                                     |   |        |        |      |   |        |       
|Deferred tax liabilities:            |                                                                     |   |        |        |      |   |        |       
|                                     | Property and equipment, due principally to
depreciation differences |   | $      | 3,142  |      |   | $      | 6,073  | 
|                                     | Intangible assets                                                   |   |        |       |      |   |        | 1,836  | 
|                                     | Other                                                               |   |        | 311    |      |   |        | 475    | 
|                                     |                                                                     |   |        |        |      |   |        |       
|Total gross deferred tax liabilities |                                                                     |   | 3,453  |        |      |   | 8,384  |       
|                                     |                                                                     |   |        |        |      |   |        |       
|Net deferred tax assets              |                                                                     | $ | 2,764  |        |      | $ | 45,845 |       
|                                     |                                                                     |   |        |        |      |   |        |       

F-17



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##### Table of Contents



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 (FASB No. 109).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | At June 30, 2002, the Company performed an assessment of the
recoverability of its net deferred tax assets. Management has determined
that tax benefits associated with previously reserved net deferred tax
assets are more likely than not realizable through future taxable income
and future reversals of existing taxable temporary differences. The
assessment was based on financial and taxable income forecasts, which
were finalized during the fourth fiscal quarter of 2002. The Companys
assessment indicated that the forecasted taxable income would be
sufficient to offset the previously reserved net deferred tax assets. As
a result, the Company recorded a tax benefit resulting from the reduction
of previously recorded valuation reserves against net deferred tax
assets, totaling $37.0 million.
|  
|   |  | In connection with its acquisitions of CMP and ACSC, the Company recorded
net deferred tax liabilities of $4.4 million and a corresponding
reduction in its valuation allowance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | At June 30, 2002, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $91 million that are
available to offset future federal taxable income, at various times which
expire during years 2009 through 2022. At June 30, 2002, the Company had
foreign tax credit carry forwards of approximately $0.9 million and
alternative minimum tax credit (AMT) carry forwards of approximately $1.0
million. Foreign tax credits will expire in 2003. 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, 2000, 2001 and 2002
(in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                                                                              |  |      |        |      |  |      |       |  |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ------ | -
|                                                                                              |  | 2000 |        | 2001 |  | 2002
|                                                                                              |  |      |        |      |  |     
|Reclassify inventory to property, plant and equipment and
leased gaming equipment             |  | $    | 3,784  |      |  | $    | 3,727 |  |  | $ | 5,823  |  
|Dividends for Series E and Series B Special Stock                                             |  |      | 442    |      |  |      |      |  |  |   |       |  
|Translation rate adjustment                                                                   |  |      | 5,505  |      |  |      | 5,763 |  |  |   | (7,846 | )
|Reclassify other assets to property, plant and equipment                                      |  |      | 242    |      |  |      | 526   |  |  |   | 330    |  
|Reclassify intangibles to property, plant and equipment                                       |  |      |       |      |  |      |      |  |  |   | 614    |  
|Deferred gain on sale/leaseback transaction                                                   |  |      | 1,546  |      |  |      |      |  |  |   |       |  
|Reclassify excess costs over net assets of acquired business
to property, plant and equipment |  |      | 500    |      |  |      |      |  |  |   |       |  
|Conversion of Series E Special Stock to Common Stock                                          |  |      | 11,198 |      |  |      | 4,612 |  |  |   |       |  
|Subordinated note payable issued in acquisition                                               |  |      |       |      |  |      |      |  |  |   | 4,000  |  



|   |  | Payments for interest expense in fiscal years 2000, 2001 and 2002 were
approximately $34.0 million, $35.4 million and $28.4 million,
respectively. Payments for income taxes, net of refunds received, in
fiscal years 2000, 2001 and 2002 were approximately $0.5 million, $(0.1)
million and $0.5 million, respectively.                                                                                                                                                                                                                                    
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|7. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The Company is obligated under several patent agreements to pay
royalties ranging from approximately $5 to $300 per applicable game
depending on the components in the gaming machines. Total royalty expense
for the Company for the years ended June 30, 2000, 2001 and 2002 was $3.4
million, $3.5 million and $2.8 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.

F-18



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | The Company leases: (a) certain office space, equipment, warehouse and
repair facilities and other property locations under non-cancelable
operating leases (Equipment and Office Space Leases) and are generally
included in the selling, general and administrative expense; and (b)
Route Operations locations where the Company operates gaming devices
(Route Location Leases), which are included in the cost of route
operations. Certain Route Location Leases provide for sharing of the net
gaming win between the Company and the location owner and are cancelable
at any time by either party, and are deemed contingent rents. Operating
rental expense for years ended June 30, 2000, 2001 and 2002 was as
follows (in 000s):
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  |  |      |         |      |  |      |         |   |  |   |         |  
|--------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                  |  | 2000 |         | 2001 |  | 2002
|                                  |  |      |         |      |  |     
|Contingent Route Location Leases  |  | $    | 120,877 |      |  | $    | 130,542 |   |  | $ | 135,338 |  
|Fixed Route Location Leases       |  |      | 14,641  |      |  |      | 19,185  |   |  |   | 17,773  |  
|Equipment and Office Space Leases |  |      | 12,681  |      |  |      | 12,479  |   |  |   | 6,830   |  
|                                  |  |      |         |      |  |      |         |   |  |   |         |  
|                                  |  |      | 148,199 |      |  |      | 162,206 |   |  |   | 159,941 |  
|Sublease rental income            |  |      | (1,416  | )    |  |      | (1,667  | ) |  |   | (1,806  | )
|                                  |  |      |         |      |  |      |         |   |  |   |         |  
|                                  |  | $    | 146,783 |      |  | $    | 160,539 |   |  | $ | 158,135 |  
|                                  |  |      |         |      |  |      |         |   |  |   |         |  



| |  | Future minimum rentals under non-cancelable operating leases at June 30, 2002 are (in 000s):
| |  | ---------------------------------------------------------------------------------------------

|                      |                     |   |                      |        |      |   |        |        |      |   |        |        |            |   |        |       |  |   |       |       |  |   |        |        |  |   |        |        | 
|--------------------- | ------------------- | - | -------------------- | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ | ---------- | - | ------ | ----- |  | - | ----- | ----- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                      |                     |   | Years ended June 30,
|                      |                     |   |                     
|                      |                     |   | 2003                 |        | 2004 |   | 2005   |        | 2006 |   | 2007   |        | Thereafter |   | Total 
|                      |                     |   |                      |        |      |   |        |        |      |   |        |        |            |   |       
|Minimum rentals(a)    |                     | $ | 22,700               |        |      | $ | 17,536 |        |      | $ | 14,313 |        |            | $ | 10,384 |       |  | $ | 8,449 |       |  | $ | 14,422 |        |  | $ | 87,804 |       
|Total sublease income |                     |   | (1,720               | )      |      |   | (1,636 | )      |      |   | (1,389 | )      |            |   | (890   | )     |  |   | (813  | )     |  |   | (1,825 | )      |  |   | (8,273 | )     
|                      |                     |   |                      |        |      |   |        |        |      |   |        |        |            |   |        |       |  |   |       |       |  |   |        |        |  |   |        |        | 
|                      | Net
minimum rentals |   | $                    | 20,980 |      |   | $      | 15,900 |      |   | $      | 12,924 |            |   | $      | 9,494 |  |   | $     | 7,636 |  |   | $      | 12,597 |  |   | $      | 79,531 | 
|                      |                     |   |                      |        |      |   |        |        |      |   |        |        |            |   |        |       |  |   |       |       |  |   |        |        |  |   |        |        | 



| | (a) |  | Represents primarily the multi-year agreements that allow the
Company to operate gaming devices at convenience stores, bars, and
taverns.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | German tax authorities perform quadrennial audits of corporate tax
returns. During fiscal 2002, Bally Wulff reached an agreement with the
tax authorities on issues for the open tax years 1992 to 1995, and
recorded a $0.3 million payment for taxes, interest and penalties for
those tax years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | 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
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 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 are seeking monetary damages in excess of $1.0 billion. In
July 2002 the Federal judge denied the plaintiff class action status.
Management believes the plaintiffs lawsuit to be without merit. The
Company is vigorously pursuing all legal defenses available to it.

F-19



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|   |  | 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.                                                                                                                                          
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|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, 2002 net accounts and notes receivable by region as a
percentage of total net receivables are as follows:                                                                                                                                                                                                                                                                                                

|                                  |  |             |      |               |  |            |      |            |  |       |     |   |  |  |     |   |  |  |       |  
|--------------------------------- |  | ----------- | ---- | ------------- |  | ---------- | ---- | ---------- |  | ----- | --- | - |  |  | --- | - |  |  | ----- | -
|                                  |  | Gaming      |      | Wall Machines |  |            |      |            |  |       |     |   |  |  |     |  
|                                  |  | Equipment   |      | and Amusement |  | Route      |      | Casino     |  |       |     |  
|                                  |  | and Systems |      | Games         |  | Operations |      | Operations |  | Total
|                                  |  |             |      |               |  |            |      |            |  |      
|Germany                           |  |             | 1.3  | %             |  |            | 29.4 | %          |  |       |    | % |  |  |    | % |  |  | 30.7  | %
|Other international jurisdictions |  |             | 21.8 |               |  |            | 1.4  |            |  |       |    |   |  |  |    |   |  |  | 23.2  |  
|Nevada                            |  |             | 11.6 |               |  |            |     |            |  |       | 7.7 |   |  |  |    |   |  |  | 19.3  |  
|Others individually less than 5%  |  |             | 26.6 |               |  |            |     |            |  |       | 0.1 |   |  |  | 0.1 |   |  |  | 26.8  |  
|                                  |  |             |      |               |  |            |      |            |  |       |     |   |  |  |     |   |  |  |       |  
|                                  |  |             | 61.3 | %             |  |            | 30.8 | %          |  |       | 7.8 | % |  |  | 0.1 | % |  |  | 100.0 | %
|                                  |  |             |      |               |  |            |      |            |  |       |     |   |  |  |     |   |  |  |       |  



