##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K




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

For the fiscal year ended June 30, 2003


[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

For the transition period from _________ to ___________


Commission File Number 0-4281

ALLIANCE GAMING CORPORATION


(Exact name of registrant as specified in its charter)


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

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

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

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value

(Title of Class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2).
[X] Yes [  ] No

The aggregate market value of the common equity held by non-affiliates of the
registrant was approximately $1,124,750,000 as of September 9, 2003.

The number of shares of Common Stock, $0.10 par value, outstanding as of
September 9, 2003, according to the records of registrants registrar and
transfer agent, was 49,689,418.

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 2. PROPERTIES                                                                           
|              | 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 
|              | ITEM 9a. CONTROLS AND PROCEDURES                                                             
|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. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                              
|PART IV      
|              | ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                      
|EXHIBIT 10.30
|EXHIBIT 10.31
|EXHIBIT 21   
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003




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; and (ii) owns and operates two casinos.
As is more fully discussed below, in July 2003 we announced our intention to
dispose of certain non-core businesses, which include the route operations in
Nevada and Louisiana, and our wall machine and amusement games business in
Germany.

Operating under the name Bally
Gaming and Systems, we are a worldwide leader in
designing, manufacturing and distributing gaming machines, having marketed over
80,000 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 240,000 game monitoring units (GMUs) installed worldwide.
We also own and operate a dockside casino in Vicksburg, Mississippi, and a
locals casino in Sparks, Nevada, which together have approximately 23 table
games and approximately 1,500 gaming devices (collectively, Casino
Operations). 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.

Discontinued Operations

In July 2003, we announced that we had entered into definitive agreements to
divest certain non-core assets including our route operations consisting of
United Coin Machine Co. (UCMC) and Video Services, Inc. (VSI) as well as
our German wall machine and amusement games business unit (Bally Wulff). On
July 18, 2003 we completed the sale of Bally Wulff to a private equity investor
and received $16.5 million in cash. We have entered into a definitive sale
agreement with Century Gaming, Inc. for the sale of UCMC. The sales price for
UCMC is based on a multiple applied to the trailing 12 month EBITDA (defined in
the sale agreement as earnings before interest, taxes, depreciation and
amortization, subject to certain adjustments), and is currently estimated at
$127 million including $18 million of 10% pay-in-kind preferred stock. We have
also entered into a definitive agreement for the sale of our interest in VSI,
and along with the holders of the minority shares of VSI, together will be sold
to Gentilly Gaming, LLC. The sales of UCMC and VSI are expected to be
completed in calendar 2004.

For purposes of financial reporting, each of these three businesses are now
treated as discontinued operations, and their results are presented net of
applicable income taxes below Income From Continuing Operations in the
accompanying consolidated statements of operations. The assets and liabilities
of these businesses are now classified as held for sale in the accompanying
consolidated balance sheets. The prior year results have been reclassified to
conform to the current year presentation.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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 |  | 2001                   |     | 2002 |  | 2003
|                    |  |                        |     |      |  |     
|Gaming Products     |  |                        | 53  | %    |  |      | 47  | % |  |  | 56  | %
|Gaming Operations   |  |                        | 18  |      |  |      | 24  |   |  |  | 17  |  
|Gaming Systems      |  |                        | 29  |      |  |      | 29  |   |  |  | 27  |  
|                    |  |                        |     |      |  |      |     |   |  |  |     |  
|                    |  |                        | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                    |  |                        |     |      |  |      |     |   |  |  |     |  

Markets.We believe that the domestic installed base of traditional gaming
devices now exceeds 725,000 units. The state of Nevada has the largest
installed base, totaling approximately 189,000 units as of June 30, 2003.

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 Hannover, Germany and Graz, 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 casino enterprise systems.Casino enterprise systems are composed
of various modules affecting departments throughout the casino. We market our
casino enterprise solutions through Bally Gaming and Systems under the names
Slot Data Systems (SDS), Advanced Casino Systems Corporation (ACSC), Casino
Marketplace (CMP), Casino Management System (CMS), Micro Clever Consulting
(MCC) and Honeyframe Systems (HFS).

The primary markets for casino enterprise systems 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 casino
enterprise 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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 $32.3 million, $36.4 million and $95.4 million for the years
ended June 30, 2001, 2002 and 2003, 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 $30.2 million, $30.4 million and $17.0 million for the years
ended June 30, 2001, 2002 and 2003, 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 and $41.4 for years
ended June 30, 2002, and 2003, respectively.

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%.

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 $3.1 million, $4.8 million and $7.2 million for the
years ended June 30, 2001, 2002 and 2003, 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 allow casinos to replace machines with new models that are popular with
casino patrons.

Gaming Operations.The proprietary gaming operations division of Bally Gaming
and Systems has become 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 generally 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 $28.4 million, $53.2 million and $55.6
million for the years ended June 30, 2001, 2002 and 2003, 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,

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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, New Jersey.

As of June 30, 2003, the following was the installed base of wide-area
progressive games:

|                  |  |             |  |                   |     |  |       | 
|----------------- |  | ----------- |  | ----------------- | --- |  | ----- | 
|                  |  | Date        |  |                   |     | 
|                  |  | Introduced  |  | Units Outstanding
|                  |  |             |  |                  
|Betty Boop        |  | March 1999  |  |                   | 590 | 
|Blondie           |  | March 2001  |  |                   | 260 | 
|Millionaire 777s |  | June 2001   |  |                   | 435 | 
|Popeye            |  | August 2001 |  |                   | 170 | 
|Cash For Life     |  | March 2003  |  |                   | 460 | 
|                  |  |             |  |                   |     |  |       | 
|                  |  |             |  |                   |     |  | 1,915 | 
|                  |  |             |  |                   |     |  |       | 

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.), Monte Carlo, 24
Karat ®, Soap Opera, and others 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,
2003, we had an installed base of daily fee games totaling 2,210 units.

System Products.We design and sell casino enterprise systems (CES) which
provide casino operators integrated modules across multiple platforms. Our
primary products include slot monitoring, casino management and cashless
systems designed to streamline casino business processes through the use of
technology. Our slot monitoring products are comprised of (i) hardware
consisting of micro controller based printed circuit boards installed within
the slot machines as well as card readers, displays and keypads which provide
casinos the ability to track player gaming activity through our casino
management systems and monitor employee access to slot machines, (ii) firmware
developed by us, which provides access to the slot machines and players
activity data gathered by the micro controller hardware; and (iii) slot
monitoring business applications developed by us which manages the slot machine
activity including security events, revenue, expenses and other financial
reporting metrics. Our casino management systems provide casino operators
patron loyalty solutions which are similar to frequent guest programs offered
in other leisure industries; table games accounting including the calculation
of all revenue and expense related items; and cage and credit accountability
for all extensions of credit and cage cash balancing functions. Our cashless
systems provide a suite of products for casino operators to provide bonusing
and cashless gaming activity to casino patrons. Bally products operate on
Windows, AS/400 (iSeries), and UNIX platforms allowing our customers to choose
a technology solution that meets their existing or future infrastructure
requirements.

During 2002, we completed two strategic acquisitions in the systems area:
Casino Marketplace and Advanced Casino Systems Corporation (ACSC). These
acquisitions bolstered our product offerings to include player marketing and
bonusing software. The ACSC product remains the only fully integrated AS/400
(iSeries) solution available in the casino industry. This has strategic
importance as the AS/400 (iSeries) solution remains the predominant technology
platform used in the gaming industry

During 2003, we completed three strategic acquisitions in the systems area:
Casino Management System (CMS), Micro Clever Consulting (MCC) and
Honeyframe Systems (HFS). These acquisitions bolstered our system product
offerings and expanded the number of platforms such products operate on.

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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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 $11.0 million, $15.0 million and $20.0 million
during the years ended June 30, 2001, 2002 and 2003, respectively. The increase
in research and development spending in the year ended June 30, 2003, 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 casino enterprise systems 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 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 casino enterprise systems; (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 series of cashless products marketed under the Bally
eSERIES name. The eSERIES represents an integrated set of cashless features to
enhance the gaming experience of casino patrons. These products allow the
transfer of funds using bar coded coupons and/or encrypted pin numbers to
download either restricted or unrestricted credits to the gaming device. These
products allow casino operators to reduce cash and coin handling expenses and
minimize overall operating expenditures. Our cashless products are in use in
Nevada, Michigan, New Jersey, Mississippi, Louisiana, Iowa, Colorado, Missouri,
Indiana and various Native American jurisdictions encompassing many states.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

The software development process for our systems includes the design and
development of features to meet various regulatory standards. The regulatory
standards vary by jurisdiction forcing us to develop multiple software settings
based on the individual state and tribal gaming standards. Each jurisdiction
requires the approval of any software modifications or new products prior to
deploying at casino locations. Approval processes can vary significantly by
jurisdiction, based on the software changes developed, technology enhancements,
and regulator resources.

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 44 people in offices in Nevada, New Jersey, Mississippi,
Illinois, California and Florida.

Bally Gaming and Systems direct sales force generated approximately 81%, 76%
and 98% of new unit machine sales for the years ended June 30, 2001, 2002 and
2003, 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 19%, 24% and 2% of new
gaming machine unit sales for the years ended June 30, 2001, 2002, and 2003,
respectively.

As of June 30, 2003, we had approximately 240,000 game monitoring units
installed in 194 locations, of which approximately 99% are in the United
States. Substantially all Systems revenues are generated by our direct sales
force.

Bally Gaming sells gaming equipment on normal credit terms (generally 2%, net
30) and also offers financing to qualified customers for periods generally
between 6 and 48 months with interest at rates ranging from 8% to 14%. During
fiscal year 2003 we provided equipment financing to two Native American tribes
totaling $24.1 million. These notes have terms of 36 and
48 months and rates of
interest of 6% and 10%, respectively. Both of these notes are currently
performing in accordance with their terms and the principal outstanding on
these loans totaled $21.7 million as of June 30, 2003. 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 casino enterprise system 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 casino enterprise system 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,
which have an average replacement cycle of three to seven years. For the year
ended June 30, 2003, the ten largest customers (including corporate customers
with multiple casino properties) accounted for approximately 33% of the Bally
Gaming and Systems new unit sales, with the largest single customer accounting
for 5% of new unit sales.

The demand for casino enterprise 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 casino
enterprise 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, 2003, the
ten largest casino enterprise system customers (which include certain
multi-site casino operators that have corporate agreements) accounted for
approximately 58% of game monitoring unit sales revenues. Due to the high
initial costs of installing a casino enterprise system, customers for such
systems generally do not change suppliers once they have installed such a
system.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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 2001, 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 2001 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 $10.7 million and $7.9 million for
years ended June 30, 2002 and 2003, respectively, and sales of game themes
totaled $1.0 million and $5.5 million for the years ended June 30, 2002 and
2003, respectively.

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 Coin and Slot, Aristocrat, Innovative Gaming Corporation of America, Mikohn
Gaming Corporation (Mikohn), Shuffle Master, Inc., Sigma Games, Inc.,
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, 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 casino enterprise systems currently consists of IGT,
Acres Gaming, Aristocrat, MIS and to a lesser extent, Konami 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, 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

Casino Operations

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 930 gaming devices and 15 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 customers
principally from within a 75-mile radius of Vicksburg. The Vicksburg casino
market generated approximately $243 million in gaming revenue in the twelve
months ended June 30, 2003, representing a growth rate of 1%.

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, 2003 operated approximately 560 gaming
devices, 8 table games, and live keno. In addition, Rail City Casino includes a
380-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.

Route Operations (Discontinued Operations)

Nevada Operations

In July 2003 we announced that we had entered into an agreement to sell our
Nevada route operations, UCMC, to Century Gaming, Inc., a privately held route
operator based in Montana. The sale is subject to certain terms and
conditions, including obtaining regulatory approval, which is a process we
expect, will be completed in calendar 2004.

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, 2003

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

|                                           |  |                      |       |      |  |      |       |  |  |   |       | 
|------------------------------------------ |  | -------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                           |  | Years ended June 30,
|                                           |  |                     
|                                           |  | 2001                 |       | 2002 |  | 2003
|                                           |  |                      |       |      |  |     
|Average number of gaming machines operated |  |                      | 8,083 |      |  |      | 8,281 |  |  |   | 8,050 | 
|Average number of locations                |  |                      | 703   |      |  |      | 702   |  |  |   | 681   | 
|Average win per day per gaming machine     |  | $                    | 67.75 |      |  | $    | 68.30 |  |  | $ | 67.60 | 

At June 30, 2003, we operated approximately 7,500 machines on our Nevada route.
Contributing to this decrease in the average games deployed was the loss of
approximately 300 games, which were destroyed in a fire at one large location
owned by a third-party. The Company expects to recover its net investment in
these games through proceeds from its insurance carrier.

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 pay the location owner 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 80%, 82%, and 83% of
revenues and 77%, 78%, and 76% of installed machines, respectively, in our
Nevada route operations for the years ended June 30, 2001, 2002 and 2003. At
June 30, 2003, the weighted average remaining term of our revenue sharing
arrangements was approximately 3.5 years. Space lease arrangements accounted
for approximately 20%, 18%, and 17% of revenues and 23%, 22%, and 24% of
installed machines, respectively, in our Nevada route operations for the years
ended June 30, 2001, 2002 and 2003. At June 30, 2003, the weighted average
remaining term of our space leases was 3.2 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, 2003, we had the Gamblers Bonus installed in over 4,100 gaming machines at
approximately 415 locations or 55% 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, 2003

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, 2003, 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,
2003, the ten largest customers accounted for approximately 16% 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 31% of the gaming machines currently used in
the Nevada route operations at June 30, 2003. 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, 2003,
approximately 41% 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. UCMC, Herbst Gaming, Inc.,
and Golden 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

In July 2003 we announced that we sold our interest in the Louisiana route,
VSI, to Gentilly Gaming, LLC., to be effective June 30, 2004. In conjunction
with this sale agreement we obtained an extension of the current operation
agreement to June 30, 2004.

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, VSI. VSI operates pursuant to
an agreement with Fair Grounds Corporation and its affiliates, Jefferson Downs
Corporation and Finish Line Management Corporation (collectively, Fair
Grounds), pursuant to which VSI is the exclusive operator of video poker
machines at the only racetrack in the greater New Orleans area and nine
associated off-track betting parlors (OTBs). 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 pay a percentage of the revenue generated by the
machines. As of June 30, 2003, 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 Video Draw Poker Device Control Law and the
rules and regulations promulgated there under (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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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 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 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 several riverboat casinos, one land based casino, and
with many truck stops and 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.

Wall Machines and Amusement Games (Discontinued operations)

On July 18, 2003, we completed the sale of our wall machine and amusement game
business unit to a third party equity investor for $16.5 million. Management
believes the German wall machine market has declined to under 190,000 units.
Management believes that the size of the wall machine market has declined from
prior years due to changes mainly in the tavern markets and an increase in
non-payout entertainment games, as well as the impact from the overall slowdown
in the German economy.

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.

The regulations regarding the useful life of a wall machine (currently 48
months) 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 the wall machine manufacturing
industry.

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.

Bally Gaming, Inc., is obligated under several patent agreements to pay
royalties ranging from approximately $10 to $500 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, 2001, 2002, and 2003 was $3.5 million,
$2.8 million, and $4.2 million, respectively.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

Employees and Labor Relations

As of June 30, 2003, we and our subsidiaries employed approximately 1,540
persons (excluding employees of Bally Wulff which was sold in July 2003), which
include approximately 915 persons in Nevada, 500 persons in Mississippi, 95
persons in various other states and 30 in various foreign countries. These
employees are not covered by collective bargaining agreements. We believe we
have satisfactory relationships with our employees.

Additionally, for our discontinued route operations, we employed approximately
645 persons in Nevada, and 60 persons in Louisiana. Employees in Nevada and
Louisiana are not covered by collective bargaining agreements.

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.

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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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. 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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
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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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.

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 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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 2003, RCVP was granted a three-year
renewal of its gaming license by the Mississippi Commission, and BGI was
granted three-year renewals 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.

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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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.

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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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 is 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).
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 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.

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
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, California, Colorado,
Connecticut, Delaware, Illinois, Indiana, Iowa, Louisiana, Michigan, Minnesota,
Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, South
Dakota, Washington, West Virginian, Wisconsin, and the local regulatory
authorities within each such

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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.

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.

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,

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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.




ITEM 2. PROPERTIES

The following table sets forth information regarding our leased properties for
our continuing operations (exclusive of space leases in connection with our
gaming device routes) as of June 30, 2003, all of which are fully utilized
unless otherwise noted (dollars in 000s):

|                        |  |                                             |  |             |        |          |  |        |     | 
|----------------------- |  | ------------------------------------------- |  | ----------- | ------ | -------- |  | ------ | --- | 
|                        |  |                                             |  |             |        |          |  | Annual
|                        |  |                                             |  | Building    |        | Rental  
|Location                |  | Use                                         |  | Square Feet |        | Payments
|                        |  |                                             |  |             |        |         
|Sparks, NV              |  | Administrative offices and warehousing      |  |             | 38,300 |          |  | $      | 345 | 
|Las Vegas, NV (1)       |  | Ground lease                                |  |             |       |          |  |        | 365 | 
|Sparks, NV              |  | Sales offices and warehousing               |  |             | 11,000 |          |  |        | 132 | 
|Atlantic City, NJ       |  | Sales offices and warehousing               |  |             | 15,800 |          |  |        | 136 | 
|Biloxi, MS              |  | Sales offices                               |  |             | 5,000  |          |  |        | 47  | 
|Westchester, IL         |  | Sales offices                               |  |             | 4,900  |          |  |        | 44  | 
|Hollywood, FL           |  | Sales offices                               |  |             | 3,400  |          |  |        | 8   | 
|Temecula, CA            |  | Sales offices                               |  |             | 2,000  |          |  |        | 20  | 
|Atlantic City, NJ       |  | Administrative offices                      |  |             | 750    |          |  |        | 10  | 
|San Juan, P R           |  | Sales offices                               |  |             | 1,000  |          |  |        | 12  | 
|Las Vegas, NV           |  | Warehousing                                 |  |             | 86,300 |          |  |        | 549 | 
|Vicksburg, MS           |  | Administrative offices                      |  |             | 2,700  |          |  |        | 19  | 
|Vicksburg, MS           |  | Administrative offices                      |  |             | 1,200  |          |  |        | 9   | 
|Shropshire, England     |  | Administrative offices                      |  |             | 1,550  |          |  |        | 14  | 
|Shropshire, England     |  | Administrative offices                      |  |             | 1,550  |          |  |        | 14  | 
|Graz, Austria           |  | Administrative offices                      |  |             | 1,184  |          |  |        | 11  | 
|Nice, France            |  | Administrative offices                      |  |             | 4,305  |          |  |        | 60  | 
|Montevideo, Uruguay     |  | Administrative offices                      |  |             | 1,238  |          |  |        | 28  | 
|Lima, Peru              |  | Administrative offices                      |  |             | 1,076  |          |  |        | 13  | 
|Absecon, NJ             |  | Direct mail office                          |  |             | 5,300  |          |  |        | 63  | 
|Egg Harbor Township, NJ |  | General and research and development office |  |             | 15,500 |          |  |        | 257 | 
|Sparks, NV (2)          |  | Ground lease                                |  |             |       |          |  |        | 5   | 
|Sparks, NV              |  | Warehousing                                 |  |             | 3,600  |          |  |        | 23  | 
|Hannover, Germany       |  | Administrative offices and warehousing      |  |             | 13,292 |          |  |        | 84  | 



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

The following table sets forth information regarding properties owned by us as
of June 30, 2003 for our continuing operations, 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                                  |  |             |        | 
|North Las Vegas, NV |  | Land/Parking                                 |  |             |        | 

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

(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.

See Note 9 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.

The following table sets forth information regarding our discontinued
operations leased properties (exclusive of space leases in connection with our
gaming device routes, and excluding the Berlin building which was included in
the sale of Bally Wulff in July 2003) as of June 30, 2003, all of which are
fully utilized unless otherwise noted (dollars in 000s):

|                |  |                                   |  |             |        |          |  |        |     | 
|--------------- |  | --------------------------------- |  | ----------- | ------ | -------- |  | ------ | --- | 
|                |  |                                   |  |             |        |          |  | Annual
|                |  |                                   |  | Building    |        | Rental  
|Location        |  | Use                               |  | Square Feet |        | Payments
|                |  |                                   |  |             |        |         
|Las Vegas, NV   |  | Nevada route operations           |  |             | 23,800 |          |  | $      | 286 | 
|Las Vegas, NV   |  | Warehousing                       |  |             | 15,000 |          |  |        | 113 | 
|Elko, NV        |  | Sales office and route operations |  |             | 4,200  |          |  |        | 9   | 
|Sparks, NV      |  | Route operations                  |  |             | 12,100 |          |  |        | 96  | 
|Carson City, NV |  | Route operations                  |  |             | 2,500  |          |  |        | 10  | 
|Winnemucca, NV  |  | Route operations                  |  |             | 1,200  |          |  |        | 5   | 
|Pahrump, NV     |  | Route operations                  |  |             | 750    |          |  |        | 6   | 
|New Orleans, LA |  | Louisiana route operations        |  |             | 6,000  |          |  |        | 65  | 
|Metairie, LA    |  | OTB operation                     |  |             | 5,000  |          |  |        | 59  | 
|LaPlace, LA     |  | OTB operation                     |  |             | 2,500  |          |  |        | 105 | 
|Harahan, LA     |  | OTB operation                     |  |             | 2,300  |          |  |        | 72  | 

In addition, we lease 19 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 $13,500.




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.

24



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003




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

On December 12, 2002 our common stock became listed on the New York Stock
Exchange under the symbol AGI. Formerly our common stock was 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 the NYSE or NASDAQ
for the periods indicated.

|                                |             |  |                |       |     |  |   |       | 
|------------------------------- | ----------- |  | -------------- | ----- | --- |  | - | ----- | 
|                                |             |  | Price Range of
|                                |             |  | Common Stock  
|                                |             |  |               
|                                |             |  | High           |       | Low
|                                |             |  |                |       |    
|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 | 
|Fiscal Year Ended June 30, 2003 |             |  |                |       |     |  |   |      
|                                | 1st Quarter |  | $              | 16.06 |     |  | $ | 11.55 | 
|                                | 2nd Quarter |  |                | 18.01 |     |  |   | 13.31 | 
|                                | 3rd Quarter |  |                | 17.30 |     |  |   | 13.38 | 
|                                | 4th Quarter |  |                | 19.03 |     |  |   | 14.50 | 

As of August 1, 2003, we had approximately 1,000 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 existing 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, 2003

Equity Compensation Plans

The following table sets forth information as of June 30, 2003 with respect to
our equity compensation plans that provides for the issuance of stock options
to purchase Alliance Gaming Corporation common stock:

|                                                           |       |         |                         |           |                |         |                        |      |  |  |                       |           | 
|---------------------------------------------------------- | ----- | ------- | ----------------------- | --------- | -------------- | ------- | ---------------------- | ---- |  |  | --------------------- | --------- | 
|                                                           |       |         |                         |           |                |         |                        |      |  |  | Number of Securities 
|                                                           |       |         |                         |           |                |         |                        |      |  |  | available for future 
|                                                           |       |         |                         |           |                |         |                        |      |  |  | issuance under equity
|                                                           |       |         | Number of Securities    |           | Wt. average    |         | compensation plans    
|                                                           |       |         | to be issued upon       |           | exercise price |         | (excluding securities 
|                                                           |       |         | exercise of outstanding |           | of outstanding |         | reflected in the first
|Plan Category                                              |       | options |                         | options   |                | column)
|                                                           |       |         |                         |           |                |        
|Equity compensation plans
approved by security holders     |       |         | 3,309,626               |           |                | $       | 9.51                   |      |  |  | 2,450,000             |          
|Equity compensation plans
not approved by security
holders |       |         |                        |           |                |         |                       |      |  |  |                      |          
|                                                           |       |         |                         |           |                |         |                        |      |  |  |                       |          
|                                                           | Total |         |                         | 3,309,626 |                |         | $                      | 9.51 |  |  |                       | 2,450,000 | 
|                                                           |       |         |                         |           |                |         |                        |      |  |  |                       |          

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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003




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.
The amounts shown below have been restated to conform to present the route
operations and Bally Wulff business units as discontinued operations.

|                                                             |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |         |      | 
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------- | ----- | ------- | ------------------------------------ | ----- | ---- | ------- | ------- | ----- | ---- | ------- | ------ | ---- | - | ------- | ------- | ---- | - | ------- | ------- | ---- | 
|Fiscal Years Ended June 30,                                 
|                                                            
|                                                             |                                                                                               |       |         | 1999                                 |       | 2000 |         | 2001    |       | 2002 |         | 2003  
|                                                             |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |       
|                                                             |                                                                                               |       |         | (In 000s, except per share amounts)
|Statements of Operations Data                                |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|Total revenues                                               |                                                                                               | $     | 188,501 |                                      |       | $    | 203,233 |         |       | $    | 235,035 |        |      | $ | 296,074 |         |      | $ | 407,560 |        
|Unusual items (1)                                            |                                                                                               |       |        |                                      |       |      | 2,164   |         |       |      | 6,489   |        |      |   |        |         |      |   |        |        
|Operating income                                             |                                                                                               |       | 5,193   |                                      |       |      | 9,677   |         |       |      | 33,922  |        |      |   | 57,108  |         |      |   | 89,936  |        
|Income (loss) from continuing operations
before income taxes |                                                                                               |       | (26,607 | )                                    |       |      | (24,350 | )       |       |      | (3,163  | )      |      |   | 28,557  |         |      |   | 62,745  |        
|Income tax expense (benefit) (2)                             |                                                                                               |       | (1,033  | )                                    |       |      | (940    | )       |       |      | (1,313  | )      |      |   | (38,440 | )       |      |   | 22,316  |        
|                                                             |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|Net income (loss) from continuing operations                 |                                                                                               |       | (25,574 | )                                    |       |      | (23,410 | )       |       |      | (1,850  | )      |      |   | 66,997  |         |      |   | 40,429  |        
|Special stock dividends                                      |                                                                                               |       | (1,697  | )                                    |       |      |        |         |       |      |        |        |      |   |        |         |      |   |        |        
|Discontinued Operations:                                     |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|                                                             | Loss on sale of wall machines and
amusement games unit, net of tax benefit (3)                |       |         |                                     |       |      |         |        |       |      |         |       |      |   |         |        |      |   |         | (25,358 | )   
|                                                             | Income (loss) from discontinued operations of wall
machines and amusement games unit, net (4) |       |         | 4,354                                |       |      |         | (5,740  | )     |      |         | 2,453  |      |   |         | (17,167 | )    |   |         | (895    | )   
|                                                             | Income from discontinued operations of
Nevada Route, net                                      |       |         | 9,740                                |       |      |         | 11,677  |       |      |         | 12,339 |      |   |         | 12,580  |      |   |         | 4,059   |     
|                                                             | Income from discontinued operations of
Louisiana Route, net                                   |       |         | 2,653                                |       |      |         | 2,438   |       |      |         | 1,540  |      |   |         | 1,439   |      |   |         | 1,288   |     
|                                                             |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|Income (loss) from discontinued operations                   |                                                                                               |       | 16,747  |                                      |       |      | 8,375   |         |       |      | 16,332  |        |      |   | (3,148  | )       |      |   | (20,906 | )      
|                                                             |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|                                                             | Net income (loss)                                                                             |       | $       | (10,524                              | )     |      | $       | (15,035 | )     |      | $       | 14,482 |      |   | $       | 63,849  |      |   | $       | 19,523  |     
|                                                             |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|Basic earning (loss) per share:(5)                           |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|                                                             | Continuing operations                                                                         |       | $       | (0.70                                | )     |      | $       | (0.57   | )     |      | $       | (0.04  | )    |   | $       | 1.45    |      |   | $       | 0.82    |     
|                                                             | Discontinued operations                                                                       |       | $       | 0.43                                 |       |      | $       | 0.20    |       |      | $       | 0.39   |      |   | $       | (0.07   | )    |   | $       | (0.42   | )   
|                                                             |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|                                                             |                                                                                               | Total |         | $                                    | (0.27 | )    |         | $       | (0.37 | )    |         | $      | 0.35 |   |         | $       | 1.38 |   |         | $       | 0.40 | 
|                                                             |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|Diluted earning (loss) per share:(5)                         |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|                                                             | Continuing operations                                                                         |       | $       | (0.70                                | )     |      | $       | (0.57   | )     |      | $       | (0.04  | )    |   | $       | 1.41    |      |   | $       | 0.81    |     
|                                                             | Discontinued operations                                                                       |       | $       | 0.43                                 |       |      | $       | 0.20    |       |      | $       | 0.38   |      |   | $       | (0.07   | )    |   | $       | (0.42   | )   
|                                                             |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        
|                                                             |                                                                                               | Total |         | $                                    | (0.27 | )    |         | $       | (0.37 | )    |         | $      | 0.34 |   |         | $       | 1.34 |   |         | $       | 0.39 | 
|                                                             |                                                                                               |       |         |                                      |       |      |         |         |       |      |         |        |      |   |         |         |      |   |         |        

|                                                   |  |            |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         | 
|-------------------------------------------------- |  | ---------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- |  |  | - | ------- | 
|As of June 30,                                    
|                                                  
|                                                   |  | 1999       |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                                                   |  |            |         |      |  |      |         |      |  |     
|                                                   |  | (In 000s)
|Balance Sheet Data                                 |  |            |         |      |  |      |         |      |  |      |         |   |  |   |         |  |  |   |         | 
|Cash and cash equivalents                          |  | $          | 2,460   |      |  | $    | 11,878  |      |  | $    | 30,657  |   |  | $ | 33,240  |  |  | $ | 40,158  | 
|Working capital (6)                                |  |            | 46,375  |      |  |      | 57,120  |      |  |      | 54,116  |   |  |   | 102,745 |  |  |   | 156,109 | 
|Total assets                                       |  |            | 356,307 |      |  |      | 352,930 |      |  |      | 371,017 |   |  |   | 459,880 |  |  |   | 525,165 | 
|Total long term debt,
including current maturities |  |            | 297,694 |      |  |      | 321,601 |      |  |      | 339,559 |   |  |   | 341,799 |  |  |   | 345,215 | 
|Total stockholders equity (deficiency)            |  |            | (30,408 | )    |  |      | (50,795 | )    |  |      | (39,205 | ) |  |   | 45,986  |  |  |   | 91,630  | 

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003



|(1) |  | The Company has recorded the following unusual items:
|--- |  | -----------------------------------------------------



| |  |  | During the year ended June 30, 2000, restructuring and
related charges totaled approximately $8.1 million. The
restructuring and related costs were incurred pursuant to a plan
adopted by the Company for staff reductions throughout the Company.
Included in the restructuring costs is a $1.9 million charge for a
valuation reserve for certain inventory for the Australian market,
which was a market we exited in 2000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During the year ended June 30, 2000, gains for the sale of
certain gaming management and development rights totaling $4.0
million.                                                                                                                                                                                                                                                                                             
|
| |  |  | During the year ended June 30, 2001, the Company incurred
costs and expenses to sell the Nevada Route Operations totaling $6.5
million consisting primarily of the break-up fee paid by the Company
to terminate the sale.                                                                                                                                                                                                     



|(2) |  | During the year ended June 30, 2002 we recorded 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).                   
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(3) |  | In June 30, 2003, we entered into a definitive agreement for the sale of
Bally Wulff and we wrote down the carrying value of the remaining net
assets of Bally Wulff to the sale price of $16.5 million, resulting in a
charge of $25.4 million, net of tax (included in discontinued operations).
|   
|(4) |  | During the year ended June 30, 2002, we recorded a non-cash charge to
write-down goodwill and other long-lived assets of Bally Wulff, totaling
$24.1 million (included in discontinued operations).                                                                                               
|   
|(5) |  | 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.                                                                                                                                  
|   
|(6) |  | Excludes assets and liabilities of discontinued operations held for sale.                                                                                                                                                                                                                         




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

Liquidity and Capital Resources

As of June 30, 2003, we had $40.2 million in cash and cash equivalents. In
addition we had net working capital of approximately $156.1 million, an
increase of approximately $53.4 million from June 30, 2002, which is explained
in the working capital section below. Consolidated cash and cash equivalents at
June 30, 2003, includes approximately $3.8 million of cash utilized in our
Casino Operations that is held in vaults, cages or change banks. Additionally,
pursuant to various state gaming regulations, we maintain certain cash accounts
to ensure availability of funds to pay wide-area progressive jackpot awards,
which totaled approximately $14.5 million at June 30, 2003.