|   |  | 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 designs, manufactures and distributes gaming machines and
computerized monitoring systems for gaming machines; (ii) Wall Machines
and Amusement Games designs, manufactures and distributes wall-mounted
gaming machines and distributes third party manufactured amusement games;
(iii) Route Operations owns and manages a significant installed base of
gaming machines; and (iv) Casino Operations owns and operates two
regional casinos. The accounting policies of these segments are
consistent with Companys policies for the Consolidated Financial
Statements.
|  
|   |  | The table below presents information as to the Companys revenues,
operating income, identifiable assets, capital expenditures and
depreciation and amortization by segment (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                            |                                   |   |                      |         |      |   |         |         |  |   |         |         | 
|--------------------------- | --------------------------------- | - | -------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                            |                                   |   | Years Ended June 30,
|                            |                                   |   |                     
|                            |                                   |   | 2000                 |         | 2001 |   | 2002   
|                            |                                   |   |                      |         |      |   |        
|Revenues:                   |                                   |   |                      |         |      |   |         |         |  |   |         |        
|                            | Gaming Equipment and Systems      |   | $                    | 135,180 |      |   | $       | 160,890 |  |   | $       | 223,021 | 
|                            | Wall Machines and Amusement Games |   |                      | 68,952  |      |   |         | 72,228  |  |   |         | 74,721  | 
|                            | Route Operations                  |   |                      | 202,480 |      |   |         | 221,505 |  |   |         | 223,989 | 
|                            | Casino Operations                 |   |                      | 68,053  |      |   |         | 73,499  |  |   |         | 72,371  | 
|                            |                                   |   |                      |         |      |   |         |         |  |   |         |        
|Total revenues              |                                   | $ | 474,665              |         |      | $ | 528,122 |         |  | $ | 594,102 |        
|                            |                                   |   |                      |         |      |   |         |         |  |   |         |        
|Intersegment revenues:      |                                   |   |                      |         |      |   |         |         |  |   |         |        
|                            | Gaming Equipment and Systems      |   | $                    | 19,914  |      |   | $       | 8,226   |  |   | $       | 16,710  | 
|                            | Wall Machines and Amusement Games |   |                      | 232     |      |   |         | 59      |  |   |         |        | 
|                            | Route Operations                  |   |                      |        |      |   |         |        |  |   |         |        | 
|                            | Casino Operations                 |   |                      |        |      |   |         |        |  |   |         |        | 
|                            |                                   |   |                      |         |      |   |         |         |  |   |         |        
|Total intersegment revenues |                                   | $ | 20,146               |         |      | $ | 8,285   |         |  | $ | 16,710  |        
|                            |                                   |   |                      |         |      |   |         |         |  |   |         |        

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                    |                                   |   |                      |         |      |   |         |         |   |   |         |         |  
|----------------------------------- | --------------------------------- | - | -------------------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                    |                                   |   | Years Ended June 30,
|                                    |                                   |   |                     
|                                    |                                   |   | 2000                 |         | 2001 |   | 2002   
|                                    |                                   |   |                      |         |      |   |        
|Operating income (loss):            |                                   |   |                      |         |      |   |         |         |   |   |         |        
|                                    | Gaming Equipment and Systems      |   | $                    | (693    | )    |   | $       | 27,039  |   |   | $       | 47,172  |  
|                                    | Wall Machines and Amusement Games |   |                      | (4,219  | )    |   |         | 4,904   |   |   |         | (16,187 | )
|                                    | Route Operations                  |   |                      | 15,162  |      |   |         | 15,482  |   |   |         | 15,470  |  
|                                    | Casino Operations                 |   |                      | 23,805  |      |   |         | 25,258  |   |   |         | 22,498  |  
|                                    | Corporate/other                   |   |                      | (13,204 | )    |   |         | (18,316 | ) |   |         | (12,562 | )
|                                    |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Total operating income              |                                   | $ | 20,851               |         |      | $ | 54,367  |         |   | $ | 56,391  |        
|                                    |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Identifiable assets:                |                                   |   |                      |         |      |   |         |         |   |   |         |        
|                                    | Gaming Equipment and Systems      |   | $                    | 145,051 |      |   | $       | 153,961 |   |   | $       | 226,239 |  
|                                    | Wall Machines and Amusement Games |   |                      | 76,235  |      |   |         | 66,043  |   |   |         | 51,087  |  
|                                    | Route Operations                  |   |                      | 62,946  |      |   |         | 74,415  |   |   |         | 79,309  |  
|                                    | Casino Operations                 |   |                      | 48,043  |      |   |         | 47,737  |   |   |         | 51,531  |  
|                                    | Corporate/other                   |   |                      | 19,012  |      |   |         | 28,861  |   |   |         | 51,714  |  
|                                    |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Total identifiable assets           |                                   | $ | 351,287              |         |      | $ | 371,017 |         |   | $ | 459,880 |        
|                                    |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Capital expenditures:               |                                   |   |                      |         |      |   |         |         |   |   |         |        
|                                    | Gaming Equipment and Systems      |   | $                    | 3,226   |      |   | $       | 2,696   |   |   | $       | 3,370   |  
|                                    | Wall Machines and Amusement Games |   |                      | 515     |      |   |         | 480     |   |   |         | 704     |  
|                                    | Route Operations                  |   |                      | 3,993   |      |   |         | 5,592   |   |   |         | 7,431   |  
|                                    | Casino Operations                 |   |                      | 5,112   |      |   |         | 2,904   |   |   |         | 4,719   |  
|                                    | Corporate/other                   |   |                      | 166     |      |   |         | 30      |   |   |         | 76      |  
|                                    |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Total capital expenditures          |                                   | $ | 13,012               |         |      | $ | 11,702  |         |   | $ | 16,300  |        
|                                    |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Depreciation and amortization:      |                                   |   |                      |         |      |   |         |         |   |   |         |        
|                                    | Gaming Equipment and Systems      |   | $                    | 7,862   |      |   | $       | 8,835   |   |   | $       | 10,202  |  
|                                    | Wall Machines and Amusement Games |   |                      | 5,776   |      |   |         | 5,555   |   |   |         | 5,213   |  
|                                    | Route Operations                  |   |                      | 9,341   |      |   |         | 9,496   |   |   |         | 12,069  |  
|                                    | Casino Operations                 |   |                      | 2,149   |      |   |         | 2,300   |   |   |         | 2,132   |  
|                                    | Corporate/other                   |   |                      | 1,660   |      |   |         | 1,559   |   |   |         | 2,236   |  
|                                    |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Total depreciation and amortization |                                   | $ | 26,788               |         |      | $ | 27,745  |         |   | $ | 31,852  |        
|                                    |                                   |   |                      |         |      |   |         |         |   |   |         |        



| |  | 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 (in 000s):                                                                                                                                                                                                                                                                                                                                                      

|               |               |   |                      |         |      |   |         |         |  |   |         |         | 
|-------------- | ------------- | - | -------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|               |               |   | Years Ended June 30,
|               |               |   |                     
|               |               |   | 2000                 |         | 2001 |   | 2002   
|               |               |   |                      |         |      |   |        
|Revenues:      |               |   |                      |         |      |   |         |         |  |   |         |        
|               | United States |   | $                    | 384,788 |      |   | $       | 441,944 |  |   | $       | 495,812 | 
|               | Germany       |   |                      | 79,330  |      |   |         | 79,110  |  |   |         | 90,203  | 
|               | Other foreign |   |                      | 10,547  |      |   |         | 7,068   |  |   |         | 8,087   | 
|               |               |   |                      |         |      |   |         |         |  |   |         |        
|Total revenues |               | $ | 474,665              |         |      | $ | 528,122 |         |  | $ | 594,102 |        
|               |               |   |                      |         |      |   |         |         |  |   |         |        

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                    |               |   |                      |         |      |   |         |         |  |   |         |         |  
|----------------------------------- | ------------- | - | -------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | -
|                                    |               |   | Years Ended June 30,
|                                    |               |   |                     
|                                    |               |   | 2000                 |         | 2001 |   | 2002   
|                                    |               |   |                      |         |      |   |        
|Operating income (loss):            |               |   |                      |         |      |   |         |         |  |   |         |        
|                                    | United States |   | $                    | 32,561  |      |   | $       | 46,974  |  |   | $       | 67,409  |  
|                                    | Germany       |   |                      | (4,994  | )    |   |         | 5,080   |  |   |         | (13,038 | )
|                                    | Other foreign |   |                      | (6,716  | )    |   |         | 2,313   |  |   |         | 2,020   |  
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Total operating income              |               | $ | 20,851               |         |      | $ | 54,367  |         |  | $ | 56,391  |        
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Identifiable assets:                |               |   |                      |         |      |   |         |         |  |   |         |        
|                                    | United States |   | $                    | 255,454 |      |   | $       | 289,071 |  |   | $       | 387,934 |  
|                                    | Germany       |   |                      | 91,800  |      |   |         | 77,234  |  |   |         | 64,952  |  
|                                    | Other foreign |   |                      | 4,033   |      |   |         | 4,712   |  |   |         | 6,994   |  
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Total identifiable assets           |               | $ | 351,287              |         |      | $ | 371,017 |         |  | $ | 459,880 |        
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Capital expenditures:               |               |   |                      |         |      |   |         |         |  |   |         |        
|                                    | United States |   | $                    | 12,348  |      |   | $       | 11,213  |  |   | $       | 15,548  |  
|                                    | Germany       |   |                      | 521     |      |   |         | 483     |  |   |         | 744     |  
|                                    | Other foreign |   |                      | 143     |      |   |         | 6       |  |   |         | 8       |  
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Total capital expenditures          |               | $ | 13,012               |         |      | $ | 11,702  |         |  | $ | 16,300  |        
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Depreciation and amortization:      |               |   |                      |         |      |   |         |         |  |   |         |        
|                                    | United States |   | $                    | 19,818  |      |   | $       | 22,047  |  |   | $       | 26,605  |  
|                                    | Germany       |   |                      | 5,924   |      |   |         | 5,681   |  |   |         | 5,228   |  
|                                    | Other Foreign |   |                      | 1,046   |      |   |         | 17      |  |   |         | 19      |  
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Total depreciation and amortization |               | $ | 26,788               |         |      | $ | 27,745  |         |  | $ | 31,852  |        
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        



|10. |  | INTERIM FINANCIAL INFORMATION (Unaudited)                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Following is the unaudited quarterly results of the Company for the years
ended June 30, 2001 and 2002 (adjusted for the August 21, 2001 and April
9, 2002 two-for-one stock splits) (in 000s, except per share data).