In September 2003, we completed a refinancing of our senior bank credit
facility, which now consists of a $275.0 million term loan, and a $125.0
million revolving credit facility (which can be increased by up to $75.0
million upon the consent of the bank group, any time during the term of the
agreement) (the Refinancing). Proceeds from the term loan were used to repay
our existing bank term loans totaling approximately $188 million, repay $150.0
million of our 10% Senior Subordinated Notes and to pay transaction fees and
expenses. The new term loan has a 1% per year mandatory principal amortization,
with a 6 year maturity and bears interest at LIBOR plus 2.75%. The revolving
credit facility commitment decreases ratably over the 5 year term of the
commitment to a 60% balloon and bears interest at LIBOR plus 2.50%. The bank
loan contains certain financial and operational covenants, however there are no
borrowing base requirements. As of the initial borrowing date on
September 5, 2003 we are
in compliance with the covenants.

28



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

As a result of the Refinancing described above, the Company will record a
pre-tax charge in the September 2003 period of approximately $12.0 million,
which includes $5.0 million for the early extinguishment of the Subordinated
Notes, and $7.0 million for the non-cash write off of deferred financing costs.

Management believes that cash flows from operating activities, cash and cash
equivalents held and the availability of the revolving credit facility
commitment will provide us with sufficient capital resources and liquidity. At
June 30, 2003, we had no material commitments for capital expenditures.

Working Capital

The following table presents the components of consolidated working capital at
June 30, 2002 and 2003, excluding assets and liabilities of discontinued
operations (dollars in 000s):

|                                     |                           |                     |         |                     |         |      |         |        |         |   |        |        |        | 
|------------------------------------ | ------------------------- | ------------------- | ------- | ------------------- | ------- | ---- | ------- | ------ | ------- | - | ------ | ------ | ------ | 
|                                     |                           |                     |         | Balance at June 30, |         |      |         |       
|                                     |                           |                     |         |                     |         |      |         |       
|                                     |                           |                     |         | 2002                |         | 2003 |         | Change
|                                     |                           |                     |         |                     |         |      |         |       
|Cash and cash equivalents            |                           | $                   | 33,240  |                     |         | $    | 40,158  |        |         | $ | 6,918  |       
|Accounts and notes receivable, net   |                           |                     | 60,274  |                     |         |      | 98,408  |        |         |   | 38,134 |       
|Inventories, net                     |                           |                     | 30,434  |                     |         |      | 32,172  |        |         |   | 1,738  |       
|Deferred tax assets, net             |                           |                     | 27,586  |                     |         |      | 44,821  |        |         |   | 17,235 |       
|Other current assets                 |                           |                     | 8,333   |                     |         |      | 8,516   |        |         |   | 183    |       
|                                     |                           |                     |         |                     |         |      |         |        |         |   |        |       
|Total current assets                 |                           |                     | 159,867 |                     |         |      | 224,075 |        |         |   | 64,208 |       
|                                     |                           |                     |         |                     |         |      |         |        |         |   |        |       
|Accounts payable                     |                           |                     | 14,323  |                     |         |      | 22,912  |        |         |   | 8,589  |       
|Jackpot liabilities                  |                           |                     | 5,855   |                     |         |      | 10,604  |        |         |   | 4,749  |       
|Accrued liabilities                  |                           |                     | 32,954  |                     |         |      | 30,913  |        |         |   | (2,041 | )     
|Current maturities of long-term debt |                           |                     | 3,990   |                     |         |      | 3,537   |        |         |   | (453   | )     
|                                     |                           |                     |         |                     |         |      |         |        |         |   |        |       
|                                     | Total current liabilities |                     |         | 57,122              |         |      |         | 67,966 |         |   |        | 10,844 |       
|                                     |                           |                     |         |                     |         |      |         |        |         |   |        |       
|                                     |                           | Net working capital |         | $                   | 102,745 |      |         | $      | 156,109 |   |        | $      | 53,364 | 
|                                     |                           |                     |         |                     |         |      |         |        |         |   |        |       

The primary fluctuations contributing to the increase in working capital were:
(i) a net increase in accounts and notes receivable resulting from an increase
in sales, primarily in the Bally Gaming and Systems business unit; (ii) an
increase in inventory due to a larger backlog of sales; (iii) an increase in
deferred tax assets due primarily to the capital loss carry forwards recognized
in conjunction with the sale of Bally Wulff, and (iv) 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, 2003, cash provided from operating activities
totaled $44.1 million, an increase of $16.4 million compared to the prior year
period.

During the year ended June 30, 2003, we used $48.3 million of cash in investing
activities resulting primarily from capital expenditures totaling $11.9
million, costs incurred to produce participation games totaling $21.4 million,
net cash used in the acquisition of CMS, MCC and Honeyframe totaling $11.5
million and payments for computer software totaling $2.1 million.

During the year ended June 30, 2003, cash flow from financing activities
included $2.6 million of cash provided from the exercise of stock options,
offset by principal payments on other long term debt totaling $4.7 million.

Customer Financing

Management believes that customer financing terms and leasing have become an
increasingly important competitive factor for the Bally Gaming and Systems
business units. Competitive conditions sometimes require Bally Gaming and
Systems to grant extended payment terms on gaming machines, systems and other
gaming equipment, especially

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

for sales in emerging markets. While these
financings are normally collateralized by such equipment, the resale value of
the collateral in the event of default may be less than the amount financed.
Accordingly, 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.

During fiscal 2003, the Company provided equipment financing to two Native
American tribes totaling $24.1 million. These notes have terms of 36 and 48
months and rate of interest of 6% and 10%, respectively. Both of these notes
are currently performing in accordance with their terms.

Euro Currency Conversion

Our Bally Gaming International GmbH 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 reconciles our earnings before interest, taxes,
depreciation and amortization (EBITDA) to our consolidated net income (loss)
from continuing operations (in 000s):

|                                             |                               |                                   |        |                      |        |      |        |         |        |   |        |        |         | 
|-------------------------------------------- | ----------------------------- | --------------------------------- | ------ | -------------------- | ------ | ---- | ------ | ------- | ------ | - | ------ | ------ | ------- | 
|                                             |                               |                                   |        | Years ended June 30,
|                                             |                               |                                   |        | 2001                 |        | 2002 |        | 2003   
|                                             |                               |                                   |        |                      |        |      |        |        
|Net income (loss) from continuing operations |                               | $                                 | (1,850 | )                    |        | $    | 66,997 |         |        | $ | 40,429 |       
|                                             | Income tax expense (benefit)  |                                   |        | (1,313               | )      |      |        | (38,440 | )      |   |        | 22,316 |        
|                                             | Other expense                 |                                   |        | 4,783                |        |      |        | 700     |        |   |        | 1,767  |        
|                                             | Interest expense, net         |                                   |        | 32,302               |        |      |        | 27,851  |        |   |        | 25,424 |        
|                                             |                               |                                   |        |                      |        |      |        |         |        |   |        |       
|                                             | Operating income              |                                   |        | 33,922               |        |      |        | 57,108  |        |   |        | 89,936 |        
|                                             | Depreciation and amortization |                                   |        | 12,886               |        |      |        | 14,570  |        |   |        | 21,603 |        
|                                             |                               |                                   |        |                      |        |      |        |         |        |   |        |       
|                                             |                               | EBITDA from continuing operations |        | $                    | 46,808 |      |        | $       | 71,678 |   |        | $      | 111,539 | 
|                                             |                               |                                   |        |                      |        |      |        |         |        |   |        |       

The following tables reconcile operating income by business segment to EBITDA:

For the year ended June 30, 2003 (from continuing operations) (in 000s):

|                         |  |           |         |              |  |        |        |  |  |   |         |  
|------------------------ |  | --------- | ------- | ------------ |  | ------ | ------ |  |  | - | ------- | -
|                         |  | Operating |         | Depreciation |  |        |        | 
|                         |  | Income    |         | and          |  |        |        | 
|                         |  | (Loss)    |         | Amortization |  | EBITDA
|                         |  |           |         |              |  |       
|Bally Gaming and Systems |  | $         | 82,879  |              |  | $      | 16,002 |  |  | $ | 98,881  |  
|Casino Operations        |  |           | 20,270  |              |  |        | 3,315  |  |  |   | 23,585  |  
|Corporate expenses       |  |           | (13,213 | )            |  |        | 2,286  |  |  |   | (10,927 | )
|                         |  |           |         |              |  |        |        |  |  |   |         |  
|                         |  | $         | 89,936  |              |  | $      | 21,603 |  |  | $ | 111,539 |  
|                         |  |           |         |              |  |        |        |  |  |   |         |  

For the year ended June 30, 2002 (from continuing operations) (in 000s):

|                         |  |           |         |              |  |        |        |  |  |   |         |  
|------------------------ |  | --------- | ------- | ------------ |  | ------ | ------ |  |  | - | ------- | -
|                         |  | Operating |         | Depreciation |  |        |        | 
|                         |  | Income    |         | and          |  |        |        | 
|                         |  | (Loss)    |         | Amortization |  | EBITDA
|                         |  |           |         |              |  |       
|Bally Gaming and Systems |  | $         | 47,172  |              |  | $      | 10,236 |  |  | $ | 57,408  |  
|Casino Operations        |  |           | 22,498  |              |  |        | 2,132  |  |  |   | 24,630  |  
|Corporate expenses       |  |           | (12,562 | )            |  |        | 2,202  |  |  |   | (10,360 | )
|                         |  |           |         |              |  |        |        |  |  |   |         |  
|                         |  | $         | 57,108  |              |  | $      | 14,570 |  |  | $ | 71,678  |  
|                         |  |           |         |              |  |        |        |  |  |   |         |  

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

For the year ended June 30, 2001 (from continuing operations) (in 000s):

|                         |  |           |         |              |  |        |        |  |  |   |         |  
|------------------------ |  | --------- | ------- | ------------ |  | ------ | ------ |  |  | - | ------- | -
|                         |  | Operating |         | Depreciation |  |        |        | 
|                         |  | Income    |         | and          |  |        |        | 
|                         |  | (Loss)    |         | Amortization |  | EBITDA
|                         |  |           |         |              |  |       
|Bally Gaming and Systems |  | $         | 26,980  |              |  | $      | 9,027  |  |  | $ | 36,007  |  
|Casino Operations        |  |           | 25,258  |              |  |        | 2,300  |  |  |   | 27,558  |  
|Corporate expenses       |  |           | (11,827 | )            |  |        | 1,559  |  |  |   | (10,268 | )
|Unusual item             |  |           | (6,489  | )            |  |        |       |  |  |   | (6,489  | )
|                         |  |           |         |              |  |        |        |  |  |   |         |  
|                         |  | $         | 33,922  |              |  | $      | 12,886 |  |  | $ | 46,808  |  
|                         |  |           |         |              |  |        |        |  |  |   |         |  

In fiscal year 2001, the Company recorded charges of $6.5 million for costs and
expenses incurred to terminate the agreement to sell the Nevada Route
Operations, which consisted primarily of the break-up fee paid by the Company.

The following table reconciles our earnings before interest, taxes,
depreciation and amortization (EBITDA) to our consolidated net income (loss)
from our discontinued operations (in 000s):

|                                               |                                |                                     |        |                      |        |      |        |        |        |   |         |         |         |  
|---------------------------------------------- | ------------------------------ | ----------------------------------- | ------ | -------------------- | ------ | ---- | ------ | ------ | ------ | - | ------- | ------- | ------- | -
|                                               |                                |                                     |        | Years ended June 30,
|                                               |                                |                                     |        | 2001                 |        | 2002 |        | 2003  
|                                               |                                |                                     |        |                      |        |      |        |       
|Net income (loss) from discontinued operations |                                | $                                   | 16,332 |                      |        | $    | (3,148 | )      |        | $ | (20,906 | )      
|                                               | Income tax expense (benefit)   |                                     |        | 1,924                |        |      |        | 2,563  |        |   |         | (10,425 | )      
|                                               | Other expense                  |                                     |        | 727                  |        |      |        | 825    |        |   |         | 717     |        
|                                               | Interest income (expense), net |                                     |        | 1,462                |        |      |        | (957   | )      |   |         | (926    | )      
|                                               |                                |                                     |        |                      |        |      |        |        |        |   |         |        
|                                               | Operating income (loss)        |                                     |        | 20,445               |        |      |        | (717   | )      |   |         | (31,540 | )      
|                                               | Depreciation and amortization  |                                     |        | 14,859               |        |      |        | 17,282 |        |   |         | 16,751  |        
|                                               |                                |                                     |        |                      |        |      |        |        |        |   |         |        
|                                               |                                | EBITDA from discontinued operations |        | $                    | 35,304 |      |        | $      | 16,565 |   |         | $       | (14,789 | )
|                                               |                                |                                     |        |                      |        |      |        |        |        |   |         |        

For the year ended June 30, 2003 (from discontinued operations) (in 000s):

|                                  |  |           |         |              |  |        |        |  |  |   |         |  
|--------------------------------- |  | --------- | ------- | ------------ |  | ------ | ------ |  |  | - | ------- | -
|                                  |  | Operating |         | Depreciation |  |        |        | 
|                                  |  | Income    |         | and          |  |        |        | 
|                                  |  | (Loss)    |         | Amortization |  | EBITDA
|                                  |  |           |         |              |  |       
|Wall Machines and Amusement Games |  | $         | (1,875  | )            |  | $      | 2,731  |  |  | $ | 856     |  
|Route Operations                  |  |           | 9,063   |              |  |        | 14,020 |  |  |   | 23,083  |  
|Asset impairment charges          |  |           | (38,728 | )            |  |        |       |  |  |   | (38,728 | )
|                                  |  |           |         |              |  |        |        |  |  |   |         |  
|                                  |  | $         | (31,540 | )            |  | $      | 16,751 |  |  | $ | (14,789 | )
|                                  |  |           |         |              |  |        |        |  |  |   |         |  

During the year ended June 30, 2003, we recorded a charge of $38.7 million to
write down the assets of Bally Wulff to the sales price.

For the year ended June 30, 2002 (from discontinued operations) (in 000s):

|                                  |  |           |         |              |  |        |        |  |  |   |         |  
|--------------------------------- |  | --------- | ------- | ------------ |  | ------ | ------ |  |  | - | ------- | -
|                                  |  | Operating |         | Depreciation |  |        |        | 
|                                  |  | Income    |         | and          |  |        |        | 
|                                  |  | (Loss)    |         | Amortization |  | EBITDA
|                                  |  |           |         |              |  |       
|Wall Machines and Amusement Games |  | $         | 7,942   |              |  | $      | 5,213  |  |  | $ | 13,155  |  
|Route Operations                  |  |           | 15,470  |              |  |        | 12,069 |  |  |   | 27,539  |  
|Asset impairment charges          |  |           | (24,129 | )            |  |        |       |  |  |   | (24,129 | )
|                                  |  |           |         |              |  |        |        |  |  |   |         |  
|                                  |  | $         | (717    | )            |  | $      | 17,282 |  |  | $ | 16,565  |  
|                                  |  |           |         |              |  |        |        |  |  |   |         |  

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

During the year ended June 30, 2002 we recorded a charge of $24.1 million to
write down the goodwill and other long-lived assets of Bally Wulff.

For the year ended June 30, 2001 (from discontinued operations) (in 000s):

|                                  |  |           |        |              |  |        |        |  |  |   |        | 
|--------------------------------- |  | --------- | ------ | ------------ |  | ------ | ------ |  |  | - | ------ | 
|                                  |  | Operating |        | Depreciation |  |        |        | 
|                                  |  | Income    |        | and          |  |        |        | 
|                                  |  | (Loss)    |        | Amortization |  | EBITDA
|                                  |  |           |        |              |  |       
|Wall Machines and Amusement Games |  | $         | 4,963  |              |  | $      | 5,555  |  |  | $ | 10,518 | 
|Route Operations                  |  |           | 15,482 |              |  |        | 9,304  |  |  |   | 24,786 | 
|                                  |  |           |        |              |  |        |        |  |  |   |        | 
|                                  |  | $         | 20,445 |              |  | $      | 14,859 |  |  | $ | 35,304 | 
|                                  |  |           |        |              |  |        |        |  |  |   |        | 

We believe that the analysis of EBITDA is a useful adjunct to operating income,
net income, cash flows and other GAAP-based measures. However, EBITDA should
not be construed as an alternative to net income (loss) or cash flows from
operating, investing and financing activities determined in accordance with
GAAP or as a measure of liquidity. EBITDA is a common measure of performance in
the gaming industry but may not be comparable to similarly titled measures
reported by other companies. We disclose EBITDA primarily because it is a
performance measure used by management in evaluating the performance of our
business units and is one of several performance measures used in our
management incentive plan. Additionally, EBITDA is utilized as a performance
measure in covenants for our bank credit agreement.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

2003 Compared with 2002

Bally Gaming and Systems

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

|                                    |                              |                    |        |                               |         |      |        |         |         | 
|----------------------------------- | ---------------------------- | ------------------ | ------ | ----------------------------- | ------- | ---- | ------ | ------- | ------- | 
|                                    |                              |                    |        | Twelve Months Ending June 30,
|                                    |                              |                    |        | 2002                          |         | 2003
|                                    |                              |                    |        |                               |         |     
|Revenues                            |                              |                    |        |                               |         |      |        |        
|                                    | Game sales                   |                    | $      | 105,675                       |         |      | $      | 188,282 |        
|                                    | System sales                 |                    |        | 64,840                        |         |      |        | 91,542  |        
|                                    | Gaming operations            |                    |        | 53,188                        |         |      |        | 55,612  |        
|                                    |                              |                    |        |                               |         |      |        |        
|                                    |                              | Total revenues     |        |                               | 223,703 |      |        |         | 335,436 | 
|Gross Margin                        |                              |                    |        |                               |         |      |        |        
|                                    | Game sales                   |                    |        | 40,680                        |         |      |        | 81,805  |        
|                                    | System sales                 |                    |        | 48,251                        |         |      |        | 70,110  |        
|                                    | Gaming operations            |                    |        | 36,052                        |         |      |        | 39,169  |        
|                                    |                              |                    |        |                               |         |      |        |        
|                                    |                              | Total gross margin |        |                               | 124,983 |      |        |         | 191,084 | 
|Selling, general and administrative |                              |                    | 52,563 |                               |         |      | 72,248 |        
|Research and development costs      |                              |                    | 15,012 |                               |         |      | 19,955 |        
|Depreciation and amortization       |                              |                    | 10,236 |                               |         |      | 16,002 |        
|                                    |                              |                    |        |                               |         |      |        |        
|Operating income                    |                              | $                  | 47,172 |                               |         | $    | 82,879 |        
|                                    |                              |                    |        |                               |         |      |        |        
|Operating Statistics:               |                              |                    |        |                               |         |      |        |        
|New Gaming Devices Sold             |                              |                    | 13,200 |                               |         |      | 19,635 |        
|Game Monitoring Units Sold          |                              |                    | 40,550 |                               |         |      | 35,500 |        
|WAP and daily-fee games             |                              |                    |        |                               |         |      |        |        
|                                    | End of period installed base |                    |        | 3,635                         |         |      |        | 4,400   |        
|                                    | Average installed base       |                    |        | 3,580                         |         |      |        | 3,980   |        

Our Bally Gaming and Systems business unit reported an overall increase in
revenues of 50% for the year-to-date period. Bally game sales division reported
an increase in revenues of 78% for the year-to-date period. New units sold
increased 49% and the average new-unit selling price (excluding OEM games)
increased 10% for the year-to-date period. Bally Systems revenues increased 41%
over the prior year driven by increased sales of software licenses for the
industrys leading single-wire TITO solution, eTICKET as well as its bonusing
and promotions software and a 32% increase in the average selling price per
unit, offset by a 12% decrease in game monitoring units shipped. Bally Systems
recurring hardware and software revenues increased to $16.9 million for the
fiscal year, resulting from the larger base of installed systems, which now
stands at approximately 240,000. Gaming Operations revenues increased 5%
compared to the prior year end as a result of a 11% increase in the average
installed base of wide-area progressive (WAP) and daily-fee games deployed,
which now total 1,910 and 2,490, respectively, offset by a decrease in the
average revenue per unit. The current placements included the continued roll
out of the Companys latest WAP offering, Cash for Life, which in addition to
the Nevada link, was launched in both Mississippi and Native American casinos
in June, and does not include units placed in Atlantic City which went live in
early July.

For the year ended June 30, 2003, the overall gross margin percentage for Bally
Gaming and Systems increase slightly to 57% compared to 56% in the prior year.

The overall selling, general and administrative expenses increased 37% for the
year-to-date period, resulting from the additional headcount added from
acquisitions. Selling, general and administrative costs as a percentage of this
business units revenue declined to 22% in the current year-to-date period
compared to 24% for the prior year-to-date period. Research and development
costs increased 33% for the year-to-date period, resulting from the increase in
hardware

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

and software engineers added during the current year. Total depreciation
expense increased 56% for the year-to-date period, driven by the increase in
the installed base of wide-area progressive and daily fee games, which have
displaced certain fully depreciated games in the field.

Casino Operations

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

|                                    |                  |                      |        |                               |        |      |        |        |        | 
|----------------------------------- | ---------------- | -------------------- | ------ | ----------------------------- | ------ | ---- | ------ | ------ | ------ | 
|                                    |                  |                      |        | Twelve Months Ending June 30,
|                                    |                  |                      |        | 2002                          |        | 2003
|                                    |                  |                      |        |                               |        |     
|Revenues                            |                  |                      |        |                               |        |      |        |       
|                                    | Rainbow Casino   |                      | $      | 52,211                        |        |      | $      | 50,945 |       
|                                    | Rail City Casino |                      |        | 20,160                        |        |      |        | 21,179 |       
|                                    |                  |                      |        |                               |        |      |        |       
|                                    |                  | Total revenues       |        |                               | 72,371 |      |        |        | 72,124 | 
|Gross Margin                        |                  |                      |        |                               |        |      |        |       
|                                    | Rainbow Casino   |                      |        | 31,190                        |        |      |        | 29,737 |       
|                                    | Rail City Casino |                      |        | 8,988                         |        |      |        | 9,744  |       
|                                    |                  |                      |        |                               |        |      |        |       
|                                    |                  | Total gross margin   |        |                               | 40,178 |      |        |        | 39,481 | 
|Selling, general and administrative |                  |                      | 15,548 |                               |        |      | 15,896 |       
|Depreciation and amortization       |                  |                      | 2,132  |                               |        |      | 3,315  |       
|Operating income                    |                  |                      |        |                               |        |      |        |       
|                                    | Rainbow Casino   |                      |        | 17,593                        |        |      |        | 15,306 |       
|                                    | Rail City Casino |                      |        | 4,905                         |        |      |        | 4,964  |       
|                                    |                  |                      |        |                               |        |      |        |       
|Total operating income              |                  | $                    | 22,498 |                               |        | $    | 20,270 |       
|                                    |                  |                      |        |                               |        |      |        |       
|Operating Statistics:               |                  |                      |        |                               |        |      |        |       
|Average Number of Gaming Devices    |                  |                      |        |                               |        |      |        |       
|                                    | Rainbow Casino   |                      |        | 975                           |        |      |        | 930    |       
|                                    | Rail City Casino |                      |        | 530                           |        |      |        | 550    |       
|                                    |                  |                      |        |                               |        |      |        |       
|                                    |                  | Total Gaming Devices |        |                               | 1,505  |      |        |        | 1,480  | 
|Average Number of Table Games       |                  |                      | 24     |                               |        |      | 23     |       

Rainbow Casino revenues decreased 2% for the year-to-date period, as a result
of 5% decrease in the average number of gaming machines offset by 2% increase
in net win per day to $144. Rail City Casino reported an increase in revenues
of 5% for the year-to-date period. The revenue improvement at the Rail City
Casino was attributable to a 5% increase in the average number of gaming
machines.

The cost of revenues for Casino Operations as a percentage of revenues
increased slightly to 45% for the year-to-date period. This increase was a
result of the decrease in revenues, with incremental increases in certain
operating costs. Cost of casino revenues includes gaming taxes, rental costs
and direct labor including payroll taxes and benefits.

The overall selling, general and administrative expenses increased 2% for the
year-to-date period, as a result of an increase in advertising and promotional
expenses. Selling, general and administrative costs as a percentage of revenue
increased to 22% compared to 21% for the year-to-date-period. Total
depreciation expense increased 55% for the year-to-date period as a result of
the additional capital improvements made to the Rainbow Casino in the current
year.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

Parent Company and other unallocated income (expense)

Summary financial results (dollars in 000s):

|                              |                   |                              |         |                               |         |      |        |         |         |  
|----------------------------- | ----------------- | ---------------------------- | ------- | ----------------------------- | ------- | ---- | ------ | ------- | ------- | -
|                              |                   |                              |         | Twelve Months Ending June 30,
|                              |                   |                              |         | 2002                          |         | 2003
|                              |                   |                              |         |                               |         |     
|General and administrative    |                   | $                            | 10,360  |                               |         | $    | 10,927 |        
|Depreciation and amortization |                   |                              | 2,202   |                               |         |      | 2,286  |        
|                              |                   |                              |         |                               |         |      |        |        
|                              |                   | Total Parent company expense |         | $                             | 12,562  |      |        | $       | 13,213  |  
|                              |                   |                              |         |                               |         |      |        |        
|Other income (expense):       |                   |                              |         |                               |         |      |        |        
|                              | Interest income   |                              | $       | 379                           |         |      | $      | 221     |        
|                              | Interest expense  |                              |         | (28,230                       | )       |      |        | (25,645 | )      
|                              | Minority interest |                              |         | (1,935                        | )       |      |        | (2,009  | )      
|                              | Other, net        |                              |         | 1,235                         |         |      |        | 242     |        
|                              |                   |                              |         |                               |         |      |        |        
|                              |                   | Total other income (expense) |         | $                             | (28,551 | )    |        | $       | (27,191 | )
|                              |                   |                              |         |                               |         |      |        |        
|Income tax expense (benefit)  |                   | $                            | (38,440 | )                             |         | $    | 22,316 |        
|                              |                   |                              |         |                               |         |      |        |        

The general and administrative expenses increased 5% for the year-to-date
period. Compared to the prior year periods, in the current year periods we are
incurring higher director and officer and general liability insurance premiums,
offset by lower accruals for certain elements of our incentive based
compensations plan. Total depreciation expense increased 4% for the
year-to-date period.

Interest expense (net of interest income) decreased 9% for the
year-to-date-period. The decrease is a result of a lower interest rate on our
LIBOR-based bank credit facility.

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

Beginning July 1, 2002, the Company began recognizing Federal income tax
expense based on 35% of pre-tax domestic income and state income taxes at a
rate of approximately 2% of domestic income. For the twelve months ended June
30, 2002, the domestic earnings were offset against net operating loss carry
forwards resulting in no Federal income tax expense.

Unusual Items

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



| |  | The $37.0 million tax benefit discussed above.
|- |  | ----------------------------------------------

Discontinued Operations:

As previously discussed, in July 2003, we announced that we had entered into
definitive agreements for the sale of our route operations and Bally Wulff.
For purposes of financial reporting, these two business units are now treated
as a discontinued operations.

35



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

Route Operations

Summary financial results and operating statistics are as follows (dollars in
000s):

|                                    |           |                        |        |                               |         |      |        |         |         | 
|----------------------------------- | --------- | ---------------------- | ------ | ----------------------------- | ------- | ---- | ------ | ------- | ------- | 
|                                    |           |                        |        | Twelve Months Ending June 30,
|                                    |           |                        |        | 2002                          |         | 2003
|                                    |           |                        |        |                               |         |     
|Revenues                            |           |                        |        |                               |         |      |        |        
|                                    | Nevada    |                        | $      | 208,874                       |         |      | $      | 202,398 |        
|                                    | Louisiana |                        |        | 15,115                        |         |      |        | 14,921  |        
|                                    |           |                        |        |                               |         |      |        |        
|                                    |           | Total revenues         |        |                               | 223,989 |      |        |         | 217,319 | 
|Gross Margin                        |           |                        |        |                               |         |      |        |        
|                                    | Nevada    |                        |        | 33,789                        |         |      |        | 30,929  |        
|                                    | Louisiana |                        |        | 5,223                         |         |      |        | 4,947   |        
|                                    |           |                        |        |                               |         |      |        |        
|                                    |           | Total gross margin     |        |                               | 39,012  |      |        |         | 35,876  | 
|Selling, general and administrative |           |                        | 11,473 |                               |         |      | 12,793 |        
|Depreciation and amortization       |           |                        | 12,069 |                               |         |      | 14,020 |        
|                                    |           |                        |        |                               |         |      |        |        
|Operating income                    |           |                        |        |                               |         |      |        |        
|                                    | Nevada    |                        |        | 13,231                        |         |      |        | 7,006   |        
|                                    | Louisiana |                        |        | 2,239                         |         |      |        | 2,057   |        
|                                    |           |                        |        |                               |         |      |        |        
|                                    |           | Total operating income |        | $                             | 15,470  |      |        | $       | 9,063   | 
|                                    |           |                        |        |                               |         |      |        |        
|Operating Statistics:               |           |                        |        |                               |         |      |        |        
|Average Number of Gaming Devices    |           |                        |        |                               |         |      |        |        
|                                    | Nevada    |                        |        | 8,270                         |         |      |        | 8,050   |        
|                                    | Louisiana |                        |        | 700                           |         |      |        | 715     |        
|                                    |           |                        |        |                               |         |      |        |        
|                                    |           | Total Gaming Devices   |        |                               | 8,970   |      |        |         | 8,765   | 

Revenues from the Nevada route operations decreased 3% for the year-to-date
period. This decrease was attributable to a decrease in the average net win per
gaming machine per day of 1% to $67.60 from $68.30 and a 3% decrease in the
average number of gaming machines for the year. Contributing to the reduced
game count were the loss of approximately 300 games which were destroyed in a
fire at one large location owned by a third-party. The Company expects to
recover its net investment in these games through proceeds from its insurance
carrier. During the year an additional eight former Raleys locations that had
closed in the December 2002 quarter, were re-opened as Food-4-Less locations.
However, play at those locations is currently substantially lower than the
historical norms as the Food-4-Less stores build their customer base and the
expectation in the future is that Food-4-Less locations will continue to earn
much lower figures given the customer(s) marketed for these locations. We have
completed the acquisition of the contract for the Longs Drug Stores as well as
an extension in that contract for an additional five years through 2012.
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, 2003, the
Gamblers Bonus product was installed in over 4,160 gaming machines at
approximately 415 locations statewide or 55% of the installed base of gaming
machines.

Revenues from route operations in Louisiana reported a decrease of 1% for
year-to-date period remained. The decrease was primarily the result of a 4%
decrease in the net win per gaming machine per day to $56.95 from $59.15,
offset by a 3% increase in the number of gaming units deployed.

For year-to-date ended June 30, 2003, the overall gross margin percentage for
the Route Operations decreased slightly, as a result of the decrease in
revenues, with incremental increases in certain operating costs.

The overall selling, general and administrative expenses increased 12% for the
year-to-date period. Selling, general and administrative costs as a percentage
of revenue increased to 6% compared to 5% for the year-to-date period. Total

36



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

depreciation expense increased 16% for the year-to-date period, driven by the
increase in gaming rights fees amortization and depreciation on a higher
capital invested in the installed base of gaming devices.

Wall Machines and Amusement Games

Summary financial results and operating statistics are as follows (dollars in
000s):

|                                    |                         |   |                               |         |      |   |        |         |  
|----------------------------------- | ----------------------- | - | ----------------------------- | ------- | ---- | - | ------ | ------- | -
|                                    |                         |   | Twelve Months Ending June 30,
|                                    |                         |   | 2002                          |         | 2003
|                                    |                         |   |                               |         |     
|Revenues                            |                         | $ | 74,721                        |         |      | $ | 60,241 |        
|Gross Margin                        |                         |   | 37,478                        |         |      |   | 26,491 |        
|Selling, general and administrative |                         |   | 21,722                        |         |      |   | 22,143 |        
|Research and development costs      |                         |   | 2,601                         |         |      |   | 3,492  |        
|Depreciation and amortization       |                         |   | 5,213                         |         |      |   | 2,731  |        
|Asset impairment charges            |                         |   | 24,129                        |         |      |   | 38,728 |        
|                                    |                         |   |                               |         |      |   |        |        
|                                    | Operating income (loss) |   | $                             | (16,187 | )    |   | $      | (40,603 | )
|                                    |                         |   |                               |         |      |   |        |        
|Operating Statistics:               |                         |   |                               |         |      |   |        |        
|Number of New Wall Machines Sold    |                         |   | 9,850                         |         |      |   | 6,025  |        
|Number of New Wall Machines Leased  |                         |   | 5,380                         |         |      |   | 5,870  |        
|Installed Base of Leased Machines   |                         |   | 7,450                         |         |      |   | 7,100  |        

Wall Machines and Amusement Games reported a decrease in revenues of 19% for
the year-to-date period. The decrease in revenues is a result of a 39% decrease
in new units sold and a 5% decrease in the installed base of leased games,
offset by an 11% increase in the average selling price.

During the fiscal year ended June 30, 2002, we recorded 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 FASB No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets.

As a result of the sale transaction completed in July 2003, we wrote down the
carrying value of the remaining net assets of Bally Wulff to the sale price of
$16.5 million, resulting in a gross charge of $38.7 million (or $25.4 million
net of tax), recorded in June 2003.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

2002 Compared with 2001

Bally Gaming and Systems

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

|                           |                                     |                   |                    |        |                               |         |        |        |         |         | 
|-------------------------- | ----------------------------------- | ----------------- | ------------------ | ------ | ----------------------------- | ------- | ------ | ------ | ------- | ------- | 
|                           |                                     |                   |                    |        | Twelve Months Ending June 30,
|                           |                                     |                   |                    |        | 2001                          |         | 2002  
|                           |                                     |                   |                    |        |                               |         |       
|                           | Revenues                            |                   |                    |        |                               |         |        |        |        
|                           |                                     | Game sales        |                    | $      | 86,551                        |         |        | $      | 105,675 |        
|                           |                                     | System sales      |                    |        | 46,562                        |         |        |        | 64,840  |        
|                           |                                     | Gaming operations |                    |        | 28,423                        |         |        |        | 53,188  |        
|                           |                                     |                   |                    |        |                               |         |        |       
|                           |                                     |                   | Total revenues     |        |                               | 161,536 |        |        |         | 223,703 | 
|                           | Gross Margin                        |                   |                    |        |                               |         |        |        |        
|                           |                                     | Game sales        |                    |        | 32,958                        |         |        |        | 40,680  |        
|                           |                                     | System sales      |                    |        | 33,179                        |         |        |        | 48,251  |        
|                           |                                     | Gaming operations |                    |        | 17,976                        |         |        |        | 36,052  |        
|                           |                                     |                   |                    |        |                               |         |        |       
|                           |                                     |                   | Total gross margin |        |                               | 84,113  |        |        |         | 124,983 | 
|                           | Selling, general and administrative |                   |                    | 37,078 |                               |         |        | 52,563 |        
|                           | Research and development costs      |                   |                    | 11,028 |                               |         |        | 15,012 |        
|                           | Depreciation and amortization       |                   |                    | 9,027  |                               |         |        | 10,236 |        
|                           |                                     |                   |                    |        |                               |         |        |       
|                           | Operating income                    |                   | $                  | 26,980 |                               |         | $      | 47,172 |        
|                           |                                     |                   |                    |        |                               |         |        |       
|Operating Statistics:      |                                     |                   |                    |        |                               |         |        |       
|New Gaming Devices Sold    |                                     |                   | 10,500             |        |                               |         | 13,200 |       
|Game Monitoring Units Sold |                                     |                   | 32,700             |        |                               |         | 40,550 |       
|WAP and daily-fee games    |                                     |                   |                    |        |                               |         |        |       
|                           | End of period installed base        |                   |                    | 3,180  |                               |         |        | 3,635  |        
|                           | Average installed base              |                   |                    | 2,765  |                               |         |        | 3,580  |        

Our Bally Gaming and Systems business unit reported an overall increase in
revenues of 39% for the year-to-date period. Bally game sales division reported
an increase in revenues of 22% for the year-to-date period. New units sold
increased 26% and the average new-unit selling price (excluding OEM games)
increased 10% for the year-to-date period. Bally Systems revenues increased 39%
over the prior year driven by a record shipment of 40,550 games monitoring
units and continued strength in new system installations. Bally Systems
recurring hardware and software revenues increased to $9.0 million for the
fiscal year, resulting from the larger base of installed systems. Gaming
Operations revenues increased 87% compared to the prior year end as a result of
a 29% increase in the average installed base of wide-area progressive and
daily-fee games deployed, which now total 2,285 and 1,350, respectively, and an
increase in the average revenue per unit.

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 overall selling, general and administrative expenses increased 42% for the
year-to-date period, resulting from the additional headcount added from
acquisitions. Selling, general and administrative costs as a percentage of this
business units revenue increased slightly to 24% in the current year-to-date
period compared to 23% for the prior year-to-date period. Research and
development costs increased 36% for the year-to-date period, resulting from the
increase in hardware and software engineers added during the current year.
Total depreciation expense increased 13% for the year-to-date period, driven by
the increase in the installed base of wide-area progressive and daily fee
games, which have displaced certain fully depreciated games in the field.

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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

Casino Operations

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

|                                    |                  |                      |        |                               |        |      |        |        |        | 
|----------------------------------- | ---------------- | -------------------- | ------ | ----------------------------- | ------ | ---- | ------ | ------ | ------ | 
|                                    |                  |                      |        | Twelve Months Ending June 30,
|                                    |                  |                      |        | 2001                          |        | 2002
|                                    |                  |                      |        |                               |        |     
|Revenues                            |                  |                      |        |                               |        |      |        |       
|                                    | Rainbow Casino   |                      | $      | 54,549                        |        |      | $      | 52,211 |       
|                                    | Rail City Casino |                      |        | 18,950                        |        |      |        | 20,160 |       
|                                    |                  |                      |        |                               |        |      |        |       
|                                    |                  | Total revenues       |        |                               | 73,499 |      |        |        | 72,371 | 
|Gross Margin                        |                  |                      |        |                               |        |      |        |       
|                                    | Rainbow Casino   |                      |        | 32,679                        |        |      |        | 31,190 |       
|                                    | Rail City Casino |                      |        | 8,279                         |        |      |        | 8,988  |       
|                                    |                  |                      |        |                               |        |      |        |       
|                                    |                  | Total gross margin   |        |                               | 40,958 |      |        |        | 40,178 | 
|Selling, general and administrative |                  |                      | 13,400 |                               |        |      | 15,548 |       
|Depreciation and amortization       |                  |                      | 2,300  |                               |        |      | 2,132  |       
|                                    |                  |                      |        |                               |        |      |        |       
|Operating income                    |                  |                      |        |                               |        |      |        |       
|                                    | Rainbow Casino   |                      |        | 20,725                        |        |      |        | 17,593 |       
|                                    | Rail City Casino |                      |        | 4,533                         |        |      |        | 4,905  |       
|                                    |                  |                      |        |                               |        |      |        |       
|Total operating income              |                  | $                    | 25,258 |                               |        | $    | 22,498 |       
|                                    |                  |                      |        |                               |        |      |        |       
|Operating Statistics:               |                  |                      |        |                               |        |      |        |       
|Average Number of Gaming Devices    |                  |                      |        |                               |        |      |        |       
|                                    | Rainbow Casino   |                      |        | 945                           |        |      |        | 975    |       
|                                    | Rail City Casino |                      |        | 500                           |        |      |        | 530    |       
|                                    |                  |                      |        |                               |        |      |        |       
|                                    |                  | Total Gaming Devices |        |                               | 1,445  |      |        |        | 1,505  | 
|Average Number of Table Games       |                  |                      | 26     |                               |        |      | 24     |       

Rainbow Casino revenues decreased 4% for the year-to-date period, as a result
of 6% decrease in net win per day to $141 offset by 3% increase in the average
number of gaming machines. This decline is a result of the significant
competitive pressure in a market that is growing at less than its historical
norm. Rail City Casino reported an increase in revenues of 6% for the
year-to-date period. 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 approximately 45%.

The overall selling, general and administrative expenses increased 16% for the
year-to-date period, as a result of an increase in advertising and promotional
expenses. Selling, general and administrative costs as a percentage of revenue
increased to 22% compared to 18% for the year-to-date-period. Total
depreciation expense decreased 7% for the year-to-date period as a result of
significant gaming assets having reached the end of their depreciable lives.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

Parent Company and other unallocated income (expense)

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

|                              |                   |                              |        |                               |         |      |        |         |         |  
|----------------------------- | ----------------- | ---------------------------- | ------ | ----------------------------- | ------- | ---- | ------ | ------- | ------- | -
|                              |                   |                              |        | Twelve Months Ending June 30,
|                              |                   |                              |        | 2001                          |         | 2002
|                              |                   |                              |        |                               |         |     
|General and administrative    |                   | $                            | 10,268 |                               |         | $    | 10,360 |        
|Depreciation and amortization |                   |                              | 1,559  |                               |         |      | 2,202  |        
|                              |                   |                              |        |                               |         |      |        |        
|                              |                   | Total Parent company expense |        | $                             | 11,827  |      |        | $       | 12,562  |  
|                              |                   |                              |        |                               |         |      |        |        
|Other income (expense):       |                   |                              |        |                               |         |      |        |        
|                              | Interest income   |                              | $      | 639                           |         |      | $      | 379     |        
|                              | Interest expense  |                              |        | (32,941                       | )       |      |        | (28,230 | )      
|                              | Minority interest |                              |        | (2,165                        | )       |      |        | (1,935  | )      
|                              | Other, net        |                              |        | (2,618                        | )       |      |        | 1,235   |        
|                              |                   |                              |        |                               |         |      |        |        
|                              |                   | Total other expense          |        | $                             | (37,085 | )    |        | $       | (28,551 | )
|                              |                   |                              |        |                               |         |      |        |        
|Income tax expense (benefit)  |                   | $                            | (1,313 | )                             |         | $    | 38,440 |        
|                              |                   |                              |        |                               |         |      |        |        

The general and administrative expenses increased 1% for the year-to-date
period. This increase was driven by higher corporate litigation costs. Total
depreciation expense increased 41% for the year-to-date period as a result of
increased amortization of capitalized debt issuance costs.

Interest expense (net of interest income) decreased 14% for the
year-to-date-period. The decrease is a result of a lower interest rate on our
LIBOR-based bank credit facility.

Unusual Items

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



| |  | The previously discussed $37.0 million tax benefit.
|- |  | ---------------------------------------------------

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, which consisted primarily of the break-up fee paid by the Company.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

Discontinued Operations:

Route Operations

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

|                                    |           |                        |        |                               |         |      |        |         |         | 
|----------------------------------- | --------- | ---------------------- | ------ | ----------------------------- | ------- | ---- | ------ | ------- | ------- | 
|                                    |           |                        |        | Twelve Months Ending June 30,
|                                    |           |                        |        | 2001                          |         | 2002
|                                    |           |                        |        |                               |         |     
|Revenues                            |           |                        |        |                               |         |      |        |        
|                                    | Nevada    |                        | $      | 205,105                       |         |      | $      | 208,874 |        
|                                    | Louisiana |                        |        | 16,400                        |         |      |        | 15,115  |        
|                                    |           |                        |        |                               |         |      |        |        
|                                    |           | Total revenues         |        |                               | 221,505 |      |        |         | 223,989 | 
|Gross Margin                        |           |                        |        |                               |         |      |        |        
|                                    | Nevada    |                        |        | 30,570                        |         |      |        | 33,789  |        
|                                    | Louisiana |                        |        | 5,815                         |         |      |        | 5,223   |        
|                                    |           |                        |        |                               |         |      |        |        
|                                    |           | Total gross margin     |        |                               | 36,385  |      |        |         | 39,012  | 
|Selling, general and administrative |           |                        | 11,599 |                               |         |      | 11,473 |        
|Depreciation and amortization       |           |                        | 9,304  |                               |         |      | 12,069 |        
|                                    |           |                        |        |                               |         |      |        |        
|Operating income                    |           |                        |        |                               |         |      |        |        
|                                    | Nevada    |                        |        | 13,000                        |         |      |        | 13,231  |        
|                                    | Louisiana |                        |        | 2,482                         |         |      |        | 2,239   |        
|                                    |           |                        |        |                               |         |      |        |        
|                                    |           | Total operating income |        | $                             | 15,482  |      |        | $       | 15,470  | 
|                                    |           |                        |        |                               |         |      |        |        
|Operating Statistics:               |           |                        |        |                               |         |      |        |        
|Average Number of Gaming Devices    |           |                        |        |                               |         |      |        |        
|                                    | Nevada    |                        |        | 8,080                         |         |      |        | 8,270   |        
|                                    | Louisiana |                        |        | 690                           |         |      |        | 700     |        
|                                    |           |                        |        |                               |         |      |        |        
|                                    |           | Total Gaming Devices   |        |                               | 8,770   |      |        |         | 8,970   | 

Revenues from the Nevada route operations increased 2% for year-to-date period.
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 the Louisiana route operations decreased 8% compared to the prior
year. This decrease was 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 1% 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, as a
percentage of revenues, decreased to 83% from 84% in the prior year. This
slight 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

Wall Machines and Amusement Games

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

|                                    |  |                               |        |      |  |   |         |  
|----------------------------------- |  | ----------------------------- | ------ | ---- |  | - | ------- | -
|                                    |  | Twelve Months Ending June 30,
|                                    |  | 2001                          |        | 2002
|                                    |  |                               |        |     
|Revenue                             |  | $                             | 72,287 |      |  | $ | 74,721  |  
|Gross Margin                        |  |                               | 33,044 |      |  |   | 37,478  |  
|Selling, general and administrative |  |                               | 19,978 |      |  |   | 21,722  |  
|Research and development costs      |  |                               | 2,548  |      |  |   | 2,601   |  
|Depreciation and amortization       |  |                               | 5,555  |      |  |   | 5,213   |  
|Asset impairment charge             |  |                               |       |      |  |   | 24,129  |  
|                                    |  |                               |        |      |  |   |         |  
|Operating income (loss)             |  | $                             | 4,963  |      |  | $ | (16,187 | )
|                                    |  |                               |        |      |  |   |         |  
|Operating Statistics:               |  |                               |        |      |  |   |         |  
|Number of New Wall Machines Sold    |  |                               | 12,400 |      |  |   | 9,850   |  
|Number of New Wall Machines Leased  |  |                               | 4,150  |      |  |   | 5,380   |  
|Installed Base of Leased Machines   |  |                               | 6,400  |      |  |   | 7,450   |  

For the year ended June 30, 2002, Wall Machines and Amusement Games reported
revenues of $74.7 million, an increase of 3% compared to revenues of $72.3
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.

During the fiscal year ended June 30, 2002, we recorded 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 and the newly adopted FASB No. 144.

Contractual Commitments

We are committed to make future payments pursuant to various contracts and
agreements. A summary of those contractual obligations existing as of June 30,
2003, as adjusted for the Refinancing (see Note 5 to the consolidated financial
statement) completed in September 2003, is as follows (in $000s):

|                                 |  |      |        |      |  |      |        |      |  |      |        |            |  |       |        |  |  |   |       |  |  |   |         |     |  |   |         | 
|-------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | ----- | ------ |  |  | - | ----- |  |  | - | ------- | --- |  | - | ------- | 
|                                 |  | 2004 |        | 2005 |  | 2006 |        | 2007 |  | 2008 |        | Thereafter |  | Total
|                                 |  |      |        |      |  |      |        |      |  |      |        |            |  |      
|Debt:                            |  |      |        |      |  |      |        |      |  |      |        |            |  |       |        |  |  |   |       |  |  |   |         |     |  |   |         | 
|Term Loan Facility               |  | $    |       |      |  | $    | 2,063  |      |  | $    | 2,750  |            |  | $     | 2,750  |  |  | $ | 2,750 |  |  | $ | 264,687 |     |  | $ | 275,000 | 
|Revolving credit facility        |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |  |  |   |      |  |  |   | 70,000  | (a) |  |   | 70,000  | 
|Other Debt                       |  |      | 1,637  |      |  |      | 2,304  |      |  |      | 1,097  |            |  |       | 2,889  |  |  |   |      |  |  |   |        |     |  |   | 7,927   | 
|                                 |  |      |        |      |  |      |        |      |  |      |        |            |  |       |        |  |  |   |       |  |  |   |         |     |  |   |         | 
|                                 |  |      | 1,637  |      |  |      | 4,367  |      |  |      | 3,847  |            |  |       | 5,639  |  |  |   | 2,750 |  |  |   | 334,687 |     |  |   | 352,927 | 
|Other commitments:               |  |      |        |      |  |      |        |      |  |      |        |            |  |       |        |  |  |   |       |  |  |   |         |     |  |   |         | 
|Net minimum rentals (b)          |  |      | 17,517 |      |  |      | 11,949 |      |  |      | 8,679  |            |  |       | 6,436  |  |  |   | 5,784 |  |  |   | 374     |     |  |   | 50,739  | 
|Other commercial
commitments (c) |  |      | 500    |      |  |      | 500    |      |  |      | 500    |            |  |       | 500    |  |  |   | 500   |  |  |   |        |     |  |   | 2,500   | 
|                                 |  |      |        |      |  |      |        |      |  |      |        |            |  |       |        |  |  |   |       |  |  |   |         |     |  |   |         | 
|Total commitments                |  | $    | 19,654 |      |  | $    | 16,816 |      |  | $    | 13,026 |            |  | $     | 12,575 |  |  | $ | 9,034 |  |  | $ | 335,061 |     |  | $ | 406,166 | 
|                                 |  |      |        |      |  |      |        |      |  |      |        |            |  |       |        |  |  |   |       |  |  |   |         |     |  |   |         | 

42



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003



| | (a) |  | Represents the initial revolver balance drawn in September 2003.                                                                                                                                                                                                                                                                                                                                                
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Represents primarily the multi-year agreements our discontinued
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, net of sublease income.                                                                                                                                             
|
| | (c) |  | Pursuant to various agreements, we are obligated to pay certain
royalty payments to third parties, which range from $10 to $500 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
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. The
total of such guarantees currently outstanding is less than $0.3 million as of
June 30, 2003.

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 information regarding of our significant
accounting policies is presented below.

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.

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.

Intangible assets

Intangible assets consist primarily of 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

Estimates

The preparation of the consolidated financial statements 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. The use of estimates is inherent in such
accounts as the reserve for bad debts, inventory obsolescence reserve and
deferred tax valuations. Actual results could differ from those estimates.

Revenue recognition

Revenue from sales of gaming machines is generally recognized at the time
products is shipped and title has passed to the customer. The Company sells
gaming equipment on normal credit terms (generally 2%, net 30) and also offers
financing to qualified customers for periods generally between 6 and 48 months.

Revenue from sales of computerized monitoring systems is recognized in
accordance with the AICPAs Statement of Position 97-2 (SOP 97-2) Software
Revenue Recognition. In accordance with the provisions of SOP 97-2, the
contracts for the sales of computerized monitoring units are considered to have
multiple elements because they include hardware, software, installation,
supervision, training, and post-contract customer support. Accordingly,
revenues from the sale of systems are deferred and begin to be recognized at
the point when the system is deemed to be functionally operational, and the
residual method is used to recognize revenue for the remaining elements as they
are delivered, each having vendor-specific objective evidence of fair values.
Post-contract customer support revenues are recognized over the period of the
support agreement (generally one year).

Our Bally Gaming and Systems business unit earns revenues from recurring
revenue sources that consist of the operations of the wide-area progressive
jackpot systems and revenues from gaming machines placed in a casino on a daily
lease or rental basis. Revenue from these sources is recognized based on the
contractual terms of the participation or rental agreements and is generally
based on a share of money wagered, a share of the net winnings, or on a fixed
daily rental rate basis.

In accordance with industry practice, we recognize gaming revenues in our route
and casino operations as the net win from gaming machine operations, which is
the difference between coins and currency deposited into the machines and
payments to customers and, for other games, the difference between gaming wins
and losses. We recognize total net win from gaming machines as revenues for
route operations which we operate pursuant to revenue-sharing arrangements and
revenue-sharing payments (either fixed or variable) as a cost of route
operations.

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.

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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

Impairment of Long-lived Assets

The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets to be held and used are
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset, undiscounted and without interest.
If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets.

Research and development

Research and development costs are charged to expense as incurred because the
establishment of technological feasibility of products and their availability
for sale (pending regulatory approval) have substantially coincided.

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, 2003, the aggregate outstanding principal amount of our
long-term indebtedness including current maturities was $345.2 million from our
continuing operations and $7.2 million from our discontinued operations. Upon
the completion of the Refinancing in September 2003, we replaced our existing
bank debt and 10% Senior Subordinated Notes with approximately $275 million of
term loans, and $70 million drawn on the revolving credit facility.

Our new credit facility contains 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 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 and to require us to apply all of our available cash to repay such
borrowings. 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 were to be accelerated, there can be no assurance that our
assets would be sufficient to repay such indebtedness in full.

Our obligation to make principal and interest payments on outstanding
indebtedness, and to comply with the covenants in 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;

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

(ii)  the bank facility 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 casino enterprise systems currently consists of IGT,
Aristocrat, Acres Gaming, Inc., MIS, and, to a lesser extent, Konami 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.

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.

Route Operations (Discontinued 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

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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.

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
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.
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.

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, 2003, Bally Gaming and Systems has $31.6 million of receivables from
customers in 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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.

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.

We pay and expect to continue to pay substantial taxes and fees in Nevada and
Mississippi. The New Jersey legislature recently enacted an eight percent tax
on the proceeds we receive from the operation of wide-area progressive slot
machines in Atlantic City casinos. We 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.

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 2002 and 2003, 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.

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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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

The results of the sensitivity analysis at June 30, 2003, are as follows:

Interest Rate Risk:

Upon completion of the Refinancing in September 2003, we had total debt of
approximately $360 million, consisting primarily of the new $275 million term
loan and the initial $70 million borrowing on the revolver. The bank facility
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 $4.0 million on a pre-tax
basis.

Foreign Currency Exchange Rate Risk:

Our foreign subsidiaries generally use their domestic currency as their
functional currency. A 10% fluctuation in the exchange rates of these
currencies against the U.S. dollar, would result in a corresponding change in
earnings reported in the consolidated group of approximately $0.3 million.

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 15, 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

None.




|         |  |                        
|-------- |  | -----------------------
|ITEM 9a. |  | CONTROLS AND PROCEDURES

The Companys management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of the companys disclosure controls and procedures as defined in
Exchange Act Rule 13a-15(e) as described at the end of the period covered by
this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that as of the end of the period covered by this
report, the companys disclosure controls and procedures were effective.
During the period covered by this report there have been no changes in the
Companys internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect the Companys internal
control over financial reporting.

49



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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003




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. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by items 10, 11, 12, 13 and 14 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.




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
|    |  | Consolidated Balance Sheets as of June 30, 2002 and 2003                                                      |  | F - 2
|    |  | Consolidated Statements of Operations for the Years Ended June 30, 2001, 2002 and 2003                        |  | F - 3
|    |  | Consolidated Statements of Stockholders Equity (Deficiency) for the Years Ended June 30,
2001, 2002 and 2003 |  | F - 4
|    |  | Consolidated Statements of Cash Flows for the Years Ended June 30, 2001, 2002 and 2003                        |  | F - 5
|    |  | Notes to Consolidated Financial Statements                                                                    |  | F - 6
|    |  |                                                                                                               |  |      
|2.  |  | Consolidated Supplemental Schedules:                                                                          |  |      
|    |  | Not applicable.                                                                                               |  |      
|    |  |                                                                                                               |  |      
|3.  |  | Exhibits:                                                                                                     |  |      

|        |  |                                                                                                                                                                                                                                                                    
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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).           

50



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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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     |  | Loan Agreement among Alliance Gaming Corporation and various lenders, and
Bank of America, N.A. (Administrative Agent), dated September 3, 2003
(incorporated by reference to Alliances 8-K filed on September 12, 2003).                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.2     |  | 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).                                                                                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.3     |  | 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).                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.4     |  | 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).                                                                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.5     |  | Form of Right Certificate (attached as Exhibit B to the Rights Agreement)
(incorporated herein by reference to Form 8-A dated March 10, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.6     |  | 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).                                                                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.7     |  | Stock Purchase Agreement for the sale of Bally Wulff (incorporated herein
by reference to Alliances Form 8-K filed on August 5, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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).*                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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).