|                                |  |         |         |        |  |       |         |        |  |   |         |  |  |   |         |  
|------------------------------- |  | ------- | ------- | ------ |  | ----- | ------- | ------ |  | - | ------- |  |  | - | ------- | -
|                                |  | Quarter
|                                |  |        
|                                |  | First   |         | Second |  | Third |         | Fourth
|                                |  |         |         |        |  |       |         |       
|2001                            |  |         |         |        |  |       |         |        |  |   |         |  |  |   |         |  
|Revenues                        |  | $       | 119,115 |        |  | $     | 130,339 |        |  | $ | 138,469 |  |  | $ | 140,199 |  
|Operating income                |  |         | 13,131  |        |  |       | 15,158  |        |  |   | 16,142  |  |  |   | 9,936   |  
|Net income (loss)               |  |         | 3,365   |        |  |       | 5,509   |        |  |   | 6,820   |  |  |   | (1,212  | )
|Basic income (loss) per share   |  | $       | 0.09    |        |  | $     | 0.14    |        |  | $ | 0.17    |  |  | $ | (0.03   | )
|Diluted income (loss) per share |  | $       | 0.08    |        |  | $     | 0.13    |        |  | $ | 0.16    |  |  | $ | (0.02   | )
|                               
|2002                            |  |         |         |        |  |       |         |        |  |   |         |  |  |   |         |  
|Revenues                        |  | $       | 129,801 |        |  | $     | 150,464 |        |  | $ | 154,832 |  |  | $ | 159,005 |  
|Impairment charges              |  |         |        |        |  |       |        |        |  |   |        |  |  |   | (24,129 | )
|Operating income (loss)         |  |         | 14,861  |        |  |       | 20,400  |        |  |   | 24,705  |  |  |   | (3,575  | )
|Non-cash tax benefit            |  |         |        |        |  |       |        |        |  |   |        |  |  |   | 37,000  |  
|Net income                      |  |         | 7,428   |        |  |       | 12,816  |        |  |   | 15,899  |  |  |   | 27,706  |  
|Basic income per share          |  | $       | 0.17    |        |  | $     | 0.29    |        |  | $ | 0.33    |  |  | $ | 0.57    |  
|Diluted income per share        |  | $       | 0.16    |        |  | $     | 0.27    |        |  | $ | 0.32    |  |  | $ | 0.56    |  

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | BUSINESS COMBINATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During the year ended June 30, 2002, the Company acquired 100 percent of
the stock of two companies: Casino Marketplace (CMP) on October 28,
2001 and Advanced Casino Systems Corporation (ACSC) on March 22, 2002.
Both CMP and ACSC are providers of software and systems for the casino
industry and both companies operations have been fully integrated into
the Companys existing Bally Gaming and Systems business unit. Based
primarily on fair value estimates obtained from a third-party valuation
consultant, the following table summarizes the values assigned to the
assets acquired and liabilities assumed in each acquisition (in 000s):

|                      |                           |                          |       |        |        |      |       |        |        | 
|--------------------- | ------------------------- | ------------------------ | ----- | ------ | ------ | ---- | ----- | ------ | ------ | 
|                      |                           |                          |       | CMP    |        | ACSC
|                      |                           |                          |       |        |        |     
|Cash                  |                           | $                        | 1,269 |        |        | $    | 6,149 |       
|Other current assets  |                           |                          | 769   |        |        |      | 8,139 |       
|Fixed assets          |                           |                          | 62    |        |        |      | 437   |       
|Intangibles assets    |                           |                          | 9,480 |        |        |      | 3,130 |       
|Goodwill              |                           |                          | 2,763 |        |        |      | 5,081 |       
|Other                 |                           |                          |      |        |        |      | 141   |       
|                      |                           |                          |       |        |        |      |       |       
|                      | Total assets acquired     |                          |       | 14,343 |        |      |       | 23,077 |       
|Current liabilities   |                           |                          | 2,343 |        |        |      | 8,190 |       
|Long-term liabilities |                           |                          |      |        |        |      | 285   |       
|                      |                           |                          |       |        |        |      |       |       
|                      | Total liabilities assumed |                          |       | 2,343  |        |      |       | 8,475  |       
|                      |                           |                          |       |        |        |      |       |       
|                      |                           | Net asset purchase price |       | $      | 12,000 |      |       | $      | 14,602 | 
|                      |                           |                          |       |        |        |      |       |       



|    |  | The intangible assets acquired consist of software and trademarks and are
both being amortized over nine years. The goodwill is not deductible for
tax purposes.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|12. |  | GOODWILL AND LONG-LIVED ASSETS                                                                                                                                  
|   
|    |  | Goodwill                                                                                                                                                        
|   
|    |  | The changes in goodwill for the year ended June 30, 2002 are as follows
(in 000s):                                                                             

|                                                |  |               |        |            |  |                   |       |       |  |   |    |  |  |   |         |  
|----------------------------------------------- |  | ------------- | ------ | ---------- |  | ----------------- | ----- | ----- |  | - | -- |  |  | - | ------- | -
|                                                |  |               |        |            |  | Business Segments |       |       |  |  
|                                                |  |               |        |            |  |                   |       |       |  |  
|                                                |  | Gaming Equip. |        | Casino     |  | Route             |       | Bally
|                                                |  | & Systems     |        | Operations |  | Operations        |       | Wulff
|                                                |  |               |        |            |  |                   |       |      
|Balances as of July 1, 2001
net of amortization |  | $             | 37,469 |            |  | $                 | 1,754 |       |  | $ | 39 |  |  | $ | 10,252  |  
|Goodwill acquired during the year               |  |               | 7,844  |            |  |                   |      |       |  |   |   |  |  |   |        |  
|Impairment losses                               |  |               |       |            |  |                   |      |       |  |   |   |  |  |   | (11,454 | )
|Translations adjustment                         |  |               | 607    |            |  |                   |      |       |  |   |   |  |  |   | 1,202   |  
|                                                |  |               |        |            |  |                   |       |       |  |   |    |  |  |   |         |  
|Balances
as of June 30, 2002                    |  | $             | 45,920 |            |  | $                 | 1,754 |       |  | $ | 39 |  |  | $ |        |  
|                                                |  |               |        |            |  |                   |       |       |  |   |    |  |  |   |         |  



| |  | In July 2001, the Company adopted FASB No. 142, which requires companies
to cease amortizing goodwill and certain intangible assets with
indefinite useful lives. Instead, goodwill and intangible assets deemed
to have indefinite useful lives are to be reviewed for impairment upon
the adoption of FASB No. 142 and annually thereafter. In accordance with
FASB No. 142, goodwill was no longer amortized for the fiscal year ended
June 30, 2002, and amortization for the fiscal years ended June 30, 2000
and 2001 was $1.4 million (or $.02 per share) per year.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company performed its initial impairment test of goodwill upon
adoption of FASB No. 142 in July 2001. The Company engaged an independent
consultant to assist in the valuation of the reporting units. The fair
value of the reporting units was determined using a discounted cash flow
model. The assessment indicated goodwill was recoverable and no
impairment charge was required.                                                                                                                                                                              

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|    |  | During the fourth fiscal quarter of 2002 the Company performed its annual
impairment assessments for each reporting unit. Based on the results of
its analysis of fair values, the Company determined that the goodwill for
its Bally Wulff business unit had become impaired. Factors contributing
to the Companys assessment included further delays in the passage of
proposed regulatory changes that would have been favorable to this
industry and a substantial slowdown in the demand for our products in
Germany due to weakening economic conditions. These factors resulted in a
significant reduction in the estimated fair value of this business unit.
As a result of this assessment, the Company wrote down the goodwill for
Bally Wulff by $11.4 million, which is included in unusual items in the
accompanying Consolidated Statement of Operations for the fiscal year
ended June 30, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Long-Lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | Due to the adverse state of the wall machine industry discussed above,
the Company also assessed the recoverability of the long-lived assets for
the Bally Wulff business unit. In accordance with FASB No. 144, the
Company wrote down virtually all of the long-lived assets of Bally Wulff
totaling $12.7 million, which is included in unusual items in the
accompanying Consolidated Statement of Operations for the fiscal year
ended June 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|13. |  | 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 August 1997. 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-24



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS
June 30, 2001
(In 000s)
ASSETS