51



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

|        |  |                                                                                                                                                                                                                                                                                                                                                             
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                             
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|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).
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|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).                                                                                                                             

52



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ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

|        |  |                                                                                                                                                                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                          
|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   |  | 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).                      
|        |  |                                                                                                                                                                                                                                                                                                          
|10.18   |  | 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).
|        |  |                                                                                                                                                                                                                                                                                                          
|10.19   |  | 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).  
|        |  |                                                                                                                                                                                                                                                                                                          
|10.20   |  | 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).             
|        |  |                                                                                                                                                                                                                                                                                                          
|10.21   |  | 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).*                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                          
|10.22   |  | 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).*                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                          
|10.23   |  | 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).*                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                          
|10.24   |  | Employment Agreement, dated July 1, 1997 between the Company and Anthony
DiCesare (incorporated herein by reference to the Companys Annual Report
on Form 10-K dated June 30, 1997).*                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                          
|10.25   |  | 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).                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                          
|10.26   |  | 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).                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                          
|10.27   |  | 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). *                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                          
|10.28   |  | 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).*                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                          
|10.29   |  | 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).*                                                                                                     

53



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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

|                                                               |  |                                                                                                                                                                                                                   
|-------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                                                        |  |                                                                                                                                                                                                                   
|Number                                                         |  | Description                                                                                                                                                                                                       
|                                                               |  |                                                                                                                                                                                                                   
|10.30                                                          |  | Amendment to Employment Agreement between the Company and Anthony L.
DiCesare, effective May 29, 2003 (incorporated by reference herein).*                                                                        
|                                                               |  |                                                                                                                                                                                                                   
|10.31                                                          |  | Amendment to Employment Agreement between the Company and Joel
Kirschbaum, effective May 29, 2003 (incorporated by reference herein).*                                                                            
|                                                               |  |                                                                                                                                                                                                                   
|10.32                                                          |  | 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).    
|                                                               |  |                                                                                                                                                                                                                   
|10.33                                                          |  | Alliance Gaming Corporation 2001 Long-Term Incentive Plan, including
amendments No. 1 and No. 2 (incorporated herein by reference to the
Companys Form S-8 filed January 22, 2002 Registration Number 333-81154).
|                                                               |  |                                                                                                                                                                                                                   
|10.34                                                          |  | Amendment No. 3 to the Alliance Gaming Corporation 2001 Long-Term
Incentive Plan (incorporated herein by reference to the Companys Form S-8
filed May 8, 2003 Registration Number 333-105087).                   
|                                                               |  |                                                                                                                                                                                                                   
|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                                                                                                                                                                                  
|                                                               |  |                                                                                                                                                                                                                   
|31.1                                                           |  | Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of
the Securities Act of 1934, as amended.                                                                                                   
|                                                               |  |                                                                                                                                                                                                                   
|31.2                                                           |  | Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of
the Securities Act of 1934, as amended.                                                                                                   
|                                                               |  |                                                                                                                                                                                                                   
|32.1                                                           |  | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.                                                               
|                                                               |  |                                                                                                                                                                                                                   
|32.2                                                           |  | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.                                                               
|                                                               |  |                                                                                                                                                                                                                   
|*     Management contract or compensatory plan or arrangement.
|                                                               |  |                                                                                                                                                                                                                   
|ITEM 15 (continued).                                          
|                                                               |  |                                                                                                                                                                                                                   
|(b)                                                            |  | Reports on Form 8-K:                                                                                                                                                                                              
|                                                               |  |                                                                                                                                                                                                                   
|                                                               |  | On April 14, 2003 the Company furnished its third quarter 2003 earnings
press release on Form 8-K.                                                                                                                

54



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##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2003

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 24,2003

|   |  |                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------
|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. Miodunski

Robert L. Miodunski |  | President and Chief Executive Officer
(Principal Executive Officer)                                    |  | September 24,2003
|                                             |  |                                                                                                        |  |                  
|/s/ Robert L. Saxton

Robert L. Saxton       |  | Sr. Vice President, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer) |  | September 24,2003
|                                             |  |                                                                                                        |  |                  
|/s/ Jacques Andre
Jacques Andre              |  | Director                                                                                               |  | September 24,2003
|                                             |  |                                                                                                        |  |                  
|/s/ Anthony DiCesare
Anthony DiCesare        |  | Director                                                                                               |  | September 24,2003
|                                             |  |                                                                                                        |  |                  
|/s/ Joel Kirschbaum
Joel Kirschbaum          |  | Director                                                                                               |  | September 24,2003
|                                             |  |                                                                                                        |  |                  
|/s/ David Robbins
David Robbins              |  | Director and Chairman of the Board                                                                     |  | September 24,2003
|                                             |  |                                                                                                        |  |                  
|/s/ Richard Haddrill
Richard Haddrill        |  | Director                                                                                               |  | September 24,2003
|                                             |  |                                                                                                        |  |                  
|/s/ Kevin Verner
Kevin Verner                |  | Director                                                                                               |  | September 24,2003

55



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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 (the Company) as of June 30, 2002
and 2003, and the related consolidated statements of operations,
stockholders equity (deficiency), and cash flows for each of the three
years in the period ended June 30, 2003. These financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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, 2002 and 2003, and the
results of their operations and their cash flows for each of the three
years in the period ended June 30, 2003, in conformity with accounting
principles generally accepted in the United States of America.

As described in Note 13 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, as of July 1, 2001.

DELOITTE & TOUCHE LLP
Las Vegas, Nevada
August 4, 2003, except for Note 5, as to which the date is September 16, 2003

F-1



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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,
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        | 2002     |         | 2003    
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |         
|                                                                                                       |                                                                                                                                 |                            |                           | ASSETS                                     |        |          |         |          |        |         |         | 
|Current assets:                                                                                        |                                                                                                                                 |                            |                           |                                            |        |          |         |         
|                                                                                                       | Cash and cash equivalents                                                                                                       |                            | $                         | 33,240                                     |        |          | $       | 40,158   |       
|                                                                                                       | Accounts and notes receivable, net of allowance
for doubtful accounts of $8,441 and $6,993                                      |                            |                           | 60,274                                     |        |          |         | 98,408   |       
|                                                                                                       | Inventories, net of reserves of $7,814 and $6,503                                                                               |                            |                           | 30,434                                     |        |          |         | 32,172   |       
|                                                                                                       | Deferred tax assets, net                                                                                                        |                            |                           | 27,586                                     |        |          |         | 44,821   |       
|                                                                                                       | Other current assets                                                                                                            |                            |                           | 8,333                                      |        |          |         | 8,516    |       
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       
|                                                                                                       |                                                                                                                                 |                            | Total current assets      |                                            |        | 159,867  |         |          |        | 224,075 |        
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       
|Long-term investments (restricted)                                                                     |                                                                                                                                 |                            | 896                       |                                            |        |          | 864     |         
|Long-term receivables, net of allowance for doubtful
accounts of $23 and $15                           |                                                                                                                                 |                            | 642                       |                                            |        |          | 14,865  |         
|Leased gaming equipment, net of accumulated depreciation of $9,931 and $15,703                         |                                                                                                                                 |                            | 19,560                    |                                            |        |          | 25,792  |         
|Property, plant and equipment, net of accumulated depreciation and
amortization of $20,347 and $26,850 |                                                                                                                                 |                            | 60,134                    |                                            |        |          | 66,530  |         
|Goodwill, net of accumulated amortization of $6,517 and $6,620                                         |                                                                                                                                 |                            | 47,713                    |                                            |        |          | 64,794  |         
|Intangible assets, net of accumulated amortization of $8,629 and $12,267                               |                                                                                                                                 |                            | 22,139                    |                                            |        |          | 26,890  |         
|Deferred tax assets, net                                                                               |                                                                                                                                 |                            | 17,489                    |                                            |        |          |        |         
|Assets of discontinued operations held for sale                                                        |                                                                                                                                 |                            | 130,396                   |                                            |        |          | 100,775 |         
|Other assets, net of reserves of $1,788 and $1,788                                                     |                                                                                                                                 |                            | 1,044                     |                                            |        |          | 580     |         
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       
|                                                                                                       |                                                                                                                                 |                            |                           | Total assets                               |        | $        | 459,880 |          |        | $       | 525,165 | 
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       
|                                                                                                       |                                                                                                                                 |                            |                           | LIABILITIES AND STOCKHOLDERS EQUITY       |        |          |         |          |        |         |         | 
|Current liabilities:                                                                                   |                                                                                                                                 |                            |                           |                                            |        |          |         |         
|                                                                                                       | Accounts payable                                                                                                                |                            | $                         | 14,323                                     |        |          | $       | 22,912   |       
|                                                                                                       | Accrued liabilities                                                                                                             |                            |                           | 32,954                                     |        |          |         | 30,913   |       
|                                                                                                       | Jackpot liabilities                                                                                                             |                            |                           | 5,855                                      |        |          |         | 10,604   |       
|                                                                                                       | Current maturities of long-term debt                                                                                            |                            |                           | 3,990                                      |        |          |         | 3,537    |       
|                                                                                                       | Liabilities of discontinued operations held for sale                                                                            |                            |                           | 15,110                                     |        |          |         | 13,494   |       
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       
|                                                                                                       |                                                                                                                                 |                            | Total current liabilities |                                            |        | 72,232   |         |          |        | 81,460  |        
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       
|Long-term debt, net                                                                                    |                                                                                                                                 |                            | 337,809                   |                                            |        |          | 341,678 |         
|Deferred tax liabilities                                                                               |                                                                                                                                 |                            |                          |                                            |        |          | 5,680   |         
|Other liabilities                                                                                      |                                                                                                                                 |                            | 2,620                     |                                            |        |          | 3,387   |         
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       
|                                                                                                       |                                                                                                                                 |                            |                           | Total liabilities                          |        |          | 412,661 |          |        |         | 432,205 | 
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       
|Minority interest                                                                                      |                                                                                                                                 |                            | 1,233                     |                                            |        |          | 1,330   |         
|Commitments and contingencies                                                                          |                                                                                                                                 |                            |                           |                                            |        |          |         |         
|Stockholders equity:                                                                                  |                                                                                                                                 |                            |                           |                                            |        |          |         |         
|                                                                                                       | Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value;
120 shares and 115 shares issued and outstanding |                            |                           | 12                                         |        |          |         | 12       |       
|                                                                                                       | Common Stock, $.10 par value; 100,000,000 shares authorized;
49,227,000 and 49,933,000 shares issued                            |                            |                           | 4,927                                      |        |          |         | 4,996    |       
|                                                                                                       | Treasury stock at cost, 513,000 shares                                                                                          |                            |                           | (501                                       | )      |          |         | (501     | )     
|                                                                                                       | Additional paid-in capital                                                                                                      |                            |                           | 157,866                                    |        |          |         | 163,267  |       
|                                                                                                       | Accumulated other comprehensive income (loss)                                                                                   |                            |                           | (19,364                                    | )      |          |         | 1,287    |       
|                                                                                                       | Accumulated deficit                                                                                                             |                            |                           | (96,954                                    | )      |          |         | (77,431  | )     
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       
|                                                                                                       |                                                                                                                                 | Total stockholders equity |                           |                                            | 45,986 |          |         |          | 91,630 |        
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       
|                                                                                                       |                                                                                                                                 |                            |                           | Total liabilities and stockholders equity |        | $        | 459,880 |          |        | $       | 525,165 | 
|                                                                                                       |                                                                                                                                 |                            |                           |                                            |        |          |         |          |       

See accompanying notes to consolidated financial statements.

F-2



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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,
|                                                                 |                                                                                                    |   |                     
|                                                                 |                                                                                                    |   | 2001                 |         | 2002 |   | 2003   
|                                                                 |                                                                                                    |   |                      |         |      |   |        
|Revenues:                                                        |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 | Gaming equipment and systems                                                                       |   | $                    | 161,536 |      |   | $       | 223,703 |   |   | $       | 335,436 |  
|                                                                 | Casino operations                                                                                  |   |                      | 73,499  |      |   |         | 72,371  |   |   |         | 72,124  |  
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|                                                                 |                                                                                                    |   | 235,035              |         |      |   | 296,074 |         |   |   | 407,560 |        
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|Costs and expenses:                                              |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 | Cost of gaming equipment and systems                                                               |   |                      | 77,423  |      |   |         | 98,720  |   |   |         | 144,352 |  
|                                                                 | Cost of casino operations                                                                          |   |                      | 32,541  |      |   |         | 32,193  |   |   |         | 32,643  |  
|                                                                 | Selling, general and administrative                                                                |   |                      | 60,746  |      |   |         | 78,471  |   |   |         | 99,071  |  
|                                                                 | Research and development costs                                                                     |   |                      | 11,028  |      |   |         | 15,012  |   |   |         | 19,955  |  
|                                                                 | Depreciation and amortization                                                                      |   |                      | 12,886  |      |   |         | 14,570  |   |   |         | 21,603  |  
|                                                                 | Unusual item                                                                                       |   |                      | 6,489   |      |   |         |        |   |   |         |        |  
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|                                                                 |                                                                                                    |   | 201,113              |         |      |   | 238,966 |         |   |   | 317,624 |        
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|Operating income                                                 |                                                                                                    |   | 33,922               |         |      |   | 57,108  |         |   |   | 89,936  |        
|Other income (expense):                                          |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 | Interest income                                                                                    |   |                      | 639     |      |   |         | 379     |   |   |         | 221     |  
|                                                                 | Interest expense                                                                                   |   |                      | (32,941 | )    |   |         | (28,230 | ) |   |         | (25,645 | )
|                                                                 | Minority interest                                                                                  |   |                      | (2,165  | )    |   |         | (1,935  | ) |   |         | (2,009  | )
|                                                                 | Other, net                                                                                         |   |                      | (2,618  | )    |   |         | 1,235   |   |   |         | 242     |  
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|Income (loss) from continuing operations before income taxes     |                                                                                                    |   | (3,163               | )       |      |   | 28,557  |         |   |   | 62,745  |        
|Income tax expense (benefit)                                     |                                                                                                    |   | (1,313               | )       |      |   | (38,440 | )       |   |   | 22,316  |        
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|                                                                 | Net income (loss) from continuing operations                                                       |   |                      | (1,850  | )    |   |         | 66,997  |   |   |         | 40,429  |  
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|Discontinued operations:                                         |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 | Loss on sale of wall machines and amusement games unit, net                                        |   |                      |        |      |   |         |        |   |   |         | (25,358 | )
|                                                                 | Income (loss) from discontinued operations of wall machines and
amusement games business unit, net |   |                      | 2,453   |      |   |         | (17,167 | ) |   |         | (895    | )
|                                                                 | Income from discontinued operations of Nevada Route, net                                           |   |                      | 12,339  |      |   |         | 12,580  |   |   |         | 4,059   |  
|                                                                 | Income from discontinued operations of Louisiana Route, net                                        |   |                      | 1,540   |      |   |         | 1,439   |   |   |         | 1,288   |  
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|Income (loss) from discontinued operations                       |                                                                                                    |   | 16,332               |         |      |   | (3,148  | )       |   |   | (20,906 | )      
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|                                                                 | Net income                                                                                         |   | $                    | 14,482  |      |   | $       | 63,849  |   |   | $       | 19,523  |  
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|Basic earnings (loss) per share:                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 | Continuing operations                                                                              |   | $                    | (0.04   | )    |   | $       | 1.45    |   |   | $       | 0.82    |  
|                                                                 | Discontinued operations                                                                            |   |                      | 0.39    |      |   |         | (0.07   | ) |   |         | (0.42   | )
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|                                                                 |                                                                                                    | $ | 0.35                 |         |      | $ | 1.38    |         |   | $ | 0.40    |        
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|Diluted earnings (loss) per share:                               |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |        
|                                                                 | Continuing operations                                                                              |   | $                    | (0.04   | )    |   | $       | 1.41    |   |   | $       | 0.81    |  
|                                                                 | Discontinued operations                                                                            |   |                      | 0.38    |      |   |         | (0.07   | ) |   |         | (0.42   | )
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|                                                                 |                                                                                                    | $ | 0.34                 |         |      | $ | 1.34    |         |   | $ | 0.39    |        
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|Weighted average common shares outstanding                       |                                                                                                    |   | 41,236               |         |      |   | 46,281  |         |   |   | 49,153  |        
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  
|Weighted average common and common share equivalents outstanding |                                                                                                    |   | 42,228               |         |      |   | 47,507  |         |   |   | 50,139  |        
|                                                                 |                                                                                                    |   |                      |         |      |   |         |         |   |   |         |         |  

See accompanying notes to consolidated financial statements.

F-3



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
(In 000s)

|                                                                                  |                            |  |              |  |          |   |               |  |         |   |               |   |               |   |         |   |              |   |         |   |               |   |             |   |  |   |          |   |       |   |         |        | 
|--------------------------------------------------------------------------------- | -------------------------- |  | ------------ |  | -------- | - | ------------- |  | ------- | - | ------------- | - | ------------- | - | ------- | - | ------------ | - | ------- | - | ------------- | - | ----------- | - |  | - | -------- | - | ----- | - | ------- | ------ | 
|                                                                                  |                            |  |              |  |          |   |               |  |         |   |               |   |               |   |         |   |              |   |         |   |               |   | Accumulated |   |  |   |          |   | Total
|                                                                                  |                            |  | Common Stock |  |          |   |               |  |         |   |               |   | Additional    |   | Other   |   |              |   |         |   | Stockholders
|                                                                                  |                            |  |              |  | Series E |   | Treasury      |  | Paid-in |   | Comprehensive |   | Accum.        |   | Equity 
|                                                                                  |                            |  | Shares       |  | Dollars  |   | Special Stock |  | Stock   |   | Capital       |   | Income (loss) |   | Deficit |   | (Deficiency)
|                                                                                  |                            |  |              |  |          |   |               |  |         |   |               |   |               |   |         |   |             
|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  |       
|                                                                                  |                            |  |              |  |          |   |               |  |         |   |               |   |               |   |         |   |              |   |         |   |               |   |             |   |  |   |          |   |       |   |         |       
|Net income                                                                        |                            |  |             |  |          |   |              |  |         |   |              |   |               |   |        |   |              |   |        |   |               |   |            |   |  |   | 19,523   |   |       |   | 19,523  |       
|Foreign currency translation
adjustment                                           |                            |  |             |  |          |   |              |  |         |   |              |   |               |   |        |   |              |   |        |   |               |   | 8,760       |   |  |   |         |   |       |   | 8,760   |       
|Reversal of foreign currency translation
adjustments for Bally Wulff
(see Note 3) |                            |  |             |  |          |   |              |  |         |   |              |   |               |   |        |   |              |   |        |   |               |   | 11,891      |   |  |   |         |   |       |   | 11,891  |       
|                                                                                  |                            |  |              |  |          |   |               |  |         |   |               |   |               |   |         |   |              |   |         |   |               |   |             |   |  |   |          |   |       |   |         |       
|                                                                                  | Total comprehensive income |  |              |  |          |   |               |  |         |   |               |   |               |   |         |   |              |   |         |   |               |   |             |   |  |   |          |   |       |   |         | 40,174 | 
|Shares issued upon exercise of
options                                            |                            |  | 706          |  |          |   | 69            |  |         |   |              |   |               |   |        |   |              |   | 2,487   |   |               |   |            |   |  |   |         |   |       |   | 2,556   |       
|Tax benefit of employee stock
option exercise                                     |                            |  |             |  |          |   |              |  |         |   |              |   |               |   |        |   |              |   | 2,914   |   |               |   |            |   |  |   |         |   |       |   | 2,914   |       
|                                                                                  |                            |  |              |  |          |   |               |  |         |   |               |   |               |   |         |   |              |   |         |   |               |   |             |   |  |   |          |   |       |   |         |       
|Balances at June 30, 2003                                                         |                            |  | 49,933       |  |          | $ | 4,996         |  |         | $ | 12            |   |               | $ | (501    | ) |              | $ | 163,267 |   |               | $ | 1,287       |   |  | $ | (77,431  | ) |       | $ | 91,630  |       
|                                                                                  |                            |  |              |  |          |   |               |  |         |   |               |   |               |   |         |   |              |   |         |   |               |   |             |   |  |   |          |   |       |   |         |       

See accompanying notes to consolidated financial statements.

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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000s)

|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |   |         |         |  
|-------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------------------------------------------------- | - | -------------------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | -
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   | Years Ended June 30,
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                     
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   | 2001                 |         | 2002    |   | 2003   
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |        
|Cash flows from operating activities of continuing operations: |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |        
|                                                               | Net income                                                                         |                                                                                                            | $                                           | 14,482                                                                       |   |                      | $       | 63,849  |   |         | $       | 19,523  |  
|                                                               |                                                                                    | Adjustments to reconcile net income
to net cash provided by operating activities of continuing operations: |                                             |                                                                              |   |                      |         |         |   |         |         |         |   |        
|                                                               |                                                                                    |                                                                                                            | (Income) loss from discontinued operations  |                                                                              |   | (16,332              | )       |         |   | (20,981 | )       |         |   | (4,452  | )      
|                                                               |                                                                                    |                                                                                                            | Write down of goodwill and other assets     |                                                                              |   | 3,164                |         |         |   | 24,129  |         |         |   | 38,728  |        
|                                                               |                                                                                    |                                                                                                            | Depreciation and amortization               |                                                                              |   | 12,886               |         |         |   | 14,570  |         |         |   | 21,603  |        
|                                                               |                                                                                    |                                                                                                            | Deferred income taxes                       |                                                                              |   | (513                 | )       |         |   | (37,675 | )       |         |   | 5,111   |        
|                                                               |                                                                                    |                                                                                                            | Provision for losses on receivables         |                                                                              |   | 1,751                |         |         |   | 2,521   |         |         |   | 1,537   |        
|                                                               |                                                                                    |                                                                                                            | Other                                       |                                                                              |   | 2,232                |         |         |   | (773    | )       |         |   | 290     |        
|                                                               | Change in operating assets and liabilities, net of effects of
businesses acquired: |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|                                                               |                                                                                    |                                                                                                            | Accounts and notes receivable               |                                                                              |   | (983                 | )       |         |   | (9,401  | )       |         |   | (50,448 | )      
|                                                               |                                                                                    |                                                                                                            | Inventories                                 |                                                                              |   | (6,140               | )       |         |   | (2,036  | )       |         |   | 1,001   |        
|                                                               |                                                                                    |                                                                                                            | Other current assets                        |                                                                              |   | 734                  |         |         |   | (1,516  | )       |         |   | 1,377   |        
|                                                               |                                                                                    |                                                                                                            | Accounts payable                            |                                                                              |   | 9,814                |         |         |   | (4,863  | )       |         |   | 7,282   |        
|                                                               |                                                                                    |                                                                                                            | Accrued liabilities and jackpot liabilities |                                                                              |   | 12,831               |         |         |   | (82     | )       |         |   | 2,577   |        
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|                                                               |                                                                                    |                                                                                                            |                                             | Net cash provided by operating activities of continuing operations           |   |                      | 33,926  |         |   |         | 27,742  |         |   |         | 44,129  |  
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|Cash flows from investing activities of continuing operations: |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |        
|                                                               | Additions to property, plant and equipment                                         |                                                                                                            |                                             | (5,630                                                                       | ) |                      |         | (8,166  | ) |         |         | (11,857 | )
|                                                               | Additions to leased gaming equipment                                               |                                                                                                            |                                             | (11,682                                                                      | ) |                      |         | (15,099 | ) |         |         | (21,357 | )
|                                                               | Acquisitions, net of cash acquired                                                 |                                                                                                            |                                             |                                                                             |   |                      |         | (15,333 | ) |         |         | (11,528 | )
|                                                               | Acquisition of assets formerly under operating leases                              |                                                                                                            |                                             | (1,271                                                                       | ) |                      |         |        |   |         |         |        |  
|                                                               | Additions to other long-term assets                                                |                                                                                                            |                                             | (2,029                                                                       | ) |                      |         | (132    | ) |         |         | (3,570  | )
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|                                                               |                                                                                    |                                                                                                            |                                             | Net cash used in investing activities of continuing operations               |   |                      | (20,612 | )       |   |         | (38,730 | )       |   |         | (48,312 | )
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|Cash flows from financing activities of continuing operations: |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |        
|                                                               | Capitalized debt issuance costs                                                    |                                                                                                            |                                             | (6,969                                                                       | ) |                      |         | (662    | ) |         |         |        |  
|                                                               | Proceeds from issuance of long-term debt                                           |                                                                                                            |                                             | 190,000                                                                      |   |                      |         |        |   |         |         |        |  
|                                                               | Payoff of debt from refinancing                                                    |                                                                                                            |                                             | (146,725                                                                     | ) |                      |         |        |   |         |         |        |  
|                                                               | Reduction of long-term debt                                                        |                                                                                                            |                                             | (2,353                                                                       | ) |                      |         | (1,839  | ) |         |         | (4,741  | )
|                                                               | Net change in revolving credit facility                                            |                                                                                                            |                                             | (23,303                                                                      | ) |                      |         |        |   |         |         |        |  
|                                                               | Purchase of common stock for treasury                                              |                                                                                                            |                                             | (436                                                                         | ) |                      |         |        |   |         |         |        |  
|                                                               | Proceeds from exercise of stock options and warrants                               |                                                                                                            |                                             | 3,673                                                                        |   |                      |         | 6,706   |   |         |         | 2,556   |  
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|                                                               |                                                                                    |                                                                                                            |                                             | Net cash provided by (used in) financing activities of
continuing operations |   |                      | 13,887  |         |   |         | 4,205   |         |   |         | (2,185  | )
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|                                                               | Effect of exchange rate changes on cash                                            |                                                                                                            |                                             | (366                                                                         | ) |                      |         | 709     |   |         |         | 286     |  
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|                                                               | Cash (used in) provided by discontinued operations                                 |                                                                                                            |                                             | (8,056                                                                       | ) |                      |         | 8,657   |   |         |         | 13,000  |  
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|                                                               | Cash and cash equivalents:                                                         |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|                                                               |                                                                                    |                                                                                                            |                                             | Increase for year                                                            |   |                      | 18,779  |         |   |         | 2,583   |         |   |         | 6,918   |  
|                                                               |                                                                                    |                                                                                                            |                                             | Balance, beginning of year                                                   |   |                      | 11,878  |         |   |         | 30,657  |         |   |         | 33,240  |  
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  
|                                                               |                                                                                    |                                                                                                            |                                             | Balance, end of year                                                         |   | $                    | 30,657  |         |   | $       | 33,240  |         |   | $       | 40,158  |  
|                                                               |                                                                                    |                                                                                                            |                                             |                                                                              |   |                      |         |         |   |         |         |         |  

See accompanying notes to consolidated financial statements.