|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |          |        |          |         | 
|----------------------------------------------------------- | --------------------------------------- | ---------------------------------- | --------------------------------------- | ------------------------- | ------ | ------------ | ------- | ------------ | ------ | -------- | -------- | ------------ | ------- | ----------- | ------- | -------- | ------ | -------- | ------- | 
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |          |        | Alliance
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |          |        | Gaming  
|                                                            |                                         |                                    |                                         |                           |        | Parent and   |         | Non-         |        |          |          |              |         | Corporation
|                                                            |                                         |                                    |                                         |                           |        | Guaranteeing |         | Guaranteeing |        | Elimina- |          | and         
|                                                            |                                         |                                    |                                         |                           |        | Subsidiaries |         | Subsidiaries |        | tions    |          | Subsidiaries
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |             
|Current assets:                                             |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         | Cash and cash equivalents          |                                         | $                         | 41,502 |              |         | $            | 13,343 |          |          | $            |        |             |         | $        | 54,845 |         
|                                                            |                                         | Accounts and notes receivable, net |                                         |                           | 58,769 |              |         |              | 37,769 |          |          |              | (17,169 | )           |         |          | 79,369 |         
|                                                            |                                         | Inventories, net                   |                                         |                           | 24,555 |              |         |              | 10,527 |          |          |              |        |             |         |          | 35,082 |         
|                                                            |                                         | Other current assets               |                                         |                           | 8,178  |              |         |              | 2,636  |          |          |              |        |             |         |          | 10,814 |         
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                    |                                         | Total current assets      |        |              | 133,004 |              |        |          | 64,275   |              |         |             | (17,169 | )        |        |          | 180,110 | 
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|Long-term notes receivable, net                             |                                         |                                    | 53,162                                  |                           |        |              | 433     |              |        |          | (52,162  | )            |         |             | 1,433   |         
|Leased equipment, net                                       |                                         |                                    | 16,374                                  |                           |        |              | 6,303   |              |        |          |         |              |         |             | 22,677  |         
|Property, plant and equipment, net                          |                                         |                                    | 54,399                                  |                           |        |              | 34,013  |              |        |          |         |              |         |             | 88,412  |         
|Excess of costs over net assets of acquired
businesses, net |                                         |                                    | 35,547                                  |                           |        |              | 13,967  |              |        |          |         |              |         |             | 49,514  |         
|Intangible assets, net                                      |                                         |                                    | 22,096                                  |                           |        |              | 116     |              |        |          |         |              |         |             | 22,212  |         
|Investments in subsidiaries                                 |                                         |                                    | 84,228                                  |                           |        |              |        |              |        |          | (84,228  | )            |         |             |        |         
|Deferred tax assets, net                                    |                                         |                                    | 1,284                                   |                           |        |              | 1,480   |              |        |          |         |              |         |             | 2,764   |         
|Other assets, net                                           |                                         |                                    | 10,167                                  |                           |        |              | (6,638  | )            |        |          | 366      |              |         |             | 3,895   |         
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         | $                                  | 410,261                                 |                           |        | $            | 113,949 |              |        | $        | (153,193 | )            |         | $           | 371,017 |         
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|                                                           
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)          
|Current liabilities:                                        |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|                                                            | Accounts payable                        |                                    | $                                       | 17,118                    |        |              | $       | 2,413        |        |          | $        |             |         |             | $       | 19,531   |       
|                                                            | Accrued liabilities                     |                                    |                                         | 36,384                    |        |              |         | 9,999        |        |          |          | (669         | )       |             |         | 45,714   |       
|                                                            | Jackpot liabilities                     |                                    |                                         | 1,264                     |        |              |         |             |        |          |          |             |         |             |         | 1,264    |       
|                                                            | Current maturities of long-term debt    |                                    |                                         | 488                       |        |              |         | 16,955       |        |          |          | (16,511      | )       |             |         | 932      |       
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                    |                                         | Total current liabilities |        |              | 55,254  |              |        |          | 29,367   |              |         |             | (17,180 | )        |        |          | 67,441  | 
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|Long term debt, net                                         |                                         |                                    | 391,032                                 |                           |        |              | 132     |              |        |          | (51,996  | )            |         |             | 339,168 |         
|Other liabilities                                           |                                         |                                    | 1,880                                   |                           |        |              | 433     |              |        |          |         |              |         |             | 2,313   |         
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                    |                                         | Total liabilities         |        |              | 448,166 |              |        |          | 29,932   |              |         |             | (69,176 | )        |        |          | 408,922 | 
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|Minority interest                                           |                                         |                                    | 1,300                                   |                           |        |              |        |              |        |          |         |              |         |             | 1,300   |         
|Commitments and contingencies                               |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|Stockholders equity (deficiency):                          |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|                                                            | Series E Special Stock                  |                                    |                                         | 12                        |        |              |         |             |        |          |          |             |         |             |         | 12       |       
|                                                            | Common Stock                            |                                    |                                         | 2,178                     |        |              |         | 17,832       |        |          |          | (17,832      | )       |             |         | 2,178    |       
|                                                            | Treasury stock                          |                                    |                                         | (501                      | )      |              |         |             |        |          |          |             |         |             |         | (501     | )     
|                                                            | Additional paid-in capital              |                                    |                                         | 147,828                   |        |              |         | 7,862        |        |          |          | (7,862       | )       |             |         | 147,828  |       
|                                                            | Accumulated other comprehensive loss    |                                    |                                         | (27,919                   | )      |              |         | (27,939      | )      |          |          | 27,939       |         |             |         | (27,919  | )     
|                                                            | Retained earnings (accumulated deficit) |                                    |                                         | (160,803                  | )      |              |         | 86,262       |        |          |          | (86,262      | )       |             |         | (160,803 | )     
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                    | Total stockholders equity (deficiency) |                           |        | (39,205      | )       |              |        | 84,017   |          |              |         | (84,017     | )       |          |        | (39,205  | )      
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         | $                                  | 410,261                                 |                           |        | $            | 113,949 |              |        | $        | (153,193 | )            |         | $           | 371,017 |         
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         

See accompanying notes.

F-25



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         |        |          |         | 
|----------------------------------------------------------- | --------------------------------------- | ---------------------------------- | --------------------------------------- | ------------------------- | ------ | ------------ | ------- | ------------ | ------ | -------- | -------- | ------------ | ------- | ----------- | ------- | ------- | ------ | -------- | ------- | 
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         |        | Alliance
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |         |        | Gaming  
|                                                            |                                         |                                    |                                         |                           |        | Parent and   |         | Non-         |        |          |          |              |         | Corporation
|                                                            |                                         |                                    |                                         |                           |        | Guaranteeing |         | Guaranteeing |        | Elimina- |          | and         
|                                                            |                                         |                                    |                                         |                           |        | Subsidiaries |         | Subsidiaries |        | tions    |          | Subsidiaries
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |             
|Current assets:                                             |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|                                                            |                                         | Cash and cash equivalents          |                                         | $                         | 47,379 |              |         | $            | 16,025 |          |          | $            |        |             |         | $       | 63,404 |         
|                                                            |                                         | Accounts and notes receivable, net |                                         |                           | 66,698 |              |         |              | 43,956 |          |          |              | (13,822 | )           |         |         | 96,832 |         
|                                                            |                                         | Inventories, net                   |                                         |                           | 28,469 |              |         |              | 14,528 |          |          |              |        |             |         |         | 42,997 |         
|                                                            |                                         | Deferred tax assets                |                                         |                           | 27,586 |              |         |              | 19     |          |          |              |        |             |         |         | 27,605 |         
|                                                            |                                         | Other current assets               |                                         |                           | 12,567 |              |         |              | 1,408  |          |          |              |        |             |         |         | 13,975 |         
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|                                                            |                                         |                                    |                                         | Total current assets      |        |              | 182,699 |              |        |          | 75,936   |              |         |             | (13,822 | )       |        |          | 244,813 | 
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|Long-term notes receivable, net                             |                                         |                                    | 60,818                                  |                           |        |              | 408     |              |        |          | (58,837  | )            |         |             | 2,389   |        
|Leased equipment, net                                       |                                         |                                    | 17,892                                  |                           |        |              |        |              |        |          |         |              |         |             | 17,892  |        
|Property, plant and equipment, net                          |                                         |                                    | 59,165                                  |                           |        |              | 32,817  |              |        |          |         |              |         |             | 91,982  |        
|Excess of costs over net assets of acquired
businesses, net |                                         |                                    | 43,390                                  |                           |        |              | 4,323   |              |        |          |         |              |         |             | 47,713  |        
|Intangible assets, net                                      |                                         |                                    | 32,511                                  |                           |        |              | 1       |              |        |          |         |              |         |             | 32,512  |        
|Investments in subsidiaries                                 |                                         |                                    | 81,855                                  |                           |        |              |        |              |        |          | (81,855  | )            |         |             |        |        
|Deferred tax assets, net                                    |                                         |                                    | 17,489                                  |                           |        |              | 751     |              |        |          |         |              |         |             | 18,240  |        
|Other assets, net                                           |                                         |                                    | 8,118                                   |                           |        |              | (4,131  | )            |        |          | 352      |              |         |             | 4,339   |        
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|                                                            |                                         | $                                  | 503,937                                 |                           |        | $            | 110,105 |              |        | $        | (154,162 | )            |         | $           | 459,880 |        
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|                                                           
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)          
|Current liabilities:                                        |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|                                                            | Accounts payable                        |                                    | $                                       | 13,533                    |        |              | $       | 2,361        |        |          | $        |             |         |             | $       | 15,894  |       
|                                                            | Accrued liabilities                     |                                    |                                         | 33,840                    |        |              |         | 13,033       |        |          |          | (1,032       | )       |             |         | 45,841  |       
|                                                            | Jackpot liabilities                     |                                    |                                         | 5,812                     |        |              |         | 103          |        |          |          |             |         |             |         | 5,915   |       
|                                                            | Current maturities of long-term debt    |                                    |                                         | 3,979                     |        |              |         | 12,952       |        |          |          | (12,815      | )       |             |         | 4,116   |       
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|                                                            |                                         |                                    |                                         | Total current liabilities |        |              | 57,164  |              |        |          | 28,449   |              |         |             | (13,847 | )       |        |          | 71,766  | 
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|Long term debt, net                                         |                                         |                                    | 396,807                                 |                           |        |              | 12      |              |        |          | (58,671  | )            |         |             | 338,148 |        
|Other liabilities                                           |                                         |                                    | 2,747                                   |                           |        |              |        |              |        |          |         |              |         |             | 2,747   |        
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|                                                            |                                         |                                    |                                         | Total liabilities         |        |              | 456,718 |              |        |          | 28,461   |              |         |             | (72,518 | )       |        |          | 412,661 | 
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|Minority interest                                           |                                         |                                    | 1,233                                   |                           |        |              |        |              |        |          |         |              |         |             | 1,233   |        
|Commitments and contingencies                               |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|Stockholders equity (deficiency):                          |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|                                                            | Series E Special Stock                  |                                    |                                         | 12                        |        |              |         |             |        |          |          |             |         |             |         | 12      |       
|                                                            | Common Stock                            |                                    |                                         | 4,927                     |        |              |         | 17,832       |        |          |          | (17,832      | )       |             |         | 4,927   |       
|                                                            | Treasury stock                          |                                    |                                         | (501                      | )      |              |         |             |        |          |          |             |         |             |         | (501    | )     
|                                                            | Additional paid-in capital              |                                    |                                         | 157,866                   |        |              |         | 7,862        |        |          |          | (7,862       | )       |             |         | 157,866 |       
|                                                            | Accumulated other comprehensive loss    |                                    |                                         | (19,364                   | )      |              |         | (19,384      | )      |          |          | 19,384       |         |             |         | (19,364 | )     
|                                                            | Retained earnings (accumulated deficit) |                                    |                                         | (96,954                   | )      |              |         | 75,334       |        |          |          | (75,334      | )       |             |         | (96,954 | )     
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|                                                            |                                         |                                    | Total stockholders equity (deficiency) |                           |        | 45,986       |         |              |        | 81,644   |          |              |         | (81,644     | )       |         |        | 45,986   |        
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        
|                                                            |                                         | $                                  | 503,937                                 |                           |        | $            | 110,105 |              |        | $        | (154,162 | )            |         | $           | 459,880 |        
|                                                            |                                         |                                    |                                         |                           |        |              |         |              |        |          |          |              |         |             |         |        

See accompanying notes.