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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|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 operates two regional casinos
and; and (iii) owns and manages a significant installed base of gaming
machines in its route operations. The Company previously operated in
Germany under the name Bally Wulff, which designed, manufactured and
distributed wall-mounted gaming machines and distributed third-party
manufactured amusement games.                                    
|  
|   |  | As is more fully described in Note 3, in July 2003, the Company announced
that it had entered into definitive agreements for the sale of its route
operations and Bally Wulff. Accordingly, these businesses have been
classified as discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | 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.                                                                                                                                                                                                                                                              
|  
|   |  | The Company is the general partner of Rainbow Casino Vicksburg Partnership
(RCVP) the partnership that operates the Rainbow Casino. Pursuant to
transactions consummated in March 1995, the Rainbow Corporation, which was
the former general partner of RCVP became a limited partner 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 when
annual revenues exceed $35.0 million but only on such incremental amount),
payable quarterly through December 31, 2010. The Company holds the
remaining economic interest in the partnership.       
|  
|   |  | The Company records minority interest expense to reflect the portion of
the earnings of VSI and RCVP attributable to the minority shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | 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 cash utilized in Casino Operations which is held
in vaults, cages or change banks which totaled $4.5 million and $3.8
million at June 30, 2002 and 2003, respectively. The Company also
maintains jackpot reserve accounts totaling approximately $6.3 million and
$14.5 million at June 30, 2002 and 2003, respectively, to ensure
availability of funds to pay wide-area progressive jackpot awards.
|  
|   |  | The Companys route operations cash balances totaled $26.2 million and
$27.6 million as of June 30, 2002 and 2003, respectively, which is
included in assets of discontinued operations held for sale in the
accompanying consolidated balance sheets (see Note 3).                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                              

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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | Inventories, net of reserves, consist of the following (in 000s):
| |  | ------------------------------------------------------------------

|                |       |   |        |        |      |   |        |        | 
|--------------- | ----- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                |       |   | 2002   |        | 2003
|                |       |   |        |        |     
|Raw materials   |       | $ | 13,548 |        |      | $ | 13,720 |       
|Work-in-process |       |   | 241    |        |      |   | 789    |       
|Finished goods  |       |   | 16,645 |        |      |   | 17,663 |       
|                |       |   |        |        |      |   |        |       
|                | Total |   | $      | 30,434 |      |   | $      | 32,172 | 
|                |       |   |        |        |      |   |        |       



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

|                                               |                                          |   |         |        |      |   |         |        | 
|---------------------------------------------- | ---------------------------------------- | - | ------- | ------ | ---- | - | ------- | ------ | 
|                                               |                                          |   | 2002    |        | 2003
|                                               |                                          |   |         |        |     
|Land and land improvements                     |                                          | $ | 21,517  |        |      | $ | 21,531  |       
|Buildings and leasehold improvements           |                                          |   | 29,566  |        |      |   | 32,748  |       
|Gaming equipment                               |                                          |   | 20,171  |        |      |   | 25,549  |       
|Furniture, fixtures and equipment              |                                          |   | 9,227   |        |      |   | 13,552  |       
|Less accumulated depreciation and amortization |                                          |   | (20,347 | )      |      |   | (26,850 | )     
|                                               |                                          |   |         |        |      |   |         |       
|                                               | Total property, plant and equipment, net |   | $       | 60,134 |      |   | $       | 66,530 | 
|                                               |                                          |   |         |        |      |   |         |       



| |  | Recently issued accounting principles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 and 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. The
Company adopted FASB No. 145 effective June 30, 2002, and reclassified a
debt refinancing charge of $3.2 million incurred in the year ended June
30, 2001, from extraordinary loss to other expense in the accompanying
consolidated statements of operations.                  
|
| |  | 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. Adoption of FASB No. 146 did not have a
significant impact on our results of operations or financial position.
|
| |  | In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, which addresses
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. FIN 45 also
requires the recognition of a liability by a guarantor at the inception of
certain                                                                                                                                                                                                                                                                                                                                                                                                                                

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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | guarantees that are entered into or modified after December 31, 2002. The
Company has adopted FIN 45, which did not have any significant impact on
its results of operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In January 2003, FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which addresses
consolidation by business enterprises of variable interest entities that
either: (1) do not have sufficient equity investment at risk to permit
the entity to finance its activities without additional subordinated
financial support, or (2) the company will hold a significant variable
interest in, or have significant involvement with, an existing variable
interest entity. The Company adopted FIN 46, which did not have any
significant impact on its results of operations or financial position.
|
| |  | In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150 Accounting for Certain Financial Instruments With Characteristics
of Both Liability and Equity (FASB No. 150). FASB No. 150 establishes
standards for how companies classify and measure certain financial
instruments with characteristics of both liabilities and equity. The
Company does not believe that FASB No. 150 will have any significant
impact on its results of operations or financial position.                                                                                                                                         
|
| |  | In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21). EITF 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions
of EITF 00-21 will apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company is currently
evaluating the impact, if any, EITF 00-21 will have on its consolidated
financial position, results of operations or cash flow.               
|
| |  | Impairment of Long-Lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of long-lived assets to be held and
used are measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset, undiscounted
and without interest. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.                                                  
|
| |  | Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Intangible assets consist primarily of 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.                                                                                                                                                                                                                                                               

|                         |          |   |            |        |      |   |         |        | 
|------------------------ | -------- | - | ---------- | ------ | ---- | - | ------- | ------ | 
|                         |          |   | 2002       |        | 2003
|                         |          |   |            |        |     
|                         |          |   | (in 000s)
|Deferred financing costs |          | $ | 13,271     |        |      | $ | 13,511  |       
|Software                 |          |   | 12,309     |        |      |   | 19,501  |       
|License rights           |          |   | 1,875      |        |      |   | 2,592   |       
|Other                    |          |   | 3,313      |        |      |   | 3,553   |       
|                         |          |   |            |        |      |   |         |       
|                         | Subtotal |   |            | 30,768 |      |   |         | 39,157 | 
|Accumulated amortization |          |   | (8,629     | )      |      |   | (12,267 | )     
|                         |          |   |            |        |      |   |         |       
|                         | Net      |   | $          | 22,139 |      |   | $       | 26,890 | 
|                         |          |   |            |        |      |   |         |       

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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | Future amortization of intangible assets is scheduled as follows (in 000s):
| |  | ----------------------------------------------------------------------------

|                      |       |      |       |        |       | 
|--------------------- | ----- | ---- | ----- | ------ | ----- | 
|Years ending June 30,
|                     
|                      |       | 2004 |       | $      | 5,682 | 
|                      |       | 2005 |       |        | 5,383 | 
|                      |       | 2006 |       |        | 4,898 | 
|                      |       | 2007 |       |        | 2,688 | 
|                      |       | 2008 |       |        | 2,161 | 
|Thereafter            |       |      | 6,078 |       
|                      |       |      |       |       
|                      | Total |      | $     | 26,890 |      
|                      |       |      |       |       



| |  | Amortization expense totaled $2.7 million, $3.1 million and $4.8 million
for the fiscal years ended June 30, 2001, 2002, and 2003, respectively.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Accrued liabilities                                                                                                                             
|
| |  | Accrued liabilities consist of the following (in 000s):                                                                                        

|                                       |                           |   |        |        |      |   |        |        | 
|-------------------------------------- | ------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                       |                           |   | 2002   |        | 2003
|                                       |                           |   |        |        |     
|Payroll and related costs              |                           | $ | 10,311 |        |      | $ | 10,248 |       
|Interest                               |                           |   | 7,397  |        |      |   | 7,125  |       
|Professional and consulting fees       |                           |   | 1,002  |        |      |   | 855    |       
|Deferred revenues, sales and use taxes |                           |   | 5,777  |        |      |   | 4,404  |       
|Other                                  |                           |   | 8,467  |        |      |   | 8,281  |       
|                                       |                           |   |        |        |      |   |        |       
|                                       | Total accrued liabilities |   | $      | 32,954 |      |   | $      | 30,913 | 
|                                       |                           |   |        |        |      |   |        |       



| |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Revenue from sales of gaming machines is generally recognized at the time
products are shipped and title has passed to the customer. Games placed
with customers on a trial basis are not recognized as revenue until the
trial period ends and the customer accepts the games. The Company sells
gaming equipment on normal credit terms (generally 2%, net 30) and also
offers financing to qualified customers for periods generally between 6
and 48 months.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Revenue from sales of computerized monitoring systems is recognized in
accordance with the AICPAs Statement of Position 97-2 (SOP 97-2)
Software Revenue Recognition. In accordance with the provisions of SOP
97-2, the contracts for the sales of computerized monitoring units are
considered to have multiple elements because they include hardware,
software, installation, supervision, training, and post-contract customer
support. Accordingly, revenues from the sale of systems are deferred and
begin to be recognized at the point when the system is deemed to be
functionally operational, and the residual method is used to recognize
revenue for the remaining elements as they are delivered, each having
vendor-specific objective evidence of fair values. Post-contract customer
support revenues are recognized over the period of the support agreement
(generally one year).
|
| |  | Our Bally Gaming and Systems business unit earns revenues from recurring
revenue sources that consist of the operations of the wide-area
progressive jackpot systems and revenues from gaming machines placed in a
casino on a daily lease or rental basis. Revenue from these sources is
recognized based on the contractual terms of the participation or rental
agreements and is generally based on a share of money wagered, a share of
the net winnings, or on a fixed daily rental rate basis.                                                                                                                                                                                                                                                                                                                                                                                                        

F-9



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | In accordance with industry practice, we recognize gaming revenues in our
route and casino operations as the net win from gaming machine operations,
which is the difference between coins and currency deposited into the
machines and payments to customers and, for other games, the difference
between gaming wins and losses. We recognize total net win from gaming
machines as revenues for route operations which we operate pursuant to
revenue-sharing arrangements and revenue-sharing payments (either fixed or
variable) as a cost of route operations.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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; items reflected elsewhere in the
consolidated statements of operations are separately identified below.                                                                                                                                                                                                                                                                         
|
| |  | Fiscal 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



| |  |  | Non-cash write down of Bally Wulff assets to the final sales
price, totaling $25.4 million net of tax, included in loss from
discontinued operations (which is more fully described in Note 3).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Fiscal 2002:
| |  | ------------



| |  |  | Non-cash write down of goodwill and other long-lived assets
related to Bally Wulff totaling $24.1 million, included in loss from
discontinued operations (which is more fully described in Note 13).                                                                                                          
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 7).



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



| |  |  | The Company incurred costs and expenses to sell the Nevada
Route Operations totaling $6.5 million, consisting primarily of the
break-up fee paid by the Company to terminate the sale.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Warranty expense                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Gaming devices are typically sold with a 90-day parts and labor warranty. For
system sales, the Company provides several after-sale, value-added
services to 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.
Historical warranty expense as a percentage of Gaming and Systems segment
revenues has been less than 1%.
|
| |  | Research and development                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Research and development costs are charged to expense as incurred because
the establishment of technological feasibility of products and their
availability for sale (pending regulatory approval) have substantially
coincided.                                                                                                                                                                                                                                            

F-10



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|   |  | Deferred Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Deferred revenue includes amounts collected or billed in excess of
recognizable revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | 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.
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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | 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, 2002 and 2003 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 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. |  | EARNINGS PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | 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,
|                                                        |            |   |                            
|                                                        |            |   | 2001                        |        | 2002 |   | 2003  
|                                                        |            |   |                             |        |      |   |       
|Net income (loss) from continuing operations            |            | $ | (1,850                      | )      |      | $ | 66,997 |        |  | $ | 40,429  |       
|Net income (loss) from discontinued operations          |            |   | 16,332                      |        |      |   | (3,148 | )      |  |   | (20,906 | )     
|                                                        |            |   |                             |        |      |   |        |        |  |   |         |       
|                                                        | Net Income |   | $                           | 14,482 |      |   | $      | 63,849 |  |   | $       | 19,523 | 
|                                                        |            |   |                             |        |      |   |        |        |  |   |         |       
|Weighted average common shares outstanding              |            |   | 41,236                      |        |      |   | 46,281 |        |  |   | 49,153  |       
|Effect of dilutive securities                           |            |   | 992                         |        |      |   | 1,226  |        |  |   | 986     |       
|                                                        |            |   |                             |        |      |   |        |        |  |   |         |       
|Weighted average common and
dilutive shares outstanding |            |   | 42,228                      |        |      |   | 47,507 |        |  |   | 50,139  |       
|                                                        |            |   |                             |        |      |   |        |        |  |   |         |       

F-11



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                           |  |                             |       |      |  |      |       |   |  |   |       |  
|------------------------------------------ |  | --------------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                           |  | Fiscal Years ended June 30,
|                                           |  |                            
|                                           |  | 2001                        |       | 2002 |  | 2003
|                                           |  |                             |       |      |  |     
|Earnings (loss) per basic share:           |  |                             |       |      |  |      |       |   |  |   |       |  
|Income (loss) from continued operations    |  | $                           | (0.04 | )    |  | $    | 1.45  |   |  | $ | 0.82  |  
|Income (loss) from discontinued operations |  |                             | 0.39  |      |  |      | (0.07 | ) |  |   | (0.42 | )
|                                           |  |                             |       |      |  |      |       |   |  |   |       |  
|                                           |  | $                           | 0.35  |      |  | $    | 1.38  |   |  | $ | 0.40  |  
|                                           |  |                             |       |      |  |      |       |   |  |   |       |  
|Earnings (loss) per diluted share:         |  |                             |       |      |  |      |       |   |  |   |       |  
|Income (loss) from continued operations    |  | $                           | (0.04 | )    |  | $    | 1.41  |   |  | $ | .81   |  
|Income (loss) from discontinued operations |  |                             | 0.38  |      |  |      | (0.07 | ) |  |   | (0.42 | )
|                                           |  |                             |       |      |  |      |       |   |  |   |       |  
|                                           |  | $                           | 0.34  |      |  | $    | 1.34  |   |  | $ | 0.39  |  
|                                           |  |                             |       |      |  |      |       |   |  |   |       |  



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

|              |  |                             |       |      |  |      |     |  |  |  |     | 
|------------- |  | --------------------------- | ----- | ---- |  | ---- | --- |  |  |  | --- | 
|              |  | Fiscal Years ended June 30,
|              |  |                            
|              |  | 2001                        |       | 2002 |  | 2003
|              |  |                             |       |      |  |     
|Stock options |  |                             | 1,366 |      |  |      | 817 |  |  |  | 862 | 
|Warrants      |  |                             | 1,429 |      |  |      |    |  |  |  |    | 
|              |  |                             |       |      |  |      |     |  |  |  |     | 
|              |  |                             | 2,795 |      |  |      | 817 |  |  |  | 862 | 
|              |  |                             |       |      |  |      |     |  |  |  |     | 



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

|                    |                                             |                       |   |                             |      |      |   |        |      |  |   |        |      | 
|------------------- | ------------------------------------------- | --------------------- | - | --------------------------- | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                    |                                             |                       |   | Fiscal Years ended June 30,
|                    |                                             |                       |   |                            
|                    |                                             |                       |   | 2001                        |      | 2002 |   | 2003  
|                    |                                             |                       |   |                             |      |      |   |       
|Net income          |                                             |                       |   |                             |      |      |   |        |      |  |   |       
|                    | As reported                                 |                       | $ | 14,482                      |      |      | $ | 63,849 |      |  | $ | 19,523 |     
|                    | Stock-based compensation under FASB No. 123 |                       |   | (454                        | )    |      |   | (3,012 | )    |  |   | (3,384 | )   
|                    |                                             |                       |   |                             |      |      |   |        |      |  |   |        |     
|                    | Pro forma net income                        |                       | $ | 14,028                      |      |      | $ | 60,837 |      |  | $ | 16,139 |     
|                    |                                             |                       |   |                             |      |      |   |        |      |  |   |        |     
|Earnings per share: |                                             |                       |   |                             |      |      |   |        |      |  |   |       
|                    |                                             | Basic  As reported   |   | $                           | 0.35 |      |   | $      | 1.38 |  |   | $      | 0.40 | 
|                    |                                             | Basic  Pro forma     |   | $                           | 0.34 |      |   | $      | 1.31 |  |   | $      | 0.33 | 
|                    |                                             | Diluted  As reported |   | $                           | 0.34 |      |   | $      | 1.34 |  |   | $      | 0.39 | 
|                    |                                             | Diluted  Pro forma   |   | $                           | 0.33 |      |   | $      | 1.28 |  |   | $      | 0.32 | 

F-12



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

|                        |  |                             |      |            |  |            |      |   |  |  |      |  
|----------------------- |  | --------------------------- | ---- | ---------- |  | ---------- | ---- | - |  |  | ---- | -
|                        |  | Fiscal Years ended June 30,
|                        |  |                            
|                        |  | 2001                        |      | 2002       |  | 2003      
|                        |  |                             |      |            |  |           
|Risk-fee interest rate  |  |                             | 4.5  | %          |  |            | 3.5  | % |  |  | 3.5  | %
|Expected volatility     |  |                             | 0.82 |            |  |            | 0.70 |   |  |  | 0.28 |  
|Expected dividend yield |  |                             | 0    | %          |  |            | 0    | % |  |  | 0    | %
|Expected life           |  | 3-10 years                  |      | 3-10 years |  | 3-10 years



|   |  | The resulting fair values applied to the options granted were $2.57, $5.72
and $2.67 per share for the years ended June 30, 2001, 2002 and 2003,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | In July 2003 the Company announced it had entered into definitive sale of
its route operations segment consisting of United Coin Machine Co.
(UCMC) and Video Services, Inc. (VSI) and its German wall machine and
amusement games segment (Alliance Automaten GmbH & Co. KG dba Bally
Wulff).                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | On June 30, 2003 the Company entered into a definitive agreement for the
sale of Bally Wulff to a third party equity investor for $16.5 million in
cash. The sale was consummated on July 18, 2003. The Company recorded a
charge in June 2003 totaling $25.4 million, net of tax, representing the
final write down of the net carrying value of the Bally Wulff assets to
the sales price, including the recognition of previously recorded currency
translation adjustments totaling $11.9 million.                                                                                                                                                                                                          
|  
|   |  | The Company has entered into a definitive agreement for the sale of UCMC
to the privately-held Century Gaming, Inc. based in Montana. The sales
price is based on a multiple of EBITDA (as defined in the sale agreement)
and is currently estimated at $127 million, consisting of $103 million in
cash, $18 million in 10% Pay-In-Kind preferred stock and $6 million in
assumed liabilities. The closing of this transaction is subject to
customary closing conditions including that the business achieve a minimum
EBITDA of $21.0 million during a defined period of time prior to closing
and that the buyer obtain the necessary gaming licenses. This transaction
is expected to close in fiscal 2004.
|  
|   |  | Through a wholly-owned subsidiary, Alliance owns 100 percent of the class
B shares of VSI. Alliance and the owners of the class A shares have
entered into a definitive agreement to sell 100 percent of VSIs stock to
Gentilly Gaming, LLC. The all-cash transaction is subject to customary
closing conditions and is expected to close on June 30, 2004. Concurrent
with the sale agreement, VSI has entered into a 12-month operating
agreement extension under terms and conditions that are the same as the
existing agreement with the Fair Grounds Corporation.                                                                                                                                        
|  
|   |  | As a result of the transactions described above, each of the three
businesses are now treated as discontinued operations, and their results
are presented net of applicable income taxes below income from continuing
operations in the accompanying consolidated statements of operations. The
net asset of the businesses is now classified as assets held for sale in
the accompanying consolidated balance sheets. The prior year results have
been reclassified to conform to the current year presentation.                                                                                                                                                                                               
|  
|   |  | Summary operating results for the discontinued operations for UCMC, VSI
and Bally Wulff are as follows (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                           |  |                             |         |      |  |      |         |   |  |   |         |     
|------------------------------------------ |  | --------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | ----
|                                           |  | Fiscal Years ended June 30,
|                                           |  |                            
|                                           |  | 2001                        |         | 2002 |  | 2003
|                                           |  |                             |         |      |  |     
|Net revenues                               |  | $                           | 293,792 |      |  | $    | 298,710 |   |  | $ | 277,560 |     
|Asset impairment charges                   |  |                             |        |      |  |      | 24,129  |   |  |   | 38,728  |     
|Operating income (loss)                    |  |                             | 20,445  |      |  |      | (717    | ) |  |   | (31,540 | )   
|Income tax expense (benefit)               |  |                             | 1,924   |      |  |      | 2,563   |   |  |   | (10,425 | )(a)
|Income (loss) from discontinued operations |  | $                           | 16,332  |      |  | $    | (3,148  | ) |  | $ | (20,906 | )   



|(a) |  | Includes a net deferred tax benefit totaling $13.4 million,
which was recorded for the sale of Bally Wulff.
|--- |  | -----------------------------------------------------------------------------------------------------------

F-13



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | The following net assets held for sale, consisting of UCMC, VSI and Bally
Wulff are included in the accompanying consolidated balance sheets (in
000s):
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      |                   |   |                             |         |      |   |        |         | 
|------------------------------------- | ----------------- | - | --------------------------- | ------- | ---- | - | ------ | ------- | 
|                                      |                   |   | Fiscal Years ended June 30,
|                                      |                   |   |                            
|                                      |                   |   | 2002                        |         | 2003
|                                      |                   |   |                             |         |     
|Cash and cash equivalents             |                   | $ | 29,268                      |         |      | $ | 27,644 |        
|Accounts and contracts receivable     |                   |   | 38,305                      |         |      |   | 21,587 |        
|Inventories                           |                   |   | 12,563                      |         |      |   |       |        
|Other current assets                  |                   |   | 5,661                       |         |      |   | 4,624  |        
|Property, plant and equipment         |                   |   | 30,180                      |         |      |   | 23,680 |        
|Intangible assets                     |                   |   | 10,373                      |         |      |   | 19,682 |        
|Other                                 |                   |   | 4,046                       |         |      |   | 3,558  |        
|                                      |                   |   |                             |         |      |   |        |        
|                                      | Total assets      |   |                             | 130,396 |      |   |        | 100,775 | 
|Current liabilities                   |                   |   | 14,644                      |         |      |   | 9,221  |        
|Long-term liabilities                 |                   |   | 466                         |         |      |   | 4,273  |        
|                                      |                   |   |                             |         |      |   |        |        
|                                      | Total liabilities |   |                             | 15,110  |      |   |        | 13,494  | 
|                                      |                   |   |                             |         |      |   |        |        
|Net assets of discontinued operations |                   | $ | 115,286                     |         |      | $ | 87,281 |        
|                                      |                   |   |                             |         |      |   |        |        



|4. |  | RECEIVABLES                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Gaming Equipment and Systems business unit grants customers payment
terms under contracts of sale. These contracts are generally for terms of
one to four 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 Note 10.
|  
|   |  | The following table represents, at June 30, 2003, scheduled collections of
accounts receivable and notes receivable (net of allowances for doubtful
accounts) by fiscal year (in 000s):                                                                                                                                                                                                       

|                      |       |      |   |         |        | 
|--------------------- | ----- | ---- | - | ------- | ------ | 
|Years ending June 30,
|                     
|                      |       | 2004 |   | $       | 98,408 | 
|                      |       | 2005 |   |         | 7,310  | 
|                      |       | 2006 |   |         | 5,065  | 
|                      |       | 2007 |   |         | 2,490  | 
|                      |       | 2008 |   |         |       | 
|Thereafter            |       |      |  |        
|                      |       |      |   |         |        | 
|                      | Total |      | $ | 113,273 |       
|                      |       |      |   |         |        | 



| |  | During the year ended June 30 2003, the Company provided equipment
financing to two Native American tribes totaling $24.1 million. These
notes have terms of 36 and 48 months and rates of interest of 6% and 10%,
respectively. Both of these notes are currently performing in accordance
with their terms, and have an outstanding balance of $21.7 million as of
June 30, 2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company constantly monitors its exposure for credit losses and
maintains allowances for anticipated losses.                                                                                                                                                                                                                                                                    

F-14



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|5. |  | DEBT AND REVOLVING CREDIT FACILITY                                                                 
|-- |  | ---------------------------------------------------------------------------------------------------
|  
|   |  | Long-term debt and lines of credit at June 30, 2002 and 2003 consisted of the following (in 000s):

|                                                                                     |                                         |   |         |         |      |   |         |         | 
|------------------------------------------------------------------------------------ | --------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | 
|                                                                                     |                                         |   | 2002    |         | 2003
|                                                                                     |                                         |   |         |         |     
|Term Loan facility                                                                   |                                         | $ | 189,525 |         |      | $ | 187,625 |        
|Revolving credit facility                                                            |                                         |   |        |         |      |   |        |        
|10% Senior Subordinated Notes due 2007, net of
unamortized discount of $495 and $416 |                                         |   | 149,584 |         |      |   | 149,663 |        
|Other subordinated debt                                                              |                                         |   | 2,495   |         |      |   | 495     |        
|Other, secured by related equipment                                                  |                                         |   | 195     |         |      |   | 7,432   |        
|                                                                                     |                                         |   |         |         |      |   |         |        
|                                                                                     |                                         |   | 341,799 |         |      |   | 345,215 |        
|Less current maturities                                                              |                                         |   | 3,990   |         |      |   | 3,537   |        
|                                                                                     |                                         |   |         |         |      |   |         |        
|                                                                                     | Long-term debt, less current maturities |   | $       | 337,809 |      |   | $       | 341,678 | 
|                                                                                     |                                         |   |         |         |      |   |         |        



| |  | The Companys debt structure at June 30, 2003 consisted primarily of a
$190 million term loan facility and a $23.7 million revolving credit
facility and $150 million 10% Senior Subordinated Notes (Subordinated
Notes). The term loan had an interest rate of LIBOR plus 3.25% (or 4.45%
as of June 30, 2003). As of June 30, 2003, there were no borrowings
outstanding on the revolving credit facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On September 5, 2003, the Company completed a senior bank debt refinancing
transaction (the Refinancing) whereby the Company entered into a new
$275 million term loan facility and a $125 million revolving credit
facility (which can be increased by up to $75.0 million upon the consent
of the bank group). Proceeds from the new loans were used to repay the
existing bank term loans totaling approximately $188 million, repay the
Subordinated Notes, and to pay transaction fees and expenses. The new
term loan has an interest rate of LIBOR plus 2.75%, has a 1% per year
mandatory principal amortization after the first year, and a 6 year
maturity. The revolving credit facility has an interest rate of LIBOR
plus 2.50%, and the commitment decreases ratably over its 5 year term to a
60% balloon. As of September 5, 2003, the initial outstanding on the
revolving credit facility totaled $70.0 million.                                                                                                                   
|
| |  | On August 13, 2003, the Company initiated a tender offer and consent
solicitation for all of the outstanding Subordinated Notes at a price of
103.33% plus a .25% tender premium which was contingent on the closing of
the new bank facility. On September 10, 2003, the tender offer period
expired, with $78.6 million of the notes having been tendered. On
September 11, 2003 the Company initiated redemption of the remaining Notes
at a price of 103.33%, which was completed on September 16, 2003, at which
time the Subordinated Notes were fully redeemed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | As a result of the Refinancing described above, the Company will record a
pre-tax charge in the September 2003 period of approximately $12.0
million, which includes $5.0 million for the early extinguishment of the
Subordinated Notes, and $7.0 million for the non-cash write off of
deferred financing costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The new bank facility is collateralized by substantially all domestic
property and is guaranteed by each domestic subsidiary of the Company,
other than the entity that holds the Companys interest in its Louisiana
and Mississippi operations, and is secured by a Pledge Agreement. The bank
facility contains a number of maintenance covenants and other significant
covenants that, among other things, restrict the ability of the Company
and the ability of certain of its subsidiaries to dispose of assets, incur
additional indebtedness and issue preferred stock, pay dividends or make
other distributions, enter into certain acquisitions, repurchase equity
interests or subordinated indebtedness, issue or sell equity interests of
the Companys subsidiaries, engage in mergers or acquisitions, or engage
in certain transactions with subsidiaries and affiliates, and that
otherwise restrict corporate activities. As of the initial borrowing date
of September 5, 2003, the Company is in compliance with these covenants.

F-15



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | Maturities of long-term debt, for each of the five fiscal years ending
subsequent to June 30, 2003, reflecting the Refinancing transaction
discussed above, are as follows (in 000s):
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|           |       |      |         |                       |       |              |   |       |       | 
|---------- | ----- | ---- | ------- | --------------------- | ----- | ------------ | - | ----- | ----- | 
|           |       |      |         | Years ending June 30,
|           |       |      |         |                      
|           |       |      |         | Continuing            |       | Discontinued
|           |       |      |         | Operations            |       | Operations  
|           |       |      |         |                       |       |             
|           |       | 2004 |         | $                     | 1,637 |              |   | $     | 3,000 | 
|           |       | 2005 |         |                       | 4,367 |              |   |       | 2,136 | 
|           |       | 2006 |         |                       | 3,847 |              |   |       | 2,068 | 
|           |       | 2007 |         |                       | 5,639 |              |   |       |      | 
|           |       | 2008 |         |                       | 2,750 |              |   |       |      | 
|Thereafter |       |      | 334,687 |                       |       |              |  |      
|           |       |      |         |                       |       |              |   |      
|           | Total |      | $       | 352,927               |       |              | $ | 7,204 |      
|           |       |      |         |                       |       |              |   |      



|6. |  | 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
4,000,000 shares (as amended in fiscal year 2003) 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.
|  
|   |  | Transactions involving stock options are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                       

|                       |           |  |           |            |                |   |                     |       | 
|---------------------- | --------- |  | --------- | ---------- | -------------- | - | ------------------- | ----- | 
|                       |           |  |           |            |                |   | Options Outstanding
|                       |           |  |           |            |                |   |                    
|                       |           |  |           |            |                |   | Weighted-Average   
|                       |           |  | Shares    |            | Exercise Price
|                       |           |  |           |            |               
|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                |      
|                       |           |  |           |            |                |   |                     |      
|                       | Granted   |  |           | 1,037,972  |                |   |                     | 16.32 | 
|                       | Exercised |  |           | (709,865   | )              |   |                     | 3.70  | 
|                       | Canceled  |  |           | (102,453   | )              |   |                     | 11.40 | 
|                       |           |  |           |            |                |   |                     |      
|Balance, June 30, 2003 |           |  | 3,309,626 |            |                | $ | 9.51                |      
|                       |           |  |           |            |                |   |                     |      

F-16



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                |               |  |        |           |                |  |                     |      | 
|--------------- | ------------- |  | ------ | --------- | -------------- |  | ------------------- | ---- | 
|                |               |  |        |           |                |  | Options Outstanding
|                |               |  |        |           |                |  |                    
|                |               |  |        |           |                |  | Weighted-Average   
|                |               |  | Shares |           | Exercise Price
|                |               |  |        |           |               
|Exercisable at: |               |  |        |           |                |  |                     |     
|                | June 30, 2001 |  |        | 2,146,710 |                |  | $                   | 4.77 | 
|                | June 30, 2002 |  |        | 2,020,650 |                |  | $                   | 3.52 | 
|                | June 30, 2003 |  |        | 2,048,132 |                |  | $                   | 6.31 | 



| |  | At June 30, 2003, the range of exercise prices for options outstanding was
$0.47 to $17.39. The weighted average remaining contractual life, by range
of exercise price, for options outstanding and exercisable at June 30,
2003 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   |     |                  | 6.5                 |        |                     |       | 263,134 |           |               | $ | 0.81  |      |  |  | 263,134 |          
|$1.01 - $2.00   |     |                  | 6.8                 |        |                     |       | 100,879 |           |               |   | 1.30  |      |  |  | 94,211  |          
|$2.01 - $3.00   |     |                  | 5.2                 |        |                     |       | 17,144  |           |               |   | 2.62  |      |  |  | 17,144  |          
|$3.01 - $4.00   |     |                  | 3.3                 |        |                     |       | 974,258 |           |               |   | 3.12  |      |  |  | 974,258 |          
|$4.01 - $10.00  |     |                  | 7.2                 |        |                     |       | 211,551 |           |               |   | 7.14  |      |  |  | 101,543 |          
|$10.01 - $13.00 |     |                  | 8.8                 |        |                     |       | 139,500 |           |               |   | 12.35 |      |  |  | 81,497  |          
|$13.01 - $14.00 |     |                  | 8.3                 |        |                     |       | 699,127 |           |               |   | 13.77 |      |  |  | 290,751 |          
|$14.01 - $20.00 |     |                  | 9.2                 |        |                     |       | 904,033 |           |               |   | 16.66 |      |  |  | 225,594 |          
|                |     |                  |                     |        |                     |       |         |           |               |   |       |      |  |  |         |          
|                | All |                  |                     | 6.8    |                     |       |         | 3,309,626 |               |   | $     | 6.31 |  |  |         | 2,048,132 | 
|                |     |                  |                     |        |                     |       |         |           |               |   |       |      |  |  |         |          



| |  | 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. There are no longer any warrants
outstanding as of June 30, 2003.                                                                                                                                                                                                                         
|
| |  | 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 year ended
June 30, 2001 the Company repurchased 416,000 shares of common stock and
has not purchased any additional shares in the subsequent years.                                                                                
|
| |  | 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       |       |  | 3,310,000 |          
|Stock options available for future issuance          |       |  | 2,450,000 |          
|Shares underlying Series E Special Stock outstanding |       |  | 2,000     |          
|                                                     |       |  |           |          
|                                                     | Total |  |           | 5,762,000 | 
|                                                     |       |  |           |          