F-26



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Year ended June 30, 2000
(In 000s)

|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |         |  
|--------------------------------------------- | ----------------------------------------- | - | ------------ | ------- | ------------ | - | -------- | ------ | ------------ | - | ----------- | ------- | - | - | -------- | ------- | -
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   | Alliance
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   | Gaming  
|                                              |                                           |   | Parent and   |         | Non-         |   |          |        |              |   | Corporation
|                                              |                                           |   | Guaranteeing |         | Guaranteeing |   | Elimina- |        | and         
|                                              |                                           |   | Subsidiaries |         | Subsidiaries |   | tions    |        | Subsidiaries
|                                              |                                           |   |              |         |              |   |          |        |             
|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                         |   |              | 17,410  |              |   |          | 50,643 |              |   |             |        |   |   |          | 68,053  |  
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              |                                           |   | 332,915      |         |              |   | 159,927  |        |              |   | (18,177     | )       |   |   | 474,665  |        
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|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       |   |              | 63,810  |              |   |          | 38,100 |              |   |             | (170    | ) |   |          | 101,740 |  
|                                              | 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   |  
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              |                                           |   | 324,467      |         |              |   | 147,524  |        |              |   | (18,177     | )       |   |   | 453,814  |        
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|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  | )      
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        

See accompanying notes.

F-27



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Year ended June 30, 2001
(In 000s)

|                                       |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |         |  
|-------------------------------------- | ----------------------------------------- | - | ------------ | ------- | ------------ | - | -------- | ------ | ------------ | - | ----------- | ------ | - | - | -------- | ------- | -
|                                       |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   | Alliance
|                                       |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   | Gaming  
|                                       |                                           |   | Parent and   |         | Non-         |   |          |        |              |   | Corporation
|                                       |                                           |   | Guaranteeing |         | Guaranteeing |   | Elimina- |        | and         
|                                       |                                           |   | Subsidiaries |         | Subsidiaries |   | tions    |        | Subsidiaries
|                                       |                                           |   |              |         |              |   |          |        |             
|Revenues:                              |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                       | Gaming equipment and systems              |   | $            | 154,919 |              |   | $        | 13,950 |              |   | $           | (7,979 | ) |   | $        | 160,890 |  
|                                       | Wall machines and amusement games         |   |              |        |              |   |          | 72,228 |              |   |             |       |   |   |          | 72,228  |  
|                                       | Route operations                          |   |              | 205,105 |              |   |          | 16,400 |              |   |             |       |   |   |          | 221,505 |  
|                                       | Casino operations                         |   |              | 18,950  |              |   |          | 54,549 |              |   |             |       |   |   |          | 73,499  |  
|                                       |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                       |                                           |   | 378,974      |         |              |   | 157,127  |        |              |   | (7,979      | )      |   |   | 528,122  |        
|                                       |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|Costs and expenses:                    |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                       | Cost of gaming equipment and systems      |   |              | 76,212  |              |   |          | 9,190  |              |   |             | (7,979 | ) |   |          | 77,423  |  
|                                       | Cost of wall machines and amusement games |   |              |        |              |   |          | 39,243 |              |   |             |       |   |   |          | 39,243  |  
|                                       | Cost of route operations                  |   |              | 167,518 |              |   |          | 10,585 |              |   |             |       |   |   |          | 178,103 |  
|                                       | Cost of casino operations                 |   |              | 10,671  |              |   |          | 21,870 |              |   |             |       |   |   |          | 32,541  |  
|                                       | Selling, general and administrative       |   |              | 63,479  |              |   |          | 35,156 |              |   |             |       |   |   |          | 98,635  |  
|                                       | Research and development                  |   |              | 11,028  |              |   |          | 2,548  |              |   |             |       |   |   |          | 13,576  |  
|                                       | Depreciation and amortization             |   |              | 19,809  |              |   |          | 7,936  |              |   |             |       |   |   |          | 27,745  |  
|                                       | Unusual items, net                        |   |              | 6,489   |              |   |          |       |              |   |             |       |   |   |          | 6,489   |  
|                                       |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                       |                                           |   | 355,206      |         |              |   | 126,528  |        |              |   | (7,979      | )      |   |   | 473,755  |        
|                                       |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|Operating income                       |                                           |   | 23,768       |         |              |   | 30,599   |        |              |   |            |        |   |   | 54,367   |        
|Earnings in consolidated subsidiaries  |                                           |   | 32,466       |         |              |   |         |        |              |   | (32,466     | )      |   |   |         |        
|Other income (expense):                |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                       | Interest income                           |   |              | 794     |              |   |          | 693    |              |   |             | (444   | ) |   |          | 1,043   |  
|                                       | Interest expense                          |   |              | (33,187 | )            |   |          | (2,064 | )            |   |             | 444    |   |   |          | (34,807 | )
|                                       | Rainbow royalty                           |   |              | 6,590   |              |   |          | (6,590 | )            |   |             |       |   |   |          |        |  
|                                       | Minority interest                         |   |              | (2,165  | )            |   |          |       |              |   |             |       |   |   |          | (2,165  | )
|                                       | Other, net                                |   |              | (15,097 | )            |   |          | 11,752 |              |   |             |       |   |   |          | (3,345  | )
|                                       |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|Income before income taxes             |                                           |   | 13,169       |         |              |   | 34,390   |        |              |   | (32,466     | )      |   |   | 15,093   |        
|Income tax (provision) benefit         |                                           |   | 1,313        |         |              |   | (1,924   | )      |              |   |            |        |   |   | (611     | )      
|                                       |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|Net income applicable to common shares |                                           | $ | 14,482       |         |              | $ | 32,466   |        |              | $ | (32,466     | )      |   | $ | 14,482   |        
|                                       |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        

See accompanying notes.

F-28



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Year ended June 30, 2002
(In 000s)

|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |         |  
|--------------------------------------------- | ----------------------------------------- | - | ------------ | ------- | ------------ | - | -------- | ------ | ------------ | - | ----------- | ------- | - | - | -------- | ------- | -
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   | Alliance
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   | Gaming  
|                                              |                                           |   | Parent and   |         | Non-         |   |          |        |              |   | Corporation
|                                              |                                           |   | Guaranteeing |         | Guaranteeing |   | Elimina- |        | and         
|                                              |                                           |   | Subsidiaries |         | Subsidiaries |   | tions    |        | Subsidiaries
|                                              |                                           |   |              |         |              |   |          |        |             
|Revenues:                                     |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              | Gaming equipment and systems              |   | $            | 213,468 |              |   | $        | 23,569 |              |   | $           | (14,016 | ) |   | $        | 223,021 |  
|                                              | Wall machines and amusement games         |   |              |        |              |   |          | 74,721 |              |   |             |        |   |   |          | 74,721  |  
|                                              | Route operations                          |   |              | 208,874 |              |   |          | 15,115 |              |   |             |        |   |   |          | 223,989 |  
|                                              | Casino operations                         |   |              | 20,160  |              |   |          | 52,211 |              |   |             |        |   |   |          | 72,371  |  
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              |                                           |   | 442,502      |         |              |   | 165,616  |        |              |   | (14,016     | )       |   |   | 594,102  |        
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|Costs and expenses:                           |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              | Cost of gaming equipment and systems      |   |              | 97,713  |              |   |          | 15,023 |              |   |             | (14,016 | ) |   |          | 98,720  |  
|                                              | Cost of wall machines and amusement games |   |              |        |              |   |          | 37,243 |              |   |             |        |   |   |          | 37,243  |  
|                                              | Cost of route operations                  |   |              | 167,555 |              |   |          | 9,892  |              |   |             |        |   |   |          | 177,447 |  
|                                              | Cost of casino operations                 |   |              | 11,172  |              |   |          | 21,021 |              |   |             |        |   |   |          | 32,193  |  
|                                              | Selling, general and administrative       |   |              | 78,649  |              |   |          | 39,865 |              |   |             |        |   |   |          | 118,514 |  
|                                              | Research and development                  |   |              | 15,012  |              |   |          | 2,601  |              |   |             |        |   |   |          | 17,613  |  
|                                              | Depreciation and amortization             |   |              | 24,824  |              |   |          | 7,028  |              |   |             |        |   |   |          | 31,852  |  
|                                              | Unusual items, net                        |   |              |        |              |   |          | 24,129 |              |   |             |        |   |   |          | 24,129  |  
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              |                                           |   | 394,925      |         |              |   | 156,802  |        |              |   | (14,016     | )       |   |   | 537,711  |        
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|Operating income                              |                                           |   | 47,577       |         |              |   | 8,814    |        |              |   |            |         |   |   | 56,391   |        
|Earnings in consolidated subsidiaries         |                                           |   | (1,982       | )       |              |   |         |        |              |   | 1,982       |         |   |   |         |        
|Other income (expense):                       |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              | Interest income                           |   |              | 1,845   |              |   |          | 919    |              |   |             | (1,394  | ) |   |          | 1,370   |  
|                                              | Interest expense                          |   |              | (28,187 | )            |   |          | (1,471 | )            |   |             | 1,394   |   |   |          | (28,264 | )
|                                              | Rainbow royalty                           |   |              | 6,380   |              |   |          | (6,380 | )            |   |             |        |   |   |          |        |  
|                                              | Minority interest                         |   |              | (1,935  | )            |   |          |       |              |   |             |        |   |   |          | (1,935  | )
|                                              | Other, net                                |   |              | 1,695   |              |   |          | (1,285 | )            |   |             |        |   |   |          | 410     |  
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|Income before income taxes                    |                                           |   | 25,393       |         |              |   | 597      |        |              |   | 1,982       |         |   |   | 27,972   |        
|Income tax (provision) benefit                |                                           |   | 38,456       |         |              |   | (2,579   | )      |              |   |            |         |   |   | 35,877   |        
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|Net income (loss) applicable to common shares |                                           | $ | 63,849       |         |              | $ | (1,982   | )      |              | $ | 1,982       |         |   | $ | 63,849   |        
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        

See accompanying notes.