F-17



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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 (which were retired in 1996) 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. 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
and 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|7. |  | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | The components of the Companys income tax expense (benefit) for continuing operations for the years
ended June 30, 2001, 2002 and 2003 are as follows (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                 |                                 |         |        |      |        |      |         |      |         |   |        |   |        | 
|-------------------------------- | ------------------------------- | ------- | ------ | ---- | ------ | ---- | ------- | ---- | ------- | - | ------ | - | ------ | 
|                                 |                                 |         |        | 2001 |        | 2002 |         | 2003
|                                 |                                 |         |        |      |        |      |         |     
|                                 | Current tax expense (benefit):  |         |        |      |        |      |         |      |         |   |        |   |       
|                                 |                                 | Federal |        | $    | (588   | )    |         | $    | (292    | ) |        | $ | 1,127  | 
|                                 |                                 | Foreign |        |      |       |      |         |      | 16      |   |        |   | 1,644  | 
|                                 |                                 | State   |        |      | 392    |      |         |      | 663     |   |        |   | 982    | 
|                                 |                                 |         |        |      |        |      |         |      |         |   |        |  
|                                 |                                 |         | (196   | )    |        |      | 387     |      |         |   | 3,753  |  
|                                 |                                 |         |        |      |        |      |         |      |         |   |        |  
|                                 | Deferred tax expense (benefit): |         |        |      |        |      |         |      |         |   |        |   |       
|                                 |                                 | Federal |        |      | (1,117 | )    |         |      | (37,577 | ) |        |   | 18,178 | 
|                                 |                                 | Foreign |        |      |       |      |         |      |        |   |        |   | 17     | 
|                                 |                                 | State   |        |      |       |      |         |      | (1,250  | ) |        |   | 368    | 
|                                 |                                 |         |        |      |        |      |         |      |         |   |        |  
|                                 |                                 |         | (1,117 | )    |        |      | (38,827 | )    |         |   | 18,563 |  
|                                 |                                 |         |        |      |        |      |         |      |         |   |        |  
|Total provision for income taxes |                                 | $       | (1,313 | )    |        | $    | (38,440 | )    |         | $ | 22,316 |  
|                                 |                                 |         |        |      |        |      |         |      |         |   |        |  

F-18



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | A reconciliation of the Companys income tax provision as compared to the tax provision for
continuing operations calculated by applying the statutory federal tax rate (35%) to the income
(loss) from continuing operations before income taxes for the years ended June 30, 2001, 2002 and
2003 are as follows (in 000s):
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                      |  |      |        |      |  |      |         |   |  |   |        |  
|----------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                      |  | 2001 |        | 2002 |  | 2003
|                                                      |  |      |        |      |  |     
|Computed expected income tax expense (benefit) at 35% |  | $    | (1,107 | )    |  | $    | 9,995   |   |  | $ | 21,960 |  
|Permanent differences                                 |  |      | (7,338 | )    |  |      | (363    | ) |  |   | 134    |  
|Change in valuation allowance                         |  |      | 6,234  |      |  |      | (47,470 | ) |  |   | (943   | )
|State income taxes, net of federal benefit            |  |      | 255    |      |  |      | (819    | ) |  |   | 1,007  |  
|Other, net                                            |  |      | 643    |      |  |      | 217     |   |  |   | 158    |  
|                                                      |  |      |        |      |  |      |         |   |  |   |        |  
|                                                      |  | $    | (1,313 | )    |  | $    | (38,440 | ) |  | $ | 22,316 |  
|                                                      |  |      |        |      |  |      |         |   |  |   |        |  



| |  | The major components of the deferred tax assets and liabilities as of June 30, 2002 and 2003 are
presented below (in 000s):
| |  | ----------------------------------------------------------------------------------------------------------------------------

|                                     |                                                                     |   |        |        |      |   |         |        | 
|------------------------------------ | ------------------------------------------------------------------- | - | ------ | ------ | ---- | - | ------- | ------ | 
|                                     |                                                                     |   | 2002   |        | 2003
|                                     |                                                                     |   |        |        |     
|Deferred tax assets:                 |                                                                     |   |        |        |      |   |         |       
|                                     | Net operating loss carry forwards                                   |   | $      | 31,839 |      |   | $       | 14,072 | 
|                                     | Capital loss carry forwards                                         |   |        |       |      |   |         | 25,375 | 
|                                     | Foreign tax credit carry forwards                                   |   |        | 949    |      |   |         | 949    | 
|                                     | Inventory obsolescence reserves                                     |   |        | 2,828  |      |   |         | 2,033  | 
|                                     | Bad debt reserves                                                   |   |        | 2,257  |      |   |         | 2,060  | 
|                                     | Accruals not currently deductible for tax purposes                  |   |        | 7,163  |      |   |         | 9,206  | 
|                                     | Refinancing costs being amortized for tax purposes                  |   |        | 4,378  |      |   |         | 2,277  | 
|                                     | Other                                                               |   |        | 11,095 |      |   |         | 6,147  | 
|                                     |                                                                     |   |        |        |      |   |         |       
|Total gross deferred tax assets      |                                                                     |   | 60,509 |        |      |   | 62,119  |       
|Less: Valuation allowance            |                                                                     |   | (7,375 | )      |      |   | (11,491 | )     
|                                     |                                                                     |   |        |        |      |   |         |       
|Deferred tax assets                  |                                                                     | $ | 53,134 |        |      | $ | 50,628  |       
|                                     |                                                                     |   |        |        |      |   |         |       
|Deferred tax liabilities:            |                                                                     |   |        |        |      |   |         |       
|                                     | Property and equipment, due principally to
depreciation differences |   | $      | 6,073  |      |   | $       | 7,603  | 
|                                     | Intangible assets                                                   |   |        | 1,836  |      |   |         | 1,552  | 
|                                     | Other                                                               |   |        | 150    |      |   |         | 2,332  | 
|                                     |                                                                     |   |        |        |      |   |         |       
|Total gross deferred tax liabilities |                                                                     |   | 8,059  |        |      |   | 11,487  |       
|                                     |                                                                     |   |        |        |      |   |         |       
|Net deferred tax assets              |                                                                     | $ | 45,075 |        |      | $ | 39,141  |       
|                                     |                                                                     |   |        |        |      |   |         |       



| |  | 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 its annual assessment of the
recoverability of its net deferred tax assets. Management determined that
tax benefits associated with previously reserved net deferred tax assets
were 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 the acquisitions of CMS, MCC and HSC, the Company
recorded net deferred tax liabilities of $1.8 million and a corresponding
offset to goodwill (see Note 12).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | In connection with its acquisitions of CMP and ACSC in fiscal year 2002,
the Company recorded net deferred tax liabilities of $4.4 million and a
corresponding reduction in its valuation allowance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | At June 30, 2003, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $40 million that are
available to offset future federal taxable income, at various times which
expire                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|   |  | during years 2009 through 2022. At June 30, 2003, the Company had foreign
tax credit carry forwards of approximately $0.9 million and alternative
minimum tax credit (AMT) carry forwards of approximately $2.2 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.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|8. |  | 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, 2001, 2002 and 2003
(in 000s):                                                                                                                                                                                                                       

|                                                     |  |      |       |      |  |      |        |   |  |   |        |  
|---------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                     |  | 2001 |       | 2002 |  | 2003
|                                                     |  |      |       |      |  |     
|Translation rate adjustments                         |  | $    | 5,763 |      |  | $    | (7,846 | ) |  | $ | (2,133 | )
|Conversion of Series E Special Stock to Common Stock |  |      | 4,612 |      |  |      |       |   |  |   |       |  
|Subordinated notes payable issued in acquisitions    |  |      |      |      |  |      | 4,000  |   |  |   | 8,073  |  



|   |  | Cash payments for interest expense in fiscal years 2001, 2002 and 2003
were approximately $33.4 million, $27.3 million and $25.9 million,
respectively. Payments for income taxes, net of refunds received, in
fiscal years 2001, 2002 and 2003 were approximately $0.4 million, $0.3
million and $2.8 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|9. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The Company is obligated under several patent agreements to pay royalties
ranging from approximately $10 to $500 per applicable game depending on
the components in the gaming machines. Total royalty expense for the
Company for the years ended June 30, 2001, 2002 and 2003 was $3.4 million,
$2.8 million and $4.2 million, respectively, and is included in the cost
of gaming equipment and systems in the accompanying consolidated statement
of operations. In addition, the Company has obtained the rights to certain
game ideas and intellectual property that call for payment of royalties
based on either fixed amounts or variable amounts based on game
performance. The Company also pays $0.5 million annually for the use of
the Bally trademark.
|  
|   |  | 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) which 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 Route Location Leases.
Operating rental expense for years ended June 30, 2001, 2002 and 2003 was
as follows (in 000s): 

|                                  |  |      |         |      |  |      |         |   |  |   |         |  
|--------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                  |  | 2001 |         | 2002 |  | 2003
|                                  |  |      |         |      |  |     
|Continuing Operations:            |  |      |         |      |  |      |         |   |  |   |         |  
|Equipment and Office Space Leases |  | $    | 6,061   |      |  | $    | 6,022   |   |  | $ | 4,253   |  
|Sublease rental income            |  |      |        |      |  |      |        |   |  |   | (332    | )
|                                  |  |      |         |      |  |      |         |   |  |   |         |  
|                                  |  | $    | 6,061   |      |  | $    | 6,022   |   |  | $ | 3,921   |  
|                                  |  |      |         |      |  |      |         |   |  |   |         |  
|Discontinued Operations:          |  |      |         |      |  |      |         |   |  |   |         |  
|Contingent Route Location Leases  |  | $    | 130,542 |      |  | $    | 135,338 |   |  | $ | 132,062 |  
|Fixed Route Location Leases       |  |      | 19,185  |      |  |      | 19,500  |   |  |   | 18,786  |  
|Equipment and Office Space Leases |  |      | 6,418   |      |  |      | 808     |   |  |   | 2,646   |  
|                                  |  |      |         |      |  |      |         |   |  |   |         |  
|                                  |  |      | 156,145 |      |  |      | 155,646 |   |  |   | 153,494 |  
|Sublease rental income            |  |      | (1,667  | )    |  |      | (1,806  | ) |  |   | (1,812  | )
|                                  |  |      |         |      |  |      |         |   |  |   |         |  
|                                  |  | $    | 154,478 |      |  | $    | 153,840 |   |  | $ | 151,682 |  
|                                  |  |      |         |      |  |      |         |   |  |   |         |  

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | Future minimum rentals under non-cancelable operating leases at June 30, 2003 are (in 000s):
| |  | ---------------------------------------------------------------------------------------------

|                    |  |                         |  |                      |        |      |  |      |        |      |  |      |       |            |  |       |       |   |  |   |       |   |  |   |        |   |  |   |        |  
|------------------- |  | ----------------------- |  | -------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ----- | ---------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                    |  |                         |  | Years ended June 30,
|                    |  |                         |  |                     
|                    |  |                         |  | 2004                 |        | 2005 |  | 2006 |        | 2007 |  | 2008 |       | Thereafter |  | Total
|                    |  |                         |  |                      |        |      |  |      |        |      |  |      |       |            |  |      
|Minimum rentals (a) |  |                         |  |                      |        |      |  |      |        |      |  |      |       |            |  |       |       |   |  |   |       |   |  |   |        |   |  |  
|                    |  | Continuing operations   |  | $                    | 1,709  |      |  | $    | 237    |      |  | $    | 105   |            |  | $     |      |   |  | $ |      |   |  | $ |       |   |  | $ | 2,051  |  
|                    |  | Discontinued operations |  |                      | 17,851 |      |  |      | 13,166 |      |  |      | 9,542 |            |  |       | 7,274 |   |  |   | 6,619 |   |  |   | 1,510  |   |  |   | 55,962 |  
|Sublease income     |  |                         |  |                      |        |      |  |      |        |      |  |      |       |            |  |       |       |   |  |   |       |   |  |   |        |   |  |  
|                    |  | Continuing operations   |  |                      | (332   | )    |  |      |       |      |  |      |      |            |  |       |      |   |  |   |      |   |  |   |       |   |  |   | (332   | )
|                    |  | Discontinued operations |  |                      | (1,711 | )    |  |      | (1,454 | )    |  |      | (968  | )          |  |       | (838  | ) |  |   | (835  | ) |  |   | (1,136 | ) |  |   | (6,942 | )
|                    |  |                         |  |                      |        |      |  |      |        |      |  |      |       |            |  |       |       |   |  |   |       |   |  |   |        |   |  |  
|                    |  | Net minimum rentals     |  | $                    | 17,517 |      |  | $    | 11,949 |      |  | $    | 8,679 |            |  | $     | 6,436 |   |  | $ | 5,784 |   |  | $ | 374    |   |  | $ | 50,739 |  
|                    |  |                         |  |                      |        |      |  |      |        |      |  |      |       |            |  |       |       |   |  |   |       |   |  |   |        |   |  |  



| | (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the year ended June 30, 2003 the Company sold a receivable to a
third-party financing company, and provided a residual value guarantee to
the buyer totaling $0.3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | 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 charge for taxes, interest and penalties for those tax years.
In 2003, the German tax authorities commenced their audit of the tax
years 1996 to 1999. The German tax authorities have raised several issues
in their preliminary findings, including the value assigned to the Bally
Wulff entity when it was acquired by the Company in 1996, as well as the
deductibility of certain intercompany interest charges. The range of the
potential tax liability estimate ranges from zero to $5.0 million, and
therefore no amount has yet been accrued in accordance with FASB No. 5.
The Company has indemnified the buyer of Bally Wulff against any claims
that may arise from the tax audit and for the additional open tax years
through June 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | On September 25, 1995, Bally Gaming International, Inc. (which is a
wholly-owned subsidiary of the Company) 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.
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | CONCENTRATION OF CREDIT RISK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company maintains its cash and cash equivalents in high credit quality
financial institutions. In addition, investment policies have been
adopted to limit investments to investment grade securities. 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, 2003 net accounts and notes receivable by region as a
percentage of total net receivables are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                  |  |                       |      |            |  |       |     |   |  |  |       |  
|--------------------------------- |  | --------------------- | ---- | ---------- |  | ----- | --- | - |  |  | ----- | -
|                                  |  | Continuing Operations |      |            |  |      
|                                  |  |                       |      |            |  |      
|                                  |  | Gaming                |      |            |  |       |     |   |  | 
|                                  |  | Equipment             |      | Casino     |  |       |     |  
|                                  |  | and Systems           |      | Operations |  | Total
|                                  |  |                       |      |            |  |      
|Germany                           |  |                       | 9.7  | %          |  |       |    | % |  |  | 9.7   | %
|South America                     |  |                       | 10.7 |            |  |       |    |   |  |  | 10.7  |  
|Other international jurisdictions |  |                       | 7.5  |            |  |       |    |   |  |  | 7.5   |  
|Nevada                            |  |                       | 16.0 |            |  |       |    |   |  |  | 16.0  |  
|California                        |  |                       | 15.2 |            |  |       |    |   |  |  | 15.2  |  
|Atlantic City                     |  |                       | 12.4 |            |  |       |    |   |  |  | 12.4  |  
|Others individually less than 5%  |  |                       | 28.4 |            |  |       | 0.1 |   |  |  | 28.5  |  
|                                  |  |                       |      |            |  |       |     |   |  |  |       |  
|                                  |  |                       | 99.9 | %          |  |       | 0.1 | % |  |  | 100.0 | %
|                                  |  |                       |      |            |  |       |     |   |  |  |       |  



|11. |  | SEGMENT AND GEOGRAPHICAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company currently operates in two business segments (exclusive of the
two business segments included in discontinued operations): (i) Gaming
Equipment and Systems which designs, manufactures and distributes gaming
machines and computerized monitoring systems for gaming machines, and (ii)
Casino Operations which 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,
|                            |  |                              |        | 2001                 |         | 2002 |        | 2003
|                            |  |                              |        |                      |         |      |        |     
|Revenues:                   |  |                              |        |                      |         |      |        |      |         |   |        |  
|                            |  | Gaming Equipment and Systems |        | $                    | 161,536 |      |        | $    | 223,703 |   |        | $ | 335,436 |  
|                            |  | Casino Operations            |        |                      | 73,499  |      |        |      | 72,371  |   |        |   | 72,124  |  
|                            |  |                              |        |                      |         |      |        |      |         |   |        |  
|                            |  | Total revenues               |        | $                    | 235,035 |      |        | $    | 296,074 |   |        | $ | 407,560 |  
|                            |  |                              |        |                      |         |      |        |      |         |   |        |  
|Intersegment revenues:      |  |                              |        |                      |         |      |        |      |         |   |        |  
|                            |  | Gaming Equipment and Systems |        | $                    | 246     |      |        | $    | 2,694   |   |        | $ | 2,885   |  
|                            |  | Casino Operations            |        |                      |        |      |        |      |        |   |        |   |        |  
|                            |  |                              |        |                      |         |      |        |      |         |   |        |  
|Total intersegment revenues |  | $                            | 246    |                      |         | $    | 2,694  |      |         | $ | 2,885  |  
|                            |  |                              |        |                      |         |      |        |      |         |   |        |  
|Operating income (loss):    |  |                              |        |                      |         |      |        |      |         |   |        |  
|                            |  | Gaming Equipment and Systems |        | $                    | 26,980  |      |        | $    | 47,172  |   |        | $ | 82,879  |  
|                            |  | Casino Operations            |        |                      | 25,258  |      |        |      | 22,498  |   |        |   | 20,270  |  
|                            |  | Corporate/other              |        |                      | (18,316 | )    |        |      | (12,562 | ) |        |   | (13,213 | )
|                            |  |                              |        |                      |         |      |        |      |         |   |        |  
|Total operating income      |  | $                            | 33,922 |                      |         | $    | 57,108 |      |         | $ | 89,936 |  
|                            |  |                              |        |                      |         |      |        |      |         |   |        |  

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                    |                              |   |                      |         |      |   |         |         |  |   |         |         | 
|----------------------------------- | ---------------------------- | - | -------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                    |                              |   | Years Ended June 30,
|                                    |                              |   | 2001                 |         | 2002 |   | 2003   
|                                    |                              |   |                      |         |      |   |        
|Identifiable assets:                |                              |   |                      |         |      |   |         |         |  |   |         |        
|                                    | Gaming Equipment and Systems |   | $                    | 153,961 |      |   | $       | 226,239 |  |   | $       | 315,446 | 
|                                    | Casino Operations            |   |                      | 47,737  |      |   |         | 51,531  |  |   |         | 56,938  | 
|                                    | Corporate/other              |   |                      | 29,188  |      |   |         | 51,714  |  |   |         | 52,006  | 
|                                    |                              |   |                      |         |      |   |         |         |  |   |         |        
|Total identifiable assets           |                              | $ | 230,886              |         |      | $ | 329,484 |         |  | $ | 424,390 |        
|                                    |                              |   |                      |         |      |   |         |         |  |   |         |        
|Capital expenditures:               |                              |   |                      |         |      |   |         |         |  |   |         |        
|                                    | Gaming Equipment and Systems |   | $                    | 2,696   |      |   | $       | 3,370   |  |   | $       | 3,589   | 
|                                    | Casino Operations            |   |                      | 2,904   |      |   |         | 4,719   |  |   |         | 8,166   | 
|                                    | Corporate/other              |   |                      | 30      |      |   |         | 77      |  |   |         | 102     | 
|                                    |                              |   |                      |         |      |   |         |         |  |   |         |        
|Total capital expenditures          |                              | $ | 5,630                |         |      | $ | 8,166   |         |  | $ | 11,857  |        
|                                    |                              |   |                      |         |      |   |         |         |  |   |         |        
|Depreciation and amortization:      |                              |   |                      |         |      |   |         |         |  |   |         |        
|                                    | Gaming Equipment and Systems |   | $                    | 9,027   |      |   | $       | 10,236  |  |   | $       | 16,002  | 
|                                    | Casino Operations            |   |                      | 2,300   |      |   |         | 2,132   |  |   |         | 3,315   | 
|                                    | Corporate/other              |   |                      | 1,559   |      |   |         | 2,202   |  |   |         | 2,286   | 
|                                    |                              |   |                      |         |      |   |         |         |  |   |         |        
|Total depreciation and amortization |                              | $ | 12,886               |         |      | $ | 14,570  |         |  | $ | 21,603  |        
|                                    |                              |   |                      |         |      |   |         |         |  |   |         |        



| |  | The Company has operations based primarily in the United States with a
significant sales and distribution office based in Germany.                                                              
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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,
|                           |               |   |                     
|                           |               |   | 2001                 |         | 2002 |   | 2003   
|                           |               |   |                      |         |      |   |        
|Revenues:                  |               |   |                      |         |      |   |         |         |  |   |         |        
|                           | United States |   | $                    | 221,085 |      |   | $       | 272,505 |  |   | $       | 363,573 | 
|                           | Germany       |   |                      | 6,882   |      |   |         | 15,482  |  |   |         | 31,436  | 
|                           | Other foreign |   |                      | 7,068   |      |   |         | 8,087   |  |   |         | 12,551  | 
|                           |               |   |                      |         |      |   |         |         |  |   |         |        
|Total revenues             |               | $ | 235,035              |         |      | $ | 296,074 |         |  | $ | 407,560 |        
|                           |               |   |                      |         |      |   |         |         |  |   |         |         | 
|Operating income:          |               |   |                      |         |      |   |         |         |  |   |         |        
|                           | United States |   | $                    | 31,493  |      |   | $       | 51,939  |  |   | $       | 84,318  | 
|                           | Germany       |   |                      | 116     |      |   |         | 3,149   |  |   |         | 5,127   | 
|                           | Other foreign |   |                      | 2,313   |      |   |         | 2,020   |  |   |         | 491     | 
|                           |               |   |                      |         |      |   |         |         |  |   |         |        
|Total operating income     |               | $ | 33,922               |         |      | $ | 57,108  |         |  | $ | 89,936  |        
|                           |               |   |                      |         |      |   |         |         |  |   |         |        
|Identifiable assets:       |               |   |                      |         |      |   |         |         |  |   |         |        
|                           | United States |   | $                    | 214,983 |      |   | $       | 308,625 |  |   | $       | 377,550 | 
|                           | Germany       |   |                      | 11,191  |      |   |         | 13,865  |  |   |         | 22,814  | 
|                           | Other foreign |   |                      | 4,712   |      |   |         | 6,994   |  |   |         | 24,026  | 
|                           |               |   |                      |         |      |   |         |         |  |   |         |        
|Total identifiable assets  |               | $ | 230,886              |         |      | $ | 329,484 |         |  | $ | 424,390 |        
|                           |               |   |                      |         |      |   |         |         |  |   |         |        
|Capital expenditures:      |               |   |                      |         |      |   |         |         |  |   |         |        
|                           | United States |   | $                    | 5,621   |      |   | $       | 8,118   |  |   | $       | 11,762  | 
|                           | Germany       |   |                      | 3       |      |   |         | 40      |  |   |         | 90      | 
|                           | Other foreign |   |                      | 6       |      |   |         | 8       |  |   |         | 5       | 
|                           |               |   |                      |         |      |   |         |         |  |   |         |        
|Total capital expenditures |               | $ | 5,630                |         |      | $ | 8,166   |         |  | $ | 11,857  |        
|                           |               |   |                      |         |      |   |         |         |  |   |         |        

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                    |               |   |                      |        |      |   |        |        |  |   |        |        | 
|----------------------------------- | ------------- | - | -------------------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                    |               |   | Years Ended June 30,
|                                    |               |   |                     
|                                    |               |   | 2001                 |        | 2002 |   | 2003  
|                                    |               |   |                      |        |      |   |       
|Depreciation and amortization:      |               |   |                      |        |      |   |        |        |  |   |        |       
|                                    | United States |   | $                    | 12,743 |      |   | $      | 14,536 |  |   | $      | 21,257 | 
|                                    | Germany       |   |                      | 126    |      |   |        | 15     |  |   |        | 47     | 
|                                    | Other Foreign |   |                      | 17     |      |   |        | 19     |  |   |        | 299    | 
|                                    |               |   |                      |        |      |   |        |        |  |   |        |        | 
|Total depreciation and amortization |               | $ | 12,886               |        |      | $ | 14,570 |        |  | $ | 21,603 |       
|                                    |               |   |                      |        |      |   |        |        |  |   |        |        | 



|12. |  | BUSINESS COMBINATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During the fiscal year ended June 30, 2003, the Company acquired 100
percent of the stock of three companies: Casino Management Systems
Software Company (CMS) on November 13, 2002, Micro Clever Consulting
Systems Company (MCC) on April 9, 2003 and Honeyframe Systems Company
(HSC) on May 28, 2003. These acquisitions reinforce the Companys
position as the leading system provider to the gaming industry. With the
acquisition of Honeyframe, Bally Gaming and Systems will begin to
integrate Honeyframes technology with the systems developed by MCC, a
Nice, France-based company. The combination of the two product lines will
allow Bally Gaming and Systems to offer a gaming machine accounting,
casino management and marketing package that links both AWP machines and
traditional Las Vegas-style slot machines to capitalize on the proposed
expansion of gaming in the United Kingdom. Based on preliminary fair value
estimates obtained from a third-party valuation consultant (which are
subject to change upon the receipt of the final valuation studies), the
following table summarizes the values assigned to the assets acquired and
liabilities assumed in each acquisition (in 000s):

|                      |                           |                          |       |       |       |     |       |        |        |   |       |       |       | 
|--------------------- | ------------------------- | ------------------------ | ----- | ----- | ----- | --- | ----- | ------ | ------ | - | ----- | ----- | ----- | 
|                      |                           |                          |       | CMS   |       | MCC |       | HSC   
|                      |                           |                          |       |       |       |     |       |       
|Cash                  |                           | $                        |      |       |       | $   | 2,585 |        |        | $ |      |      
|Other current assets  |                           |                          | 485   |       |       |     | 2,094 |        |        |   | 922   |      
|Fixed assets          |                           |                          |      |       |       |     | 75    |        |        |   | 38    |      
|Intangibles assets    |                           |                          | 600   |       |       |     | 5,139 |        |        |   | 109   |      
|Goodwill              |                           |                          | 5,755 |       |       |     | 5,085 |        |        |   | 4,848 |      
|                      |                           |                          |       |       |       |     |       |        |        |   |       |      
|                      | Total assets acquired     |                          |       | 6,840 |       |     |       | 14,978 |        |   |       | 5,917 |      
|Current liabilities   |                           |                          | 592   |       |       |     | 2,101 |        |        |   | 1,011 |      
|Long-term liabilities |                           |                          | 210   |       |       |     | 1,635 |        |        |   |      |      
|                      |                           |                          |       |       |       |     |       |        |        |   |       |      
|                      | Total liabilities assumed |                          |       | 802   |       |     |       | 3,736  |        |   |       | 1,011 |      
|                      |                           |                          |       |       |       |     |       |        |        |   |       |      
|                      |                           | Net asset purchase price |       | $     | 6,038 |     |       | $      | 11,242 |   |       | $     | 4,906 | 
|                      |                           |                          |       |       |       |     |       |        |        |   |       |      



| |  | The intangible assets acquired consist primarily of software and is being
amortized over nine years. The goodwill is not deductible for book or tax
purposes.                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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, for $12.0 million and Advanced Casino Systems Corporation (ACSC)
on March 22, 2002, for $14.6 million. 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.

F-24



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|13. |  | GOODWILL                                                                           
|--- |  | -----------------------------------------------------------------------------------
|   
|    |  | The changes in goodwill for the year ended June 30, 2003 are as follows
(in 000s):

|                                                |  |                           |        |            |  |   |       | 
|----------------------------------------------- |  | ------------------------- | ------ | ---------- |  | - | ----- | 
|                                                |  | Continuing Business Units
|                                                |  |                          
|                                                |  | Gaming                    |        | Casino    
|                                                |  | & Systems                 |        | Operations
|                                                |  |                           |        |           
|Balances as of July 1, 2002
net of amortization |  | $                         | 45,959 |            |  | $ | 1,754 | 
|Goodwill acquired during the year (see Note 12) |  |                           | 15,688 |            |  |   |      | 
|Translation adjustment                          |  |                           | 1,393  |            |  |   |      | 
|                                                |  |                           |        |            |  |   |       | 
|Balances as June 30, 2003                       |  | $                         | 63,040 |            |  | $ | 1,754 | 
|                                                |  |                           |        |            |  |   |       | 



|    |  | 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 beginning with the year ended
June 30, 2002. Amortization for the year ended June 30, 2001 was $1.4
million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During the fourth quarter of fiscal year 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. 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. Both of
these non-cash impairment charges are included in the results from
discontinued operations.
|   
|14. |  | 401(k) PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | The Company is the sponsor of the Alliance Gaming Corporation 401(k)
Savings Plan (the 401(k) Plan). The 401(k) Plan was adopted for
domestic employees of Alliance Gaming and all its domestic subsidiaries.
Employees may enroll in the plan after meeting certain age and length of
employment criteria, and plan participants may defer up to 25% of their
compensation, up to certain IRS imposed limitations, currently $12,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | The Company matches 50% of any participants contributions, up to the
first 6% of their compensation (as the term compensation is defined in
the 401(k) plan document). Company matching contributions totaled
approximately $0.5 million, $0.8 million and $1.0 million for the fiscal
years ended June 30, 2001, 2002 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|15. |  | 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 new bank credit agreement. The
financial information presented includes Alliance Gaming Corporation (the
Parent), its wholly-owned guaranteeing subsidiaries (Guaranteeing
Subsidiaries), and the non-guaranteeing subsidiaries Video Services,
Inc., the Rainbow Casino Vicksburg Partnership, L.P. (dba Rainbow Casino)
and the Companys non-domestic subsidiaries (together the
Non-Guaranteeing Subsidiaries). The notes to consolidating financial
statements should be read in conjunction with these consolidating
financial statements.                                                                                                                                                                                                                                                                                                                                                                               

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


|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |        |         | 
|----------------------------------------------- |  | ---------------------------------------------------- | -------------------------- | ------------------------- | ------- | ------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | -------- | --- | -------- | ----------- | -------- | -------- | ------- | ------ | ------- | 
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          | Reclas-     |          | Alliance
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          | sifications |          | Gaming  
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         | Non-         |          | and |          | Corporation
|                                                |  |                                                      |                            |                           |         |        |         |              |         | Guaranteeing |         | Guaranteeing |         | Elimina-     |          | and
|                                                |  |                                                      |                            |                           |         | Parent |         | Subsidiaries |         | Subsidiaries |         | tions        |         | Subsidiaries
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |             
|Current assets:                                 |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |         
|                                                |  | Cash and cash equivalents                            |                            | $                         | 8,121   |        |         | $            | 18,854  |              |         | $            | 6,265   |              |          | $   |         |             |          | $        | 33,240  |       
|                                                |  | Accounts and notes receivable, net                   |                            |                           | 743     |        |         |              | 46,572  |              |         |              | 13,664  |              |          |     | (705     | )           |          |          | 60,274  |       
|                                                |  | Inventories, net                                     |                            |                           |        |        |         |              | 28,469  |              |         |              | 2,175   |              |          |     | (210     | )           |          |          | 30,434  |       
|                                                |  | Deferred tax assets, net                             |                            |                           | 16,489  |        |         |              | 11,097  |              |         |              |        |              |          |     |         |             |          |          | 27,586  |       
|                                                |  | Other current assets                                 |                            |                           | 260     |        |         |              | 7,733   |              |         |              | 340     |              |          |     |         |             |          |          | 8,333   |       
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |       
|                                                |  |                                                      |                            | Total current assets      |         |        | 25,613  |              |         |              | 112,725 |              |         |              | 22,444   |     |          |             | (915     | )        |         |        | 159,867 | 
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |       
|Long-term investments (restricted)              |  |                                                      |                           |                           |         |        | 896     |              |         |              |        |              |         |              |         |     |          |             | 896      |         
|Long-term receivables, net                      |  |                                                      | 147,595                    |                           |         |        | 901     |              |         |              |        |              |         |              | (147,854 | )   |          |             | 642      |         
|Leased gaming equipment, net                    |  |                                                      |                           |                           |         |        | 19,560  |              |         |              |        |              |         |              |         |     |          |             | 19,560   |         
|Property, plant and equipment, net              |  |                                                      | 129                        |                           |         |        | 27,578  |              |         |              | 32,427  |              |         |              |         |     |          |             | 60,134   |         
|Goodwill, net                                   |  |                                                      | (4,842                     | )                         |         |        | 48,232  |              |         |              | 4,323   |              |         |              |         |     |          |             | 47,713   |         
|Intangible assets, net                          |  |                                                      | 9,033                      |                           |         |        | 13,105  |              |         |              | 1       |              |         |              |         |     |          |             | 22,139   |         
|Investment in subsidiaries                      |  |                                                      | 335,739                    |                           |         |        | 81,855  |              |         |              |        |              |         |              | (417,594 | )   |          |             |         |         
|Deferred tax assets, net                        |  |                                                      | 22,394                     |                           |         |        | (4,905  | )            |         |              |        |              |         |              |         |     |          |             | 17,489   |         
|Assets of discontinued operations held for sale |  |                                                      | 13,117                     |                           |         |        | 133,808 |              |         |              | 55,260  |              |         |              | (71,789  | )   |          |             | 130,396  |         
|Other assets, net                               |  |                                                      | (145,694                   | )                         |         |        | 150,894 |              |         |              | (4,140  | )            |         |              | (16      | )   |          |             | 1,044    |         
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |       
|                                                |  | $                                                    | 403,084                    |                           |         | $      | 584,649 |              |         | $            | 110,315 |              |         | $            | (638,168 | )   |          | $           | 459,880  |         
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY            |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |         
|Current liabilities:                            |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |         
|                                                |  | Accounts payable                                     |                            | $                         | 135     |        |         | $            | 12,720  |              |         | $            | 1,468   |              |          | $   |         |             |          | $        | 14,323  |       
|                                                |  | Accrued liabilities                                  |                            |                           | 11,506  |        |         |              | 19,087  |              |         |              | 3,090   |              |          |     | (729     | )           |          |          | 32,954  |       
|                                                |  | Jackpot liabilities                                  |                            |                           |        |        |         |              | 5,752   |              |         |              | 103     |              |          |     |         |             |          |          | 5,855   |       
|                                                |  | Current maturities of long-term debt                 |                            |                           | 3,900   |        |         |              | 79      |              |         |              | 11      |              |          |     |         |             |          |          | 3,990   |       
|                                                |  | Liabilities of discontinued operations held
for sale |                            |                           |        |        |         |              | 63,122  |              |         |              | 23,777  |              |          |     | (71,789  | )           |          |          | 15,110  |       
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |       
|                                                |  |                                                      |                            | Total current liabilities |         |        | 15,541  |              |         |              | 100,760 |              |         |              | 28,449   |     |          |             | (72,518  | )        |         |        | 72,232  | 
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |       
|Long term debt, net                             |  |                                                      | 337,704                    |                           |         |        | 147,687 |              |         |              | 12      |              |         |              | (147,594 | )   |          |             | 337,809  |         
|Deferred tax liabilities                        |  |                                                      |                           |                           |         |        |        |              |         |              |        |              |         |              |         |     |          |             |         |         
|Other liabilities                               |  |                                                      | 2,620                      |                           |         |        |        |              |         |              |        |              |         |              |         |     |          |             | 2,620    |         
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |       
|                                                |  |                                                      |                            | Total liabilities         |         |        | 355,865 |              |         |              | 248,447 |              |         |              | 28,461   |     |          |             | (220,112 | )        |         |        | 412,661 | 
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |       
|Minority interest                               |  |                                                      | 1,233                      |                           |         |        |        |              |         |              |        |              |         |              |         |     |          |             | 1,233    |         
|Commitments and contingencies                   |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |         
|Stockholders equity:                           |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |         
|                                                |  | Special Stock Series E                               |                            |                           | 12      |        |         |              |        |              |         |              |        |              |          |     |         |             |          |          | 12      |       
|                                                |  | Common Stock                                         |                            |                           | 4,927   |        |         |              | 478     |              |         |              | 17,832  |              |          |     | (18,310  | )           |          |          | 4,927   |       
|                                                |  | Treasury stock                                       |                            |                           | (501    | )      |         |              |        |              |         |              |        |              |          |     |         |             |          |          | (501    | )     
|                                                |  | Additional paid-in capital                           |                            |                           | 157,866 |        |         |              | 190,449 |              |         |              | 70,382  |              |          |     | (260,831 | )           |          |          | 157,866 |       
|                                                |  | Accumulated other comprehensive
income (loss)        |                            |                           | (19,364 | )      |         |              | (19,361 | )            |         |              | (19,384 | )            |          |     | 38,745   |             |          |          | (19,364 | )     
|                                                |  | Retained earnings (accumulated deficit)              |                            |                           | (96,954 | )      |         |              | 164,636 |              |         |              | 13,024  |              |          |     | (177,660 | )           |          |          | (96,954 | )     
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |       
|                                                |  |                                                      | Total stockholders equity |                           |         | 45,986 |         |              |         | 336,202      |         |              |         | 81,854       |          |     |          | (418,056    | )        |          |         | 45,986 |        
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |         |              |          |     |          |             |          |          |         |       
|                                                |  | $                                                    | 403,084                    |                           |         | $      | 584,649 |              |         | $            | 110,315 |              |         | $            | (638,168 | )   |          | $           | 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 BALANCE SHEETS

June 30, 2003
(In 000s)
ASSETS


|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |        |         | 
|----------------------------------------------- |  | ---------------------------------------------------- | -------------------------- | ------------------------- | ------- | ------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | ------ | ------------ | -------- | --- | -------- | ----------- | -------- | -------- | ------- | ------ | ------- | 
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          | Reclas-     |          | Alliance
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          | sifications |          | Gaming  
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        | Non-         |          | and |          | Corporation
|                                                |  |                                                      |                            |                           |         |        |         |              |         | Guaranteeing |         | Guaranteeing |        | Elimina-     |          | and
|                                                |  |                                                      |                            |                           |         | Parent |         | Subsidiaries |         | Subsidiaries |         | tions        |        | Subsidiaries
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |             
|Current assets:                                 |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |         
|                                                |  | Cash and cash equivalents                            |                            | $                         | 12,730  |        |         | $            | 19,310  |              |         | $            | 8,118  |              |          | $   |         |             |          | $        | 40,158  |       
|                                                |  | Accounts and notes receivable, net                   |                            |                           | 738     |        |         |              | 70,920  |              |         |              | 27,496 |              |          |     | (746     | )           |          |          | 98,408  |       
|                                                |  | Inventories, net                                     |                            |                           |        |        |         |              | 29,871  |              |         |              | 2,518  |              |          |     | (217     | )           |          |          | 32,172  |       
|                                                |  | Deferred tax assets, net                             |                            |                           | 33,182  |        |         |              | 11,639  |              |         |              |       |              |          |     |         |             |          |          | 44,821  |       
|                                                |  | Other current assets                                 |                            |                           | 404     |        |         |              | 7,616   |              |         |              | 496    |              |          |     |         |             |          |          | 8,516   |       
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       
|                                                |  |                                                      |                            | Total current assets      |         |        | 47,054  |              |         |              | 139,356 |              |        |              | 38,628   |     |          |             | (963     | )        |         |        | 224,075 | 
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       
|Long-term investment (restricted)               |  |                                                      |                           |                           |         |        | 864     |              |         |              |        |              |        |              |         |     |          |             | 864      |         
|Long-term receivables, net                      |  |                                                      | 159,723                    |                           |         |        | 15,113  |              |         |              | 12      |              |        |              | (159,983 | )   |          |             | 14,865   |         
|Leased gaming equipment, net                    |  |                                                      |                           |                           |         |        | 25,792  |              |         |              |        |              |        |              |         |     |          |             | 25,792   |         
|Property, plant and equipment, net              |  |                                                      | 74                         |                           |         |        | 30,030  |              |         |              | 36,426  |              |        |              |         |     |          |             | 66,530   |         
|Goodwill, net                                   |  |                                                      | (900                       | )                         |         |        | 50,047  |              |         |              | 15,647  |              |        |              |         |     |          |             | 64,794   |         
|Intangible assets, net                          |  |                                                      | 7,049                      |                           |         |        | 14,809  |              |         |              | 5,032   |              |        |              |         |     |          |             | 26,890   |         
|Investments in subsidiaries                     |  |                                                      | 296,273                    |                           |         |        | 74,990  |              |         |              |        |              |        |              | (371,263 | )   |          |             |         |         
|Deferred tax assets, net                        |  |                                                      | 1,634                      |                           |         |        |        |              |         |              |        |              |        |              | (1,634   | )   |          |             |         |         
|Assets of discontinued operations held for sale |  |                                                      | 16,539                     |                           |         |        | 80,133  |              |         |              | 4,103   |              |        |              |         |     |          |             | 100,775  |         
|Other assets, net                               |  |                                                      | (84,406                    | )                         |         |        | 99,918  |              |         |              | (14,933 | )            |        |              | 1        |     |          |             | 580      |         
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       
|                                                |  | $                                                    | 443,040                    |                           |         | $      | 531,052 |              |         | $            | 84,915  |              |        | $            | (533,842 | )   |          | $           | 525,165  |         
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY           
|Current liabilities:                            |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |         
|                                                |  | Accounts payable                                     |                            | $                         | 1,295   |        |         | $            | 19,693  |              |         | $            | 1,924  |              |          | $   |         |             |          | $        | 22,912  |       
|                                                |  | Accrued liabilities                                  |                            |                           | 7,378   |        |         |              | 18,918  |              |         |              | 5,368  |              |          |     | (751     | )           |          |          | 30,913  |       
|                                                |  | Jackpot liabilities                                  |                            |                           |        |        |         |              | 10,462  |              |         |              | 142    |              |          |     |         |             |          |          | 10,604  |       
|                                                |  | Current maturities of long-term debt                 |                            |                           | 2,395   |        |         |              | 1,124   |              |         |              | 18     |              |          |     |         |             |          |          | 3,537   |       
|                                                |  | Liabilities of discontinued operations held
for sale |                            |                           | 1,000   |        |         |              | 11,666  |              |         |              | 828    |              |          |     |         |             |          |          | 13,494  |       
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       
|                                                |  |                                                      |                            | Total current liabilities |         |        | 12,068  |              |         |              | 61,863  |              |        |              | 8,280    |     |          |             | (751     | )        |         |        | 81,460  | 
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       
|Long term debt, net                             |  |                                                      | 335,388                    |                           |         |        | 166,013 |              |         |              |        |              |        |              | (159,723 | )   |          |             | 341,678  |         
|Deferred tax liabilities                        |  |                                                      |                           |                           |         |        | 5,679   |              |         |              | 1,635   |              |        |              | (1,634   | )   |          |             | 5,680    |         
|Other liabilities                               |  |                                                      | 2,624                      |                           |         |        | 753     |              |         |              | 10      |              |        |              |         |     |          |             | 3,387    |         
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       
|                                                |  |                                                      |                            | Total liabilities         |         |        | 350,080 |              |         |              | 234,308 |              |        |              | 9,925    |     |          |             | (162,108 | )        |         |        | 432,205 | 
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       
|Minority interest                               |  |                                                      | 1,330                      |                           |         |        |        |              |         |              |        |              |        |              |         |     |          |             | 1,330    |         
|Commitments and contingencies                   |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |         
|Stockholders equity:                           |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |         
|                                                |  | Special Stock Series E                               |                            |                           | 12      |        |         |              |        |              |         |              |       |              |          |     |         |             |          |          | 12      |       
|                                                |  | Common Stock                                         |                            |                           | 4,996   |        |         |              | 478     |              |         |              | 1,027  |              |          |     | (1,505   | )           |          |          | 4,996   |       
|                                                |  | Treasury stock                                       |                            |                           | (501    | )      |         |              |        |              |         |              |       |              |          |     |         |             |          |          | (501    | )     
|                                                |  | Additional paid-in capital                           |                            |                           | 163,267 |        |         |              | 190,449 |              |         |              | 33,415 |              |          |     | (223,864 | )           |          |          | 163,267 |       
|                                                |  | Accumulated other comprehensive
income (loss)        |                            |                           | 1,287   |        |         |              | 1,290   |              |         |              | 1,267  |              |          |     | (2,557   | )           |          |          | 1,287   |       
|                                                |  | Retained earnings (accumulated deficit)              |                            |                           | (77,431 | )      |         |              | 104,527 |              |         |              | 39,281 |              |          |     | (143,808 | )           |          |          | (77,431 | )     
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       
|                                                |  |                                                      | Total stockholders equity |                           |         | 91,630 |         |              |         | 296,744      |         |              |        | 74,990       |          |     |          | (371,734    | )        |          |         | 91,630 |        
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       
|                                                |  | $                                                    | 443,040                    |                           |         | $      | 531,052 |              |         | $            | 84,915  |              |        | $            | (533,842 | )   |          | $           | 525,165  |         
|                                                |  |                                                      |                            |                           |         |        |         |              |         |              |         |              |        |              |          |     |          |             |          |          |         |       

See accompanying notes.

F-27



---



##### 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)

|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------------- |  | ------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------ | --- |  | ----------- | ------- | -------- |  | ------- | ------- | -
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  | Reclas-     |         | Alliance
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  | sifications |         | Gaming  
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  | Non-         |        | and |  | Corporation
|                                                             |                                                                                    |  |         |         |              |  | Guaranteeing |         | Guaranteeing |  | Elimina-     |        | and
|                                                             |                                                                                    |  | Parent  |         | Subsidiaries |  | Subsidiaries |         | tions        |  | Subsidiaries
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |             
|Revenues:                                                    |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             | Gaming equipment and systems                                                       |  | $       |        |              |  | $            | 155,812 |              |  | $            | 13,950 |     |  | $           | (8,226  | )        |  | $       | 161,536 |  
|                                                             | Casino operations                                                                  |  |         |        |              |  |              | 20,937  |              |  |              | 61,172 |     |  |             | (8,610  | )        |  |         | 73,499  |  
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|                                                             |                                                                                    |  |        |         |              |  | 176,749      |         |              |  | 75,122       |        |     |  | (16,836     | )       |          |  | 235,035 |        
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|Costs and expenses:                                          |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             | Cost of gaming equipment and systems                                               |  |         |        |              |  |              | 76,443  |              |  |              | 9,190  |     |  |             | (8,210  | )        |  |         | 77,423  |  
|                                                             | Cost of casino operations                                                          |  |         |        |              |  |              | 10,671  |              |  |              | 21,870 |     |  |             |        |          |  |         | 32,541  |  
|                                                             | Selling, general and administrative                                                |  |         | 10,268  |              |  |              | 39,987  |              |  |              | 19,117 |     |  |             | (8,626  | )        |  |         | 60,746  |  
|                                                             | Research and development costs                                                     |  |         |        |              |  |              | 11,028  |              |  |              |       |     |  |             |        |          |  |         | 11,028  |  
|                                                             | Depreciation and amortization                                                      |  |         | 1,559   |              |  |              | 9,580   |              |  |              | 1,791  |     |  |             | (44     | )        |  |         | 12,886  |  
|                                                             | Unusual item                                                                       |  |         | 6,489   |              |  |              |        |              |  |              |       |     |  |             |        |          |  |         | 6,489   |  
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|                                                             |                                                                                    |  | 18,316  |         |              |  | 147,709      |         |              |  | 51,968       |        |     |  | (16,880     | )       |          |  | 201,113 |        
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|Operating income (loss)                                      |                                                                                    |  | (18,316 | )       |              |  | 29,040       |         |              |  | 23,154       |        |     |  | 44          |         |          |  | 33,922  |        
|Earnings in consolidated subsidiaries                        |                                                                                    |  | 35,615  |         |              |  | 28,483       |         |              |  |             |        |     |  | (64,098     | )       |          |  |        |        
|Other income (expense):                                      |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             | Interest income                                                                    |  |         | 10,689  |              |  |              |        |              |  |              | 384    |     |  |             | (10,434 | )        |  |         | 639     |  
|                                                             | Interest expense                                                                   |  |         | (33,149 | )            |  |              | (10,008 | )            |  |              | (218   | )   |  |             | 10,434  |          |  |         | (32,941 | )
|                                                             | Rainbow royalty                                                                    |  |         | 6,590   |              |  |              |        |              |  |              | (6,590 | )   |  |             |        |          |  |         |        |  
|                                                             | Minority interest                                                                  |  |         | (2,165  | )            |  |              |        |              |  |              |       |     |  |             |        |          |  |         | (2,165  | )
|                                                             | Other, net                                                                         |  |         | (2,755  | )            |  |              | (11,616 | )            |  |              | 11,753 |     |  |             |        |          |  |         | (2,618  | )
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|Income (loss) from continuing operations
before income taxes |                                                                                    |  | (3,491  | )       |              |  | 35,899       |         |              |  | 28,483       |        |     |  | (64,054     | )       |          |  | (3,163  | )      
|Income tax expense (benefit)                                 |                                                                                    |  | (1,641  | )       |              |  | 328          |         |              |  |             |        |     |  |            |         |          |  | (1,313  | )      
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|Net income (loss) from continuing operations                 |                                                                                    |  | (1,850  | )       |              |  | 35,571       |         |              |  | 28,483       |        |     |  | (64,054     | )       |          |  | (1,850  | )      
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|Discontinued Operations:                                     |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             | Income from discontinued operations of wall
machines and amusement games unit, net |  |         | 10      |              |  |              |        |              |  |              | 2,443  |     |  |             |        |          |  |         | 2,453   |  
|                                                             | Income from disc. ops. of Nevada Route, net                                        |  |         |        |              |  |              | 12,147  |              |  |              |       |     |  |             | 192     |          |  |         | 12,339  |  
|                                                             | Income from disc. ops. of Louisiana Route, net                                     |  |         |        |              |  |              |        |              |  |              | 1,540  |     |  |             |        |          |  |         | 1,540   |  
|                                                             | Earnings from consolidated discontinued
operations                                 |  |         | 16,322  |              |  |              | 3,983   |              |  |              |       |     |  |             | (20,305 | )        |  |         |        |  
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|                                                             | Income (loss) from discontinued operations                                         |  |         | 16,332  |              |  |              | 16,130  |              |  |              | 3,983  |     |  |             | (20,113 | )        |  |         | 16,332  |  
|                                                             |                                                                                    |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|                                                             | Net income (loss)                                                                  |  | $       | 14,482  |              |  | $            | 51,701  |              |  | $            | 32,466 |     |  | $           | (84,167 | )        |  | $       | 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)

|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------- |  | ------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- | --- |  | ----------- | ------- | -------- |  | ------- | ------- | -
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  | Reclas-     |         | Alliance
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  | sifications |         | Gaming  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  | Non-         |         | and |  | Corporation
|                                                             |                                                                                           |  |         |         |              |  | Guaranteeing |         | Guaranteeing |  | Elimina-     |         | and
|                                                             |                                                                                           |  | Parent  |         | Subsidiaries |  | Subsidiaries |         | tions        |  | Subsidiaries
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |             
|Revenues:                                                    |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |        
|                                                             | Gaming equipment and systems                                                              |  | $       |        |              |  | $            | 216,844 |              |  | $            | 23,630  |     |  | $           | (16,771 | )        |  | $       | 223,703 |  
|                                                             | Casino operations                                                                         |  |         |        |              |  |              | 22,488  |              |  |              | 58,812  |     |  |             | (8,929  | )        |  |         | 72,371  |  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  
|                                                             |                                                                                           |  |        |         |              |  | 239,332      |         |              |  | 82,442       |         |     |  | (25,700     | )       |          |  | 296,074 |        
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  
|Costs and expenses:                                          |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |        
|                                                             | Cost of gaming equipment and systems                                                      |  |         |        |              |  |              | 100,407 |              |  |              | 15,023  |     |  |             | (16,710 | )        |  |         | 98,720  |  
|                                                             | Cost of casino operations                                                                 |  |         |        |              |  |              | 11,172  |              |  |              | 21,021  |     |  |             |        |          |  |         | 32,193  |  
|                                                             | Selling, general and administrative                                                       |  |         | 10,360  |              |  |              | 54,990  |              |  |              | 22,111  |     |  |             | (8,990  | )        |  |         | 78,471  |  
|                                                             | Research and development costs                                                            |  |         |        |              |  |              | 15,012  |              |  |              |        |     |  |             |        |          |  |         | 15,012  |  
|                                                             | Depreciation and amortization                                                             |  |         | 2,202   |              |  |              | 10,986  |              |  |              | 1,525   |     |  |             | (143    | )        |  |         | 14,570  |  
|                                                             | Unusual item                                                                              |  |         |        |              |  |              |        |              |  |              |        |     |  |             |        |          |  |         |        |  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  
|                                                             |                                                                                           |  | 12,562  |         |              |  | 192,567      |         |              |  | 59,680       |         |     |  | (25,843     | )       |          |  | 238,966 |        
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  
|Operating income (loss)                                      |                                                                                           |  | (12,562 | )       |              |  | 46,765       |         |              |  | 22,762       |         |     |  | 143         |         |          |  | 57,108  |        
|Earnings in consolidated subsidiaries                        |                                                                                           |  | 60,271  |         |              |  | 15,119       |         |              |  |             |         |     |  | (75,390     | )       |          |  |        |        
|Other income (expense):                                      |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |        
|                                                             | Interest income                                                                           |  |         | 11,336  |              |  |              | 1       |              |  |              | 56      |     |  |             | (11,014 | )        |  |         | 379     |  
|                                                             | Interest expense                                                                          |  |         | (28,172 | )            |  |              | (11,002 | )            |  |              | (70     | )   |  |             | 11,014  |          |  |         | (28,230 | )
|                                                             | Rainbow royalty                                                                           |  |         | 6,380   |              |  |              |        |              |  |              | (6,380  | )   |  |             |        |          |  |         |        |  
|                                                             | Minority interest                                                                         |  |         | (1,935  | )            |  |              |        |              |  |              |        |     |  |             |        |          |  |         | (1,935  | )
|                                                             | Other, net                                                                                |  |         | 2,180   |              |  |              | 288     |              |  |              | (1,233  | )   |  |             |        |          |  |         | 1,235   |  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  
|Income (loss) from continuing operations
before income taxes |                                                                                           |  | 37,498  |         |              |  | 51,171       |         |              |  | 15,135       |         |     |  | (75,247     | )       |          |  | 28,557  |        
|Income tax expense (benefit)                                 |                                                                                           |  | (29,499 | )       |              |  | (8,957       | )       |              |  | 16           |         |     |  |            |         |          |  | (38,440 | )      
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  
|Net income (loss) from continuing operations                 |                                                                                           |  | 66,997  |         |              |  | 60,128       |         |              |  | 15,119       |         |     |  | (75,247     | )       |          |  | 66,997  |        
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  
|Discontinued Operations:                                     |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |        
|                                                             | Income (loss) from discontinued operations of
wall machines and amusement games unit, net |  |         | 1,373   |              |  |              |        |              |  |              | (18,540 | )   |  |             |        |          |  |         | (17,167 | )
|                                                             | Income from disc. ops. of Nevada Route, net                                               |  |         |        |              |  |              | 11,960  |              |  |              |        |     |  |             | 620     |          |  |         | 12,580  |  
|                                                             | Income from disc. ops. of Louisiana Route, net                                            |  |         |        |              |  |              |        |              |  |              | 1,439   |     |  |             |        |          |  |         | 1,439   |  
|                                                             | Earnings from consolidated discontinued
operations                                        |  |         | (4,521  | )            |  |              | (17,101 | )            |  |              |        |     |  |             | 21,622  |          |  |         |        |  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  
|Income (loss) from discontinued operations                   |                                                                                           |  | (3,148  | )       |              |  | (5,141       | )       |              |  | (17,101      | )       |     |  | 22,242      |         |          |  | (3,148  | )      
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  
|                                                             | Net income (loss)                                                                         |  | $       | 63,849  |              |  | $            | 54,987  |              |  | $            | (1,982  | )   |  | $           | (53,005 | )        |  | $       | 63,849  |  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |         |     |  |             |         |          |  |         |         |  

See accompanying notes.