F-29



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS

Year ended June 30, 2000
(In 000s)

|                                        |                                                                                                    |                                                 |                                                     |                                                     |   |              |        |              |   |          |        |              |   |             |        |         |   |          |       | 
|--------------------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | - | ------------ | ------ | ------------ | - | -------- | ------ | ------------ | - | ----------- | ------ | ------- | - | -------- | ----- | 
|                                        |                                                                                                    |                                                 |                                                     |                                                     |   |              |        |              |   |          |        |              |   |             |        |         |   | Alliance
|                                        |                                                                                                    |                                                 |                                                     |                                                     |   |              |        |              |   |          |        |              |   |             |        |         |   | Gaming  
|                                        |                                                                                                    |                                                 |                                                     |                                                     |   | Parent and   |        | Non-         |   |          |        |              |   | Corporation
|                                        |                                                                                                    |                                                 |                                                     |                                                     |   | Guaranteeing |        | Guaranteeing |   | Elimina- |        | and         
|                                        |                                                                                                    |                                                 |                                                     |                                                     |   | Subsidiaries |        | Subsidiaries |   | tions    |        | Subsidiaries
|                                        |                                                                                                    |                                                 |                                                     |                                                     |   |              |        |              |   |          |        |             
|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      |      
|                                        |                                                                                                    |                                                 | Deferred tax expense (benefit)                      |                                                     |   | (3           | )      |              |   | (23      | )      |              |   |            |        |         |   | (26      | )    
|                                        |                                                                                                    |                                                 | (Gain) loss on sale of assets                       |                                                     |   | (4,152       | )      |              |   | (6       | )      |              |   |            |        |         |   | (4,158   | )    
|                                        |                                                                                                    |                                                 | Provision for losses on receivables                 |                                                     |   | 5,077        |        |              |   | 2,850    |        |              |   |            |        |         |   | 7,927    |      
|                                        |                                                                                                    |                                                 | Other                                               |                                                     |   | 398          |        |              |   | (131     | )      |              |   | 110         |        |         |   | 377      |      
|                                        |                                                                                                    | Net change in operating assets and liabilities: |                                                     |                                                     |   |              |        |              |   |          |        |              |   |             |        |         |   |         
|                                        |                                                                                                    |                                                 | Accounts and notes receivable                       |                                                     |   | (8,935       | )      |              |   | 4,427    |        |              |   | 4,638       |        |         |   | 130      |      
|                                        |                                                                                                    |                                                 | Inventories                                         |                                                     |   | 13,439       |        |              |   | (4,437   | )      |              |   |            |        |         |   | 9,002    |      
|                                        |                                                                                                    |                                                 | 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 |   |              | (4,278 | )            |   |          | 16,538 |              |   |             | (2,772 | )       |   |          | 9,488 | 
|                                        |                                                                                                    |                                                 |                                                     |                                                     |   |              |        |              |   |          |        |              |   |             |        |        
|Cash flows from investing activities:   |                                                                                                    |                                                 |                                                     |                                                     |   |              |        |              |   |          |        |              |   |             |        |        
|                                        | Additions to property, plant and equipment                                                         |                                                 |                                                     | (6,883                                              | ) |              |        | (6,129       | ) |          |        |             |   |             |        | (13,012 | )
|                                        | Additions to participation gaming devices                                                          |                                                 |                                                     | (12,447                                             | ) |              |        |             |   |          |        |             |   |             |        | (12,447 | )
|                                        | 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               |                                                     |   | (16,203      | )      |              |   | (6,076   | )      |              |   |            |        |         |   | (22,279  | )    
|                                        |                                                                                                    |                                                 |                                                     |                                                     |   |              |        |              |   |          |        |              |   |             |        |        
|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:              |                                                                                                    |                                                 |                                                     |                                                     |   |              |        |              |   |          |        |              |   |             |        |        
|                                        | Increase 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  |  
|                                        |                                                                                                    |                                                 |                                                     |                                                     |   |              |        |              |   |          |        |              |   |             |        |        

See accompanying notes.

F-30



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS

Year ended June 30, 2001
(In 000s)

|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |          |          |        | 
|--------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | -------- | ------------ | ------ | ------------ | ------- | -------- | ------ | ------------ | ------- | ----------- | ------ | ---- | -------- | -------- | ------ | 
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |          | Alliance
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |          | Gaming  
|                                        |                                                                                                    |                                                     |                                                     |          | Parent and   |        | Non-         |         |          |        |              |         | Corporation
|                                        |                                                                                                    |                                                     |                                                     |          | Guaranteeing |        | Guaranteeing |         | Elimina- |        | and         
|                                        |                                                                                                    |                                                     |                                                     |          | Subsidiaries |        | Subsidiaries |         | tions    |        | Subsidiaries
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |             
|Cash flows from operating activities:   |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|                                        | Net income (loss)                                                                                  |                                                     | $                                                   | 14,482   |              |        | $            | 32,466  |          |        | $            | (32,466 | )           |        | $    | 14,482   |         
|                                        | Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities: |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |          |         
|                                        |                                                                                                    | Depreciation and amortization                       |                                                     |          | 19,809       |        |              |         | 7,936    |        |              |         |            |        |      |          | 27,745   |       
|                                        |                                                                                                    | Amortization of debt discounts                      |                                                     |          | 154          |        |              |         |         |        |              |         |            |        |      |          | 154      |       
|                                        |                                                                                                    | Write down of other assets                          |                                                     |          | 117          |        |              |         |         |        |              |         |            |        |      |          | 117      |       
|                                        |                                                                                                    | Deferred tax expense (benefit)                      |                                                     |          | (382         | )      |              |         | 884      |        |              |         |            |        |      |          | 502      |       
|                                        |                                                                                                    | Write off of deferred financing costs               |                                                     |          | 3,164        |        |              |         |         |        |              |         |            |        |      |          | 3,164    |       
|                                        |                                                                                                    | (Gain) loss on sale of assets                       |                                                     |          | 948          |        |              |         | (140     | )      |              |         |            |        |      |          | 808      |       
|                                        |                                                                                                    | Provision for losses on receivables                 |                                                     |          | 2,387        |        |              |         | 1,438    |        |              |         |            |        |      |          | 3,825    |       
|                                        |                                                                                                    | Other                                               |                                                     |          | 1,167        |        |              |         | 59       |        |              |         | 132         |        |      |          | 1,358    |       
|                                        | Net change in operating assets and liabilities:                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |          |         
|                                        |                                                                                                    | Accounts and notes receivable                       |                                                     |          | 2,029        |        |              |         | (5,370   | )      |              |         | 550         |        |      |          | (2,791   | )     
|                                        |                                                                                                    | Inventories                                         |                                                     |          | (6,103       | )      |              |         | (2,201   | )      |              |         |            |        |      |          | (8,304   | )     
|                                        |                                                                                                    | Other current assets                                |                                                     |          | 653          |        |              |         | 1,586    |        |              |         |            |        |      |          | 2,239    |       
|                                        |                                                                                                    | Intercompany accounts                               |                                                     |          | (13,654      | )      |              |         | (14,671  | )      |              |         | 28,325      |        |      |          |         |       
|                                        |                                                                                                    | Accounts payable                                    |                                                     |          | 8,886        |        |              |         | 490      |        |              |         |            |        |      |          | 9,376    |       
|                                        |                                                                                                    | Accrued liabilities                                 |                                                     |          | 16,951       |        |              |         | (1,550   | )      |              |         | 458         |        |      |          | 15,859   |       
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|                                        |                                                                                                    |                                                     | Net cash provided by (used in) operating activities |          |              | 50,608 |              |         |          | 20,927 |              |         |             | (3,001 | )    |          |          | 68,534 | 
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|Cash flows from investing activities:   |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|                                        | Additions to property, plant and equipment                                                         |                                                     |                                                     | (8,602   | )            |        |              | (3,100  | )        |        |              |        |             |        |      | (11,702  | )       
|                                        | Additions to participation gaming devices                                                          |                                                     |                                                     | (11,682  | )            |        |              |        |          |        |              |        |             |        |      | (11,682  | )       
|                                        | Acquisition of assets formerly under operating leases                                              |                                                     |                                                     | (13,040  | )            |        |              |        |          |        |              |        |             |        |      | (13,040  | )       
|                                        | Proceeds from disposal of assets                                                                   |                                                     |                                                     | 258      |              |        |              |        |          |        |              |        |             |        |      | 258      |         
|                                        | Proceeds from sale/leaseback transaction                                                           |                                                     |                                                     |         |              |        |              |        |          |        |              |        |             |        |      |         |         
|                                        | Additions to long-term assets                                                                      |                                                     |                                                     | (3,297   | )            |        |              |        |          |        |              |        |             |        |      | (3,297   | )       
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|                                        |                                                                                                    | Net cash used in investing activities               |                                                     |          | (36,363      | )      |              |         | (3,100   | )      |              |         |            |        |      |          | (39,463  | )     
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|Cash flows from financing activities:   |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|                                        | Capitalized debt issuance costs                                                                    |                                                     |                                                     | (6,969   | )            |        |              |        |          |        |              |        |             |        |      | (6,969   | )       
|                                        | Proceeds from issuance of long-term debt                                                           |                                                     |                                                     | 190,000  |              |        |              |        |          |        |              |        |             |        |      | 190,000  |         
|                                        | Payoff debt from refinancing                                                                       |                                                     |                                                     | (166,058 | )            |        |              |        |          |        |              |        |             |        |      | (166,058 | )       
|                                        | Reduction of long-term debt                                                                        |                                                     |                                                     | (2,344   | )            |        |              | (3,468  | )        |        |              | 3,001   |             |        |      | (2,811   | )       
|                                        | Net change in credit lines                                                                         |                                                     |                                                     | (23,179  | )            |        |              | (124    | )        |        |              |        |             |        |      | (23,303  | )       
|                                        | Purchase of common stock for treasury                                                              |                                                     |                                                     | (436     | )            |        |              |        |          |        |              |        |             |        |      | (436     | )       
|                                        | Proceeds from exercise of stock options and warrants                                               |                                                     |                                                     | 3,673    |              |        |              |        |          |        |              |        |             |        |      | 3,673    |         
|                                        | Dividends received (paid)                                                                          |                                                     |                                                     | 13,042   |              |        |              | (13,042 | )        |        |              |        |             |        |      |         |         
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|                                        |                                                                                                    | Net cash provided by (used in) financing activities |                                                     |          | 7,729        |        |              |         | (16,634  | )      |              |         | 3,001       |        |      |          | (5,904   | )     
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|Effect of exchange rate changes on cash |                                                                                                    |                                                     |                                                    |          |              |        | (366         | )       |          |        |             |         |             |        | (366 | )       
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|Cash and cash equivalents:              |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|                                        | Increase for period                                                                                |                                                     |                                                     | 21,974   |              |        |              | 827     |          |        |              |        |             |        |      | 22,801   |         
|                                        | Balance, beginning of period                                                                       |                                                     |                                                     | 19,528   |              |        |              | 12,516  |          |        |              |        |             |        |      | 32,044   |         
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         
|                                        | Balance, end of period                                                                             |                                                     | $                                                   | 41,502   |              |        | $            | 13,343  |          |        | $            |        |             |        | $    | 54,845   |         
|                                        |                                                                                                    |                                                     |                                                     |          |              |        |              |         |          |        |              |         |             |        |      |         

See accompanying notes.

F-31



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS

Year ended June 30, 2002
(In 000s)

|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |         |          |        | 
|--------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ------- | ------------ | ------ | ------------ | ------ | -------- | ------ | ------------ | ----- | ----------- | ------ | --- | ------- | -------- | ------ | 
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |         | Alliance
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |         | Gaming  
|                                        |                                                                                                    |                                                     |                                                     |         | Parent and   |        | Non-         |        |          |        |              |       | Corporation
|                                        |                                                                                                    |                                                     |                                                     |         | Guaranteeing |        | Guaranteeing |        | Elimina- |        | and         
|                                        |                                                                                                    |                                                     |                                                     |         | Subsidiaries |        | Subsidiaries |        | tions    |        | Subsidiaries
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |             
|Cash flows from operating activities:   |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|                                        | Net income (loss)                                                                                  |                                                     | $                                                   | 63,849  |              |        | $            | (1,982 | )        |        | $            | 1,982 |             |        | $   | 63,849  |         
|                                        | Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities: |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |         |         
|                                        |                                                                                                    | Depreciation and amortization                       |                                                     |         | 24,824       |        |              |        | 7,028    |        |              |       |            |        |     |         | 31,852   |       
|                                        |                                                                                                    | Amortization of debt discounts                      |                                                     |         | 79           |        |              |        |         |        |              |       |            |        |     |         | 79       |       
|                                        |                                                                                                    | Write down of other assets                          |                                                     |         |             |        |              |        | 24,129   |        |              |       |            |        |     |         | 24,129   |       
|                                        |                                                                                                    | Deferred income tax                                 |                                                     |         | (43,948      | )      |              |        | 867      |        |              |       |            |        |     |         | (43,081  | )     
|                                        |                                                                                                    | (Gain) loss on sale of assets                       |                                                     |         | 494          |        |              |        | (47      | )      |              |       |            |        |     |         | 447      |       
|                                        |                                                                                                    | Provision for losses on receivables                 |                                                     |         | 3,095        |        |              |        | 941      |        |              |       |            |        |     |         | 4,036    |       
|                                        |                                                                                                    | Other                                               |                                                     |         | 6,219        |        |              |        |         |        |              |       |            |        |     |         | 6,219    |       
|                                        | Net change in operating assets and liabilities, net of
the effects of acquisitions:                |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |         |         
|                                        |                                                                                                    | Accounts and notes receivable                       |                                                     |         | (6,994       | )      |              |        | (3,451   | )      |              |       | (3,348      | )      |     |         | (13,793  | )     
|                                        |                                                                                                    | Inventories                                         |                                                     |         | (2,788       | )      |              |        | (9,315   | )      |              |       |            |        |     |         | (12,103  | )     
|                                        |                                                                                                    | Other current assets                                |                                                     |         | (476         | )      |              |        | 311      |        |              |       |            |        |     |         | (165     | )     
|                                        |                                                                                                    | Intercompany accounts                               |                                                     |         | 6,812        |        |              |        | (2,551   | )      |              |       | (4,261      | )      |     |         |         |       
|                                        |                                                                                                    | Accounts payable                                    |                                                     |         | (5,666       | )      |              |        | (143     | )      |              |       |            |        |     |         | (5,809   | )     
|                                        |                                                                                                    | Accrued liabilities                                 |                                                     |         | (3,215       | )      |              |        | 2,920    |        |              |       | (363        | )      |     |         | (658     | )     
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|                                        |                                                                                                    |                                                     | Net cash provided by (used in) operating activities |         |              | 42,285 |              |        |          | 18,707 |              |       |             | (5,990 | )   |         |          | 55,002 | 
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|Cash flows from investing activities:   |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|                                        | Additions to property, plant and equipment                                                         |                                                     |                                                     | (12,734 | )            |        |              | (3,566 | )        |        |              |      |             |        |     | (16,300 | )       
|                                        | Additions to participation gaming devices                                                          |                                                     |                                                     | (15,099 | )            |        |              |       |          |        |              |      |             |        |     | (15,099 | )       
|                                        | Acquisitions, net of cash acquired                                                                 |                                                     |                                                     | (15,333 | )            |        |              |       |          |        |              |      |             |        |     | (15,333 | )       
|                                        | Proceeds from disposal of assets                                                                   |                                                     |                                                     | 45      |              |        |              | 43     |          |        |              |      |             |        |     | 88      |         
|                                        | Additions to other long-term assets                                                                |                                                     |                                                     | (4,110  | )            |        |              | (92    | )        |        |              |      |             |        |     | (4,202  | )       
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|                                        |                                                                                                    | Net cash used in investing activities               |                                                     |         | (47,231      | )      |              |        | (3,615   | )      |              |       |            |        |     |         | (50,846  | )     
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|Cash flows from financing activities:   |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|                                        | Reduction of long-term debt                                                                        |                                                     |                                                     | (4,167  | )            |        |              | (4,174 | )        |        |              | 5,990 |             |        |     | (2,351  | )       
|                                        | Capitalized debt issuance costs                                                                    |                                                     |                                                     | (662    | )            |        |              |       |          |        |              |      |             |        |     | (662    | )       
|                                        | Proceeds from exercise of stock options and warrants                                               |                                                     |                                                     | 6,706   |              |        |              |       |          |        |              |      |             |        |     | 6,706   |         
|                                        | Dividends received (paid)                                                                          |                                                     |                                                     | 8,946   |              |        |              | (8,946 | )        |        |              |      |             |        |     |        |         
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|                                        |                                                                                                    | Net cash provided by (used in) financing activities |                                                     |         | 10,823       |        |              |        | (13,120  | )      |              |       | 5,990       |        |     |         | 3,693    |       
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|Effect of exchange rate changes on cash |                                                                                                    |                                                     |                                                    |         |              |        | 710          |        |          |        |             |       |             |        | 710 |        
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|Cash and cash equivalents:              |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|                                        | Increase for period                                                                                |                                                     |                                                     | 5,877   |              |        |              | 2,682  |          |        |              |      |             |        |     | 8,559   |         
|                                        | Balance, beginning of period                                                                       |                                                     |                                                     | 41,502  |              |        |              | 13,343 |          |        |              |      |             |        |     | 54,845  |         
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        
|                                        | Balance, end of period                                                                             |                                                     | $                                                   | 47,379  |              |        | $            | 16,025 |          |        | $            |      |             |        | $   | 63,404  |         
|                                        |                                                                                                    |                                                     |                                                     |         |              |        |              |        |          |        |              |       |             |        |     |        

See accompanying notes.

F-32



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2001 and 2002

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 to the current year presentation.

Debt and Lines of Credit

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

|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  |          |         | 
|------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | -------- | ------ | ------------ |  | ----------- | ------- | - |  | -------- | ------- | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  | Alliance
|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  | Gaming  
|                                                                    |  | Parent and   |         | Non-         |  |          |        |              |  | Corporation
|                                                                    |  | Guaranteeing |         | Guaranteeing |  | Elimina- |        | and         
|                                                                    |  | Subsidiaries |         | Subsidiaries |  | tions    |        | Subsidiaries
|                                                                    |  |              |         |              |  |          |        |             
|Term Loan Facility                                                  |  | $            | 190,000 |              |  |          |       |              |  |             |        |   |  | $        | 190,000 | 
|10% Senior Subordinated Notes due
2007, net of unamortized discount |  |              | 149,505 |              |  |          |       |              |  |             |        |   |  |          | 149,505 | 
|Intercompany notes payable                                          |  |              | 51,996  |              |  |          | 16,511 |              |  |             | (68,507 | ) |  |          |        | 
|Other                                                               |  |              | 19      |              |  |          | 576    |              |  |             |        |   |  |          | 595     | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  |          |         | 
|                                                                    |  |              | 391,520 |              |  |          | 17,087 |              |  |             | (68,507 | ) |  |          | 340,100 | 
|Less current maturities                                             |  |              | 488     |              |  |          | 16,955 |              |  |             | (16,511 | ) |  |          | 932     | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  |          |         | 
|Long-term debt, less current
Maturities                             |  | $            | 391,032 |              |  | $        | 132    |              |  | $           | (51,996 | ) |  | $        | 339,168 | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  |          |         | 

Long-term debt and lines of credit at June 30, 2002 consist of the following (in 000s):

|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  |          |         | 
|------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | -------- | ------ | ------------ |  | ----------- | ------- | - |  | -------- | ------- | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  | Alliance
|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  | Gaming  
|                                                                    |  | Parent and   |         | Non-         |  |          |        |              |  | Corporation
|                                                                    |  | Guaranteeing |         | Guaranteeing |  | Elimina- |        | and         
|                                                                    |  | Subsidiaries |         | Subsidiaries |  | tions    |        | Subsidiaries
|                                                                    |  |              |         |              |  |          |        |             
|Term Loan Facility                                                  |  | $            | 189,525 |              |  |          |       |              |  |             |        |   |  | $        | 189,525 | 
|10% Senior Subordinated Notes due
2007, net of unamortized discount |  |              | 149,584 |              |  |          |       |              |  |             |        |   |  |          | 149,584 | 
|Other subordinated debt                                             |  |              | 2,495   |              |  |          |       |              |  |             |        |   |  |          | 2,495   | 
|Intercompany notes payable                                          |  |              | 58,672  |              |  |          | 12,814 |              |  |             | (71,486 | ) |  |          |        | 
|Other                                                               |  |              | 510     |              |  |          | 150    |              |  |             |        |   |  |          | 660     | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  |          |         | 
|                                                                    |  |              | 400,786 |              |  |          | 12,964 |              |  |             | (71,486 | ) |  |          | 342,264 | 
|Less current maturities                                             |  |              | 3,979   |              |  |          | 12,952 |              |  |             | (12,815 | ) |  |          | 4,116   | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  |          |         | 
|Long-term debt, less current
maturities                             |  | $            | 396,807 |              |  | $        | 12     |              |  | $           | (58,671 | ) |  | $        | 338,148 | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |         |   |  |          |         | 

F-33



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##### Table of Contents



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, 2001 are as follows (in 000s):

|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |        | 
|------------------------------------ | ------------------------------------------------------------------- | - | ------------ | ------ | ------------ | - | -------- | ----- | ------------ | - | ----------- | - |  | - | -------- | ------ | 
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   | Alliance
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   | Gaming  
|                                     |                                                                     |   | Parent and   |        | Non-         |   |          |       |              |   | Corporation
|                                     |                                                                     |   | Guaranteeing |        | Guaranteeing |   | Elimina- |       | and         
|                                     |                                                                     |   | Subsidiaries |        | Subsidiaries |   | tions    |       | Subsidiaries
|                                     |                                                                     |   |              |        |              |   |          |       |             
|Deferred tax assets:                 |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|                                     | Net operating loss carry forwards                                   |   | $            | 35,235 |              |   | $        |      |              |   | $           |  |  |   | $        | 35,235 | 
|                                     | Foreign tax credit carry forwards                                   |   |              | 6,639  |              |   |          |      |              |   |             |  |  |   |          | 6,639  | 
|                                     | Inventory obsolescence reserves                                     |   |              | 2,322  |              |   |          | 466   |              |   |             |  |  |   |          | 2,788  | 
|                                     | Bad debt reserves                                                   |   |              | 2,843  |              |   |          | 2,438 |              |   |             |  |  |   |          | 5,281  | 
|                                     | Accruals not currently deductible
for tax purposes                  |   |              | 2,774  |              |   |          | 18    |              |   |             |  |  |   |          | 2,792  | 
|                                     | Refinancing costs being amortized
for tax purposes                  |   |              | 6,480  |              |   |          |      |              |   |             |  |  |   |          | 6,480  | 
|                                     | Intangibles                                                         |   |              | 10,324 |              |   |          | 2     |              |   |             |  |  |   |          | 10,326 | 
|                                     | Other                                                               |   |              | 2,349  |              |   |          | 6,883 |              |   |             |  |  |   |          | 9,232  | 
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Total gross deferred tax assets      |                                                                     |   | 68,966       |        |              |   | 9,807    |       |              |   |             |   |  |   | 78,773   |       
|Less: Valuation allowance            |                                                                     |   | (64,556      | )      |              |   | (8,000   | )     |              |   |            |   |  |   | (72,556  | )     
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Deferred tax assets                  |                                                                     | $ | 4,410        |        |              | $ | 1,807    |       |              | $ |            |   |  | $ | 6,217    |       
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Deferred tax liabilities:            |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|                                     | Property and equipment, principally
due to depreciation differences |   | $            | 3,142  |              |   | $        |      |              |   | $           |  |  |   | $        | 3,142  | 
|                                     | Other                                                               |   |              | (19    | )            |   |          | 330   |              |   |             |  |  |   |          | 311    | 
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Total gross deferred tax liabilities |                                                                     |   | 3,123        |        |              |   | 330      |       |              |   |            |   |  |   | 3,453    |       
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Net deferred tax assets              |                                                                     | $ | 1,287        |        |              | $ | 1,477    |       |              | $ |            |   |  | $ | 2,764    |       
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       

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##### Table of Contents



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, 2002 are as follows (in 000s):

|                                     |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   |          |        | 
|------------------------------------ | ------------------------------------------------------------------- | - | ------------ | ------ | ------------ | - | -------- | ------ | ------------ | - | ----------- | - |  | - | -------- | ------ | 
|                                     |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   | Alliance
|                                     |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   | Gaming  
|                                     |                                                                     |   | Parent and   |        | Non-         |   |          |        |              |   | Corporation
|                                     |                                                                     |   | Guaranteeing |        | Guaranteeing |   | Elimina- |        | and         
|                                     |                                                                     |   | Subsidiaries |        | Subsidiaries |   | tions    |        | Subsidiaries
|                                     |                                                                     |   |              |        |              |   |          |        |             
|Deferred tax assets:                 |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   |          |       
|                                     | Net operating loss carry forwards                                   |   | $            | 31,839 |              |   | $        |       |              |   | $           |  |  |   | $        | 31,839 | 
|                                     | Foreign tax credit carry forwards                                   |   |              | 949    |              |   |          |       |              |   |             |  |  |   |          | 949    | 
|                                     | Inventory obsolescence reserves                                     |   |              | 2,528  |              |   |          | 563    |              |   |             |  |  |   |          | 3,091  | 
|                                     | Bad debt reserves                                                   |   |              | 2,557  |              |   |          | 263    |              |   |             |  |  |   |          | 2,820  | 
|                                     | Accruals not currently deductible
for tax purposes                  |   |              | 7,162  |              |   |          | 19     |              |   |             |  |  |   |          | 7,181  | 
|                                     | Refinancing costs being amortized
for tax purposes                  |   |              | 4,378  |              |   |          |       |              |   |             |  |  |   |          | 4,378  | 
|                                     | Intangibles                                                         |   |              |       |              |   |          |       |              |   |             |  |  |   |          |       | 
|                                     | Other                                                               |   |              | 11,096 |              |   |          | 11,952 |              |   |             |  |  |   |          | 23,048 | 
|                                     |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   |          |       
|Total gross deferred tax assets      |                                                                     |   | 60,509       |        |              |   | 12,797   |        |              |   |             |   |  |   | 73,306   |       
|Less: Valuation allowance            |                                                                     |   | (7,376       | )      |              |   | (11,701  | )      |              |   |            |   |  |   | (19,077  | )     
|                                     |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   |          |       
|Deferred tax assets                  |                                                                     | $ | 53,133       |        |              | $ | 1,096    |        |              | $ |            |   |  | $ | 54,229   |       
|                                     |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   |          |       
|Deferred tax liabilities:            |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   |          |       
|                                     | Property and equipment, principally
due to depreciation differences |   | $            | 6,073  |              |   | $        |       |              |   | $           |  |  |   | $        | 6,073  | 
|                                     | Intangibles                                                         |   |              | 1,836  |              |   |          |       |              |   |             |  |  |   |          | 1,836  | 
|                                     | Other                                                               |   |              | 149    |              |   |          | 326    |              |   |             |  |  |   |          | 475    | 
|                                     |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   |          |       
|Total gross deferred tax liabilities |                                                                     |   | 8,058        |        |              |   | 326      |        |              |   |            |   |  |   | 8,384    |       
|                                     |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   |          |       
|Net deferred tax assets              |                                                                     | $ | 45,075       |        |              | $ | 770      |        |              | $ |            |   |  | $ | 45,845   |       
|                                     |                                                                     |   |              |        |              |   |          |        |              |   |             |   |  |   |          |       

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##### Table of Contents



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, 2000, 2001 and 2002 for each of the valuation reserve and
allowance accounts (in 000s):

|                                 |  |              |        |           |  |            |       |      |  |   |        |            |  |   |        | 
|-------------------------------- |  | ------------ | ------ | --------- |  | ---------- | ----- | ---- |  | - | ------ | ---------- |  | - | ------ | 
|                                 |  | Balance at   |        |           |  |            |       |      |  |   |        | Balance at
|                                 |  | Beginning of |        |           |  |            |       |      |  |   |        | End of    
|                                 |  | Year         |        | Additions |  | Deductions |       | Year
|                                 |  |              |        |           |  |            |       |     
|Allowance for doubtful accounts: |  |              |        |           |  |            |       |      |  |   |        |            |  |   |        | 
|Year ended June 30, 2002         |  | $            | 16,001 |           |  | $          | 7,160 |      |  | $ | 7,010  |            |  | $ | 16,151 | 
|Year ended June 30, 2001         |  | $            | 20,208 |           |  | $          | 9,411 |      |  | $ | 13,618 |            |  | $ | 16,001 | 
|Year ended June 30, 2000         |  | $            | 13,696 |           |  | $          | 7,405 |      |  | $ | 893    |            |  | $ | 20,208 | 
|Inventory valuation allowance:   |  |              |        |           |  |            |       |      |  |   |        |            |  |   |        | 
|Year ended June 30, 2002         |  | $            | 7,128  |           |  | $          | 4,603 |      |  | $ | 3,917  |            |  | $ | 7,814  | 
|Year ended June 30, 2001         |  | $            | 6,660  |           |  | $          | 9,668 |      |  | $ | 9,200  |            |  | $ | 7,128  | 
|Year ended June 30, 2000         |  | $            | 7,077  |           |  | $          | 2,837 |      |  | $ | 3,254  |            |  | $ | 6,660  | 
|Other assets valuation reserve:  |  |              |        |           |  |            |       |      |  |   |        |            |  |   |        | 
|Year ended June 30, 2002         |  | $            | 1,826  |           |  | $          | 75    |      |  | $ | 83     |            |  | $ | 1,818  | 
|Year ended June 30, 2001         |  | $            | 1,813  |           |  | $          | 38    |      |  | $ | 25     |            |  | $ | 1,826  | 
|Year ended June 30, 2000         |  | $            | 3,468  |           |  | $          |      |      |  | $ | 1,655  |            |  | $ | 1,813  | 

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