F-29



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Year ended June 30, 2003
(In 000s)

|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------- |  | ------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------ | --- |  | ----------- | ------- | -------- |  | ------- | ------- | -
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  | Reclas-     |         | Alliance
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  | sifications |         | Gaming  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  | Non-         |        | and |  | Corporation
|                                                             |                                                                                           |  |         |         |              |  | Guaranteeing |         | Guaranteeing |  | Elimina-     |        | and
|                                                             |                                                                                           |  | Parent  |         | Subsidiaries |  | Subsidiaries |         | tions        |  | Subsidiaries
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |             
|Revenues:                                                    |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             | Gaming equipment and systems                                                              |  | $       |        |              |  | $            | 322,560 |              |  | $            | 44,057 |     |  | $           | (31,181 | )        |  | $       | 335,436 |  
|                                                             | Casino operations                                                                         |  |         |        |              |  |              | 23,708  |              |  |              | 57,257 |     |  |             | (8,841  | )        |  |         | 72,124  |  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             |                                                                                           |  |        |         |              |  | 346,268      |         |              |  | 101,314      |        |     |  | (40,022     | )       |          |  | 407,560 |        
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|Costs and expenses:                                          |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             | Cost of gaming equipment and systems                                                      |  |         |        |              |  |              | 145,262 |              |  |              | 30,193 |     |  |             | (31,103 | )        |  |         | 144,352 |  
|                                                             | Cost of casino operations                                                                 |  |         |        |              |  |              | 11,435  |              |  |              | 21,208 |     |  |             |        |          |  |         | 32,643  |  
|                                                             | Selling, general and administrative                                                       |  |         | 10,927  |              |  |              | 72,042  |              |  |              | 25,013 |     |  |             | (8,911  | )        |  |         | 99,071  |  
|                                                             | Research and development costs                                                            |  |         |        |              |  |              | 18,499  |              |  |              | 1,456  |     |  |             |        |          |  |         | 19,955  |  
|                                                             | Depreciation and amortization                                                             |  |         | 2,286   |              |  |              | 16,797  |              |  |              | 2,520  |     |  |             |        |          |  |         | 21,603  |  
|                                                             | Unusual item                                                                              |  |         |        |              |  |              |        |              |  |              |       |     |  |             |        |          |  |         |        |  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             |                                                                                           |  | 13,213  |         |              |  | 264,035      |         |              |  | 80,390       |        |     |  | (40,014     | )       |          |  | 317,624 |        
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|Operating income (loss)                                      |                                                                                           |  | (13,213 | )       |              |  | 82,233       |         |              |  | 20,924       |        |     |  | (8          | )       |          |  | 89,936  |        
|Earnings in consolidated subsidiaries                        |                                                                                           |  | 80,666  |         |              |  | 11,660       |         |              |  |             |        |     |  | (92,326     | )       |          |  |        |        
|Other income (expense):                                      |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             | Interest income                                                                           |  |         | 12,291  |              |  |              | 1       |              |  |              | 57     |     |  |             | (12,128 | )        |  |         | 221     |  
|                                                             | Interest expense                                                                          |  |         | (25,433 | )            |  |              | (12,273 | )            |  |              | (67    | )   |  |             | 12,128  |          |  |         | (25,645 | )
|                                                             | Rainbow royalty                                                                           |  |         | 6,216   |              |  |              |        |              |  |              | (6,216 | )   |  |             |        |          |  |         |        |  
|                                                             | Minority interest                                                                         |  |         | (2,009  | )            |  |              |        |              |  |              |       |     |  |             |        |          |  |         | (2,009  | )
|                                                             | Other, net                                                                                |  |         | 1,726   |              |  |              | (90     | )            |  |              | (1,394 | )   |  |             |        |          |  |         | 242     |  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|Income (loss) from continuing operations before
income taxes |                                                                                           |  | 60,244  |         |              |  | 81,531       |         |              |  | 13,304       |        |     |  | (92,334     | )       |          |  | 62,745  |        
|Income tax expense (benefit)                                 |                                                                                           |  | 19,815  |         |              |  | 857          |         |              |  | 1,644        |        |     |  |            |         |          |  | 22,316  |        
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|Net income (loss) from continuing operations                 |                                                                                           |  | 40,429  |         |              |  | 80,674       |         |              |  | 11,660       |        |     |  | (92,334     | )       |          |  | 40,429  |        
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|Discontinued Operations:                                     |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             | Loss on sale of wall machines and
amusement games unit, net                               |  |         | (25,358 | )            |  |              |        |              |  |              |       |     |  |             |        |          |  |         | (25,358 | )
|                                                             | Income (loss) from discontinued operations
of wall machines and amusement games
unit, net |  |         | 1,593   |              |  |              | (13,101 | )            |  |              | (1,278 | )   |  |             | 11,891  |          |  |         | (895    | )
|                                                             | Income from disc. ops. of Nevada Route, net                                               |  |         |        |              |  |              | 4,059   |              |  |              |       |     |  |             |        |          |  |         | 4,059   |  
|                                                             | Income from disc. ops. of Louisiana Route, net                                            |  |         |        |              |  |              |        |              |  |              | 1,288  |     |  |             |        |          |  |         | 1,288   |  
|                                                             | Earnings from consolidated discontinued
operations                                        |  |         | 2,859   |              |  |              | (36,268 | )            |  |              |       |     |  |             | 33,409  |          |  |         |        |  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|Income (loss) from discontinued operations                   |                                                                                           |  | (20,906 | )       |              |  | (45,310      | )       |              |  | 10           |        |     |  | 45,300      |         |          |  | (20,906 | )      
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |        
|                                                             | Net income (loss)                                                                         |  | $       | 19,523  |              |  | $            | 35,364  |              |  | $            | 11,670 |     |  | $           | (47,034 | )        |  | $       | 19,523  |  
|                                                             |                                                                                           |  |         |         |              |  |              |         |              |  |              |        |     |  |             |         |          |  |         |         |  

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)

|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |          |         |  
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------- | - | -------- | ------- | ------------ | ------ | ------------ | ------- | ------------ | ----- | ------------ | ------- | --- | - | ----------- | ------ | -------- | ------ | -------- | ------- | -
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   | Reclas-     |        | Alliance
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   | sifications |        | Gaming  
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       | Non-         |         | and |   | Corporation
|                                                   |                                                                                                    |                                                     |   |          |         |              |        | Guaranteeing |         | Guaranteeing |       | Elimina-     |         | and
|                                                   |                                                                                                    |                                                     |   | Parent   |         | Subsidiaries |        | Subsidiaries |         | tions        |       | Subsidiaries
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |             
|Cash flows from operating activities:              |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |         
|                                                   | Net income (loss)                                                                                  |                                                     | $ | 14,482   |         |              | $      | 51,701       |         |              | $     | 32,466       |         |     | $ | (84,167     | )      |          | $      | 14,482   |        
|                                                   | Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities: |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |          |        
|                                                   |                                                                                                    | (Income) loss from discontinued operations          |   |          | (16,332 | )            |        |              | (16,130 | )            |       |              | (3,983  | )   |   |             | 20,113 |          |        |          | (16,332 | )
|                                                   |                                                                                                    | Write down of goodwill and other assets             |   |          | 3,164   |              |        |              |        |              |       |              |        |     |   |             |       |          |        |          | 3,164   |  
|                                                   |                                                                                                    | Depreciation and amortization                       |   |          | 1,559   |              |        |              | 9,580   |              |       |              | 1,791   |     |   |             | (44    | )        |        |          | 12,886  |  
|                                                   |                                                                                                    | Deferred income taxes                               |   |          | (1,921  | )            |        |              | 1,408   |              |       |              |        |     |   |             |       |          |        |          | (513    | )
|                                                   |                                                                                                    | Provision for losses on receivables                 |   |          | 74      |              |        |              | 32      |              |       |              | 1,645   |     |   |             |       |          |        |          | 1,751   |  
|                                                   |                                                                                                    | Other                                               |   |          | 237     |              |        |              | 1,923   |              |       |              | 72      |     |   |             |       |          |        |          | 2,232   |  
|                                                   | Change in operating assets and liabilities,
net of the effects of business acquired:               |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |          |        
|                                                   |                                                                                                    | Accounts and notes receivable                       |   |          | 479     |              |        |              | 1,433   |              |       |              | 389     |     |   |             | (3,284 | )        |        |          | (983    | )
|                                                   |                                                                                                    | Intercompany accounts                               |   |          | (7,750  | )            |        |              | (37,665 | )            |       |              | (18,508 | )   |   |             | 63,923 |          |        |          |        |  
|                                                   |                                                                                                    | Inventories                                         |   |          |        |              |        |              | (7,577  | )            |       |              | 1,437   |     |   |             |       |          |        |          | (6,140  | )
|                                                   |                                                                                                    | Other current assets                                |   |          | 234     |              |        |              | (246    | )            |       |              | 746     |     |   |             |       |          |        |          | 734     |  
|                                                   |                                                                                                    | Accounts payable                                    |   |          | 255     |              |        |              | 9,356   |              |       |              | 203     |     |   |             |       |          |        |          | 9,814   |  
|                                                   |                                                                                                    | Accrued liabilities and jackpot liabilities         |   |          | 5,211   |              |        |              | 8,495   |              |       |              | (1,333  | )   |   |             | 458    |          |        |          | 12,831  |  
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |          |        
|                                                   |                                                                                                    | Net cash provided by (used in)
operating activities |   |          | (308    | )            |        |              | 22,310  |              |       |              | 14,925  |     |   |             | (3,001 | )        |        |          | 33,926  |  
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |         
|Cash flows from investing activities:              |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |         
|                                                   | Additions to property, plant and equipment                                                         |                                                     |   | (19      | )       |              |        | (3,279       | )       |              |       | (2,332       | )       |     |   |            |        |          |        | (5,630   | )      
|                                                   | Additions to leased gaming equipment                                                               |                                                     |   |         |         |              |        | (11,682      | )       |              |       |             |         |     |   |            |        |          |        | (11,682  | )      
|                                                   | Acquisitions of assets formerly under op. leases                                                   |                                                     |   |         |         |              |        | (1,271       | )       |              |       |             |         |     |   |            |        |          |        | (1,271   | )      
|                                                   | Additions to other long-term assets                                                                |                                                     |   | (2       | )       |              |        | (2,027       | )       |              |       |             |         |     |   |            |        |          |        | (2,029   | )      
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |         
|                                                   |                                                                                                    | Net cash used in investing activities               |   |          | (21     | )            |        |              | (18,259 | )            |       |              | (2,332  | )   |   |             |       |          |        |          | (20,612 | )
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |         
|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 of debt from refinancing                                                                    |                                                     |   | (146,725 | )       |              |        |             |         |              |       |             |         |     |   |            |        |          |        | (146,725 | )      
|                                                   | Reduction of long-term debt                                                                        |                                                     |   | (2,341   | )       |              |        | (3           | )       |              |       | (3,010       | )       |     |   | 3,001       |        |          |        | (2,353   | )      
|                                                   | Net change in revolving credit facility                                                            |                                                     |   | (23,200  | )       |              |        | (103         | )       |              |       |             |         |     |   |            |        |          |        | (23,303  | )      
|                                                   | Purchase of common stock for treasury                                                              |                                                     |   | (436     | )       |              |        |             |         |              |       |             |         |     |   |            |        |          |        | (436     | )      
|                                                   | Proceeds from exercise of stock options                                                            |                                                     |   | 3,673    |         |              |        |             |         |              |       |             |         |     |   |            |        |          |        | 3,673    |        
|                                                   | Dividends received (paid)                                                                          |                                                     |   |         |         |              |        | 10,791       |         |              |       | (10,791      | )       |     |   |            |        |          |        |         |        
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |         
|                                                   |                                                                                                    | Net cash provided by (used in)
financing activities |   |          | 14,002  |              |        |              | 10,685  |              |       |              | (13,801 | )   |   |             | 3,001  |          |        |          | 13,887  |  
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |         
|Effect of exchange rate changes on cash            |                                                                                                    |                                                     |  |          |         |              |       |              |         |              | (366  | )            |         |     |  |             |        |          | (366   | )       
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |         
|Cash provided by (used in) discontinued operations |                                                                                                    |                                                     |  |          |         |              | (9,355 | )            |         |              | 1,299 |              |         |     |  |             |        |          | (8,056 | )       
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |          |        
|                                                   | Increase (decrease) for the year                                                                   |                                                     |   | 13,673   |         |              |        | 5,381        |         |              |       | (275         | )       |     |   |            |        |          |        | 18,779   |        
|                                                   | Balance, beginning of year                                                                         |                                                     |   | 4,563    |         |              |        | 1,326        |         |              |       | 5,989        |         |     |   |            |        |          |        | 11,878   |        
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |         
|                                                   | Balance, end of year                                                                               |                                                     | $ | 18,236   |         |              | $      | 6,707        |         |              | $     | 5,714        |         |     | $ |            |        |          | $      | 30,657   |        
|                                                   |                                                                                                    |                                                     |   |          |         |              |        |              |         |              |       |              |         |     |   |             |        |          |        |         

See accompanying notes.

F-31



---



##### 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)

|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |         |         |  
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------- | - | ------- | ------- | ------------ | ----- | ------------ | ------- | ------------ | ----- | ------------ | ------- | --- | - | ----------- | ------- | -------- | ----- | ------- | ------- | -
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   | Reclas-     |         | Alliance
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   | sifications |         | Gaming  
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       | Non-         |         | and |   | Corporation
|                                                   |                                                                                                    |                                                     |   |         |         |              |       | Guaranteeing |         | Guaranteeing |       | Elimina-     |         | and
|                                                   |                                                                                                    |                                                     |   | Parent  |         | Subsidiaries |       | Subsidiaries |         | tions        |       | Subsidiaries
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |             
|Cash flows from operating activities:              |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|                                                   | Net income (loss)                                                                                  |                                                     | $ | 63,849  |         |              | $     | 54,987       |         |              | $     | (1,982       | )       |     | $ | (53,005     | )       |          | $     | 63,849  |        
|                                                   | Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities: |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |         |        
|                                                   |                                                                                                    | (Income) loss from discontinued operations          |   |         | 3,148   |              |       |              | 5,141   |              |       |              | (7,028  | )   |   |             | (22,242 | )        |       |         | (20,981 | )
|                                                   |                                                                                                    | Write down of goodwill and other assets             |   |         |        |              |       |              |        |              |       |              | 24,129  |     |   |             |        |          |       |         | 24,129  |  
|                                                   |                                                                                                    | Depreciation and amortization                       |   |         | 2,202   |              |       |              | 10,986  |              |       |              | 1,525   |     |   |             | (143    | )        |       |         | 14,570  |  
|                                                   |                                                                                                    | Deferred income taxes                               |   |         | (43,297 | )            |       |              | 5,747   |              |       |              | (125    | )   |   |             |        |          |       |         | (37,675 | )
|                                                   |                                                                                                    | Provision for losses on receivables                 |   |         |        |              |       |              | 2,995   |              |       |              | (474    | )   |   |             |        |          |       |         | 2,521   |  
|                                                   |                                                                                                    | Other                                               |   |         | 6,294   |              |       |              | (7,020  | )            |       |              | (47     | )   |   |             |        |          |       |         | (773    | )
|                                                   | Change in operating assets and liabilities,
net of effects of businesses acquired:                 |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |         |        
|                                                   |                                                                                                    | Accounts and notes receivable                       |   |         | (82     | )            |       |              | (4,205  | )            |       |              | (4,268  | )   |   |             | (846    | )        |       |         | (9,401  | )
|                                                   |                                                                                                    | Intercompany accounts                               |   |         | (48,000 | )            |       |              | (23,919 | )            |       |              | (3,483  | )   |   |             | 75,402  |          |       |         |        |  
|                                                   |                                                                                                    | Inventories                                         |   |         |        |              |       |              | (1,610  | )            |       |              | (426    | )   |   |             |        |          |       |         | (2,036  | )
|                                                   |                                                                                                    | Other current assets                                |   |         | 485     |              |       |              | (3,222  | )            |       |              | 1,221   |     |   |             |        |          |       |         | (1,516  | )
|                                                   |                                                                                                    | Accounts payable                                    |   |         | (304    | )            |       |              | (5,033  | )            |       |              | 474     |     |   |             |        |          |       |         | (4,863  | )
|                                                   |                                                                                                    | Accrued liabilities and jackpot liabilities         |   |         | (2,437  | )            |       |              | 1,693   |              |       |              | 721     |     |   |             | (59     | )        |       |         | (82     | )
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|                                                   |                                                                                                    | Net cash provided by (used in)
operating activities |   |         | (18,142 | )            |       |              | 36,540  |              |       |              | 10,237  |     |   |             | (893    | )        |       |         | 27,742  |  
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|Cash flows from investing activities:              |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|                                                   | Additions to property, plant and equipment                                                         |                                                     |   | (28     | )       |              |       | (4,738       | )       |              |       | (3,400       | )       |     |   |            |         |          |       | (8,166  | )      
|                                                   | Additions to leased gaming equipment                                                               |                                                     |   |        |         |              |       | (15,099      | )       |              |       |             |         |     |   |            |         |          |       | (15,099 | )      
|                                                   | Acquisitions, net of cash acquired                                                                 |                                                     |   | 4,000   |         |              |       | (19,333      | )       |              |       |             |         |     |   |            |         |          |       | (15,333 | )      
|                                                   | Additions to other long-term assets                                                                |                                                     |   | (10     | )       |              |       | (165         | )       |              |       | 43           |         |     |   |            |         |          |       | (132    | )      
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|                                                   |                                                                                                    | Net cash provided by (used in)
investing activities |   |         | 3,962   |              |       |              | (39,335 | )            |       |              | (3,357  | )   |   |             |        |          |       |         | (38,730 | )
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|Cash flows from financing activities:              |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|                                                   | Capitalized debt issuance costs                                                                    |                                                     |   | (662    | )       |              |       |             |         |              |       |             |         |     |   |            |         |          |       | (662    | )      
|                                                   | Reduction of long-term debt                                                                        |                                                     |   | (1,980  | )       |              |       | 152          |         |              |       | (904         | )       |     |   | 893         |         |          |       | (1,839  | )      
|                                                   | Net change in revolving credit facility                                                            |                                                     |   |        |         |              |       |             |         |              |       |             |         |     |   |            |         |          |       |        |        
|                                                   | Proceeds from exercise of stock options and
warrants                                               |                                                     |   | 6,706   |         |              |       |             |         |              |       |             |         |     |   |            |         |          |       | 6,706   |        
|                                                   | Dividends received (paid)                                                                          |                                                     |   |        |         |              |       | 10,346       |         |              |       | (10,346      | )       |     |   |            |         |          |       |        |        
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|                                                   |                                                                                                    | Net cash provided by (used in)
financing activities |   |         | 4,064   |              |       |              | 10,498  |              |       |              | (11,250 | )   |   |             | 893     |          |       |         | 4,205   |  
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|Effect of exchange rate changes on cash            |                                                                                                    |                                                     |  |         |         |              |      |              |         |              | 709   |              |         |     |  |             |         |          | 709   |        
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|Cash provided by (used in) discontinued operations |                                                                                                    |                                                     |  |         |         |              | 4,445 |              |         |              | 4,212 |              |         |     |  |             |         |          | 8,657 |        
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |         |        
|                                                   | Increase
(decrease) for the year                                                                   |                                                     |   | (10,116 | )       |              |       | 12,148       |         |              |       | 551          |         |     |   |            |         |          |       | 2,583   |        
|                                                   | Balance, beginning of year                                                                         |                                                     |   | 18,237  |         |              |       | 6,706        |         |              |       | 5,714        |         |     |   |            |         |          |       | 30,657  |        
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        
|                                                   | Balance, end of year                                                                               |                                                     | $ | 8,121   |         |              | $     | 18,854       |         |              | $     | 6,265        |         |     | $ |            |         |          | $     | 33,240  |        
|                                                   |                                                                                                    |                                                     |   |         |         |              |       |              |         |              |       |              |         |     |   |             |         |          |       |        

See accompanying notes.

F-32



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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, 2003
(In 000s)

|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |         |         |  
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------- | - | ------ | ------- | ------------ | ------ | ------------ | ------- | ------------ | ------ | ------------ | ------- | --- | - | ----------- | ------- | -------- | ------ | ------- | ------- | -
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   | Reclas-     |         | Alliance
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   | sifications |         | Gaming  
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        | Non-         |         | and |   | Corporation
|                                                   |                                                                                                    |                                                     |   |        |         |              |        | Guaranteeing |         | Guaranteeing |        | Elimina-     |         | and
|                                                   |                                                                                                    |                                                     |   | Parent |         | Subsidiaries |        | Subsidiaries |         | tions        |        | Subsidiaries
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |             
|Cash flows from operating activities:              |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        
|                                                   | Net income (loss)                                                                                  |                                                     | $ | 19,523 |         |              | $      | 35,364       |         |              | $      | 11,670       |         |     | $ | (47,034     | )       |          | $      | 19,523  |        
|                                                   | Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities: |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |         |        
|                                                   |                                                                                                    | (Income) loss from discontinued operations          |   |        | (4,452  | )            |        |              | 45,310  |              |        |              | (10     | )   |   |             | (45,300 | )        |        |         | (4,452  | )
|                                                   |                                                                                                    | Write down of goodwill and other assets             |   |        | 38,728  |              |        |              |        |              |        |              |        |     |   |             |        |          |        |         | 38,728  |  
|                                                   |                                                                                                    | Depreciation and amortization                       |   |        | 2,286   |              |        |              | 16,797  |              |        |              | 2,520   |     |   |             |        |          |        |         | 21,603  |  
|                                                   |                                                                                                    | Deferred income taxes                               |   |        | 5,663   |              |        |              | (830    | )            |        |              | 278     |     |   |             |         |          |        |         | 5,111   |  
|                                                   |                                                                                                    | Provision for losses on receivables                 |   |        |        |              |        |              | 1,519   |              |        |              | 18      |     |   |             |        |          |        |         | 1,537   |  
|                                                   |                                                                                                    | Other                                               |   |        | 176     |              |        |              | 115     |              |        |              | (1      | )   |   |             |        |          |        |         | 290     |  
|                                                   | Change in operating assets and liabilities,
net of effects of businesses acquired:                 |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |         |        
|                                                   |                                                                                                    | Accounts and notes receivable                       |   |        | 5       |              |        |              | (39,586 | )            |        |              | (10,867 | )   |   |             |        |          |        |         | (50,448 | )
|                                                   |                                                                                                    | Intercompany accounts                               |   |        | (54,909 | )            |        |              | (48,486 | )            |        |              | 11,003  |     |   |             | 92,392  |          |        |         |        |  
|                                                   |                                                                                                    | Inventories                                         |   |        |        |              |        |              | 1,027   |              |        |              | (26     | )   |   |             |        |          |        |         | 1,001   |  
|                                                   |                                                                                                    | Other current assets                                |   |        | (144    | )            |        |              | (804    | )            |        |              | 2,325   |     |   |             |        |          |        |         | 1,377   |  
|                                                   |                                                                                                    | Accounts payable                                    |   |        | 3,767   |              |        |              | 4,396   |              |        |              | (881    | )   |   |             |        |          |        |         | 7,282   |  
|                                                   |                                                                                                    | Accrued liabilities and jackpot liabilities         |   |        | (4,443  | )            |        |              | 6,408   |              |        |              | 634     |     |   |             | (22     | )        |        |         | 2,577   |  
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |         |        
|                                                   |                                                                                                    | Net cash provided by (used in)
operating activities |   |        | 6,200   |              |        |              | 21,230  |              |        |              | 16,663  |     |   |             | 36      |          |        |         | 44,129  |  
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        
|Cash flows from investing activities:              |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        
|                                                   | Additions to property, plant and equipment                                                         |                                                     |   | (7     | )       |              |        | (5,687       | )       |              |        | (6,163       | )       |     |   |            |         |          |        | (11,857 | )      
|                                                   | Additions to leased gaming equipment                                                               |                                                     |   |       |         |              |        | (21,357      | )       |              |        |             |         |     |   |            |         |          |        | (21,357 | )      
|                                                   | Acquisitions, net of cash acquired                                                                 |                                                     |   |       |         |              |        | (11,528      | )       |              |        |             |         |     |   |            |         |          |        | (11,528 | )      
|                                                   | Additions to other long-term assets                                                                |                                                     |   | (240   | )       |              |        | (3,285       | )       |              |        | (45          | )       |     |   |            |         |          |        | (3,570  | )      
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        
|                                                   |                                                                                                    | Net cash used in investing activities               |   |        | (247    | )            |        |              | (41,857 | )            |        |              | (6,208  | )   |   |             |        |          |        |         | (48,312 | )
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        
|Cash flows from financing activities:              |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        
|                                                   | Reduction of long-term debt                                                                        |                                                     |   | (3,900 | )       |              |        | (836         | )       |              |        | (5           | )       |     |   |            |         |          |        | (4,741  | )      
|                                                   | Bally Austria APIC                                                                                 |                                                     |   |       |         |              |        |             |         |              |        | 36           |         |     |   | (36         | )       |          |        |        |        
|                                                   | Net change in revolving credit facility                                                            |                                                     |   |       |         |              |        |             |         |              |        |             |         |     |   |            |         |          |        |        |        
|                                                   | Proceeds from exercise of stock options                                                            |                                                     |   | 2,556  |         |              |        |             |         |              |        |             |         |     |   |            |         |          |        | 2,556   |        
|                                                   | Dividends received (paid)                                                                          |                                                     |   |       |         |              |        | 7,179        |         |              |        | (7,179       | )       |     |   |            |         |          |        |        |        
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        
|                                                   |                                                                                                    | Net cash provided by (used in)
financing activities |   |        | (1,344  | )            |        |              | 6,343   |              |        |              | (7,148  | )   |   |             | (36     | )        |        |         | (2,185  | )
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        
|Effect of exchange rate changes on cash            |                                                                                                    |                                                     |  |        |         |              |       |              |         |              | 286    |              |         |     |  |             |         |          | 286    |        
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        
|Cash provided by (used in) discontinued operations |                                                                                                    |                                                     |  |        |         |              | 14,740 |              |         |              | (1,740 | )            |         |     |  |             |         |          | 13,000 |        
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |         |        
|                                                   | Increase for the year                                                                              |                                                     |   | 4,609  |         |              |        | 456          |         |              |        | 1,853        |         |     |   |            |         |          |        | 6,918   |        
|                                                   | Balance, beginning of year                                                                         |                                                     |   | 8,121  |         |              |        | 18,854       |         |              |        | 6,265        |         |     |   |            |         |          |        | 33,240  |        
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        
|                                                   | Balance, end of year                                                                               |                                                     | $ | 12,730 |         |              | $      | 19,310       |         |              | $      | 8,118        |         |     | $ |            |         |          | $      | 40,158  |        
|                                                   |                                                                                                    |                                                     |   |        |         |              |        |              |         |              |        |              |         |     |   |             |         |          |        |        

See accompanying notes.

F-33



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2002 and 2003

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, 2002 consist of the following (in 000s):

|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  |             |          |          |  |   |         | 
|------------------------------------------------------------------- |  | ------ | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | -- | --- |  | ----------- | -------- | -------- |  | - | ------- | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  | Reclas-     |          | Alliance
|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  | sifications |          | Gaming  
|                                                                    |  |        |         |              |  |              |         |              |  | Non-         |    | and |  | Corporation
|                                                                    |  |        |         |              |  | Guaranteeing |         | Guaranteeing |  | Elimina-     |    | and
|                                                                    |  | Parent |         | Subsidiaries |  | Subsidiaries |         | tions        |  | Subsidiaries
|                                                                    |  |        |         |              |  |              |         |              |  |             
|10% Senior Subordinated Notes due
2007, net of unamortized discount |  | $      | 149,584 |              |  | $            |        |              |  | $            |   |     |  | $           |         |          |  | $ | 149,584 | 
|Term Loan Facility                                                  |  |        | 189,525 |              |  |              |        |              |  |              |   |     |  |             |         |          |  |   | 189,525 | 
|Other subordinated debt                                             |  |        | 2,495   |              |  |              |        |              |  |              |   |     |  |             |         |          |  |   | 2,495   | 
|Intercompany notes payable                                          |  |        |        |              |  |              | 147,594 |              |  |              |   |     |  |             | (147,594 | )        |  |   |        | 
|Other                                                               |  |        |        |              |  |              | 172     |              |  |              | 23 |     |  |             |         |          |  |   | 195     | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  |             |          |          |  |   |         | 
|                                                                    |  |        | 341,604 |              |  |              | 147,766 |              |  |              | 23 |     |  |             | (147,594 | )        |  |   | 341,799 | 
|Less current maturities                                             |  |        | 3,900   |              |  |              | 79      |              |  |              | 11 |     |  |             |         |          |  |   | 3,990   | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  |             |          |          |  |   |         | 
|Long-term debt, less current
Maturities                             |  | $      | 337,704 |              |  | $            | 147,687 |              |  | $            | 12 |     |  | $           | (147,594 | )        |  | $ | 337,809 | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  |             |          |          |  |   |         | 

Long-term debt and lines of credit at June 30, 2003 consist of the following (in 000s):

|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  |             |          |          |  |   |         | 
|------------------------------------------------------------------- |  | ------ | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | -- | --- |  | ----------- | -------- | -------- |  | - | ------- | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  | Reclas-     |          | Alliance
|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  | sifications |          | Gaming  
|                                                                    |  |        |         |              |  |              |         |              |  | Non-         |    | and |  | Corporation
|                                                                    |  |        |         |              |  | Guaranteeing |         | Guaranteeing |  | Elimina-     |    | and
|                                                                    |  | Parent |         | Subsidiaries |  | Subsidiaries |         | tions        |  | Subsidiaries
|                                                                    |  |        |         |              |  |              |         |              |  |             
|10% Senior Subordinated Notes due
2007, net of unamortized discount |  | $      | 149,663 |              |  | $            |        |              |  | $            |   |     |  | $           |         |          |  | $ | 149,663 | 
|Term Loan Facility                                                  |  |        | 187,625 |              |  |              |        |              |  |              |   |     |  |             |         |          |  |   | 187,625 | 
|Other subordinated debt                                             |  |        | 495     |              |  |              |        |              |  |              |   |     |  |             |         |          |  |   | 495     | 
|Intercompany notes payable                                          |  |        |        |              |  |              | 159,723 |              |  |              |   |     |  |             | (159,723 | )        |  |   |        | 
|Other                                                               |  |        |        |              |  |              | 7,414   |              |  |              | 18 |     |  |             |         |          |  |   | 7,432   | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  |             |          |          |  |   |         | 
|                                                                    |  |        | 337,783 |              |  |              | 167,137 |              |  |              | 18 |     |  |             | (159,723 | )        |  |   | 345,215 | 
|Less current maturities                                             |  |        | 2,395   |              |  |              | 1,124   |              |  |              | 18 |     |  |             |         |          |  |   | 3,537   | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  |             |          |          |  |   |         | 
|Long-term debt, less current
maturities                             |  | $      | 335,388 |              |  | $            | 166,013 |              |  | $            |   |     |  | $           | (159,723 | )        |  | $ | 341,678 | 
|                                                                    |  |        |         |              |  |              |         |              |  |              |    |     |  |             |          |          |  |   |         | 

F-34



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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, 2002 are as follows (in 000s):

|                                     |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   |      |   |       |  |              |  |     |   |             |   |          |   |        |        | 
|------------------------------------ | ------------------------------------------------------------------- | - | ------ | ------ | ------------ | - | ------------ | ----- |  |  | ------------ |  | ------------ | - | ---- | - | ----- |  | ------------ |  | --- | - | ----------- | - | -------- | - | ------ | ------ | 
|                                     |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   |      |   |       |  |              |  |     |   | Reclas-     |   | Alliance
|                                     |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   |      |   |       |  |              |  |     |   | sifications |   | Gaming  
|                                     |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   | Non- |   |       |  |              |  | and |   | Corporation
|                                     |                                                                     |   |        |        |              |   | Guaranteeing |       |  |  |              |  | Guaranteeing |   |      |   |       |  | Elimina-     |  | and
|                                     |                                                                     |   | Parent |        | 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                                     |   |        | (114   | )            |   |              | 2,942 |  |  |              |  |              |   |      |  |       |  |              |  |     |   |             |  |          |   |        | 2,828  | 
|                                     | Bad debt reserves                                                   |   |        | 320    |              |   |              | 1,937 |  |  |              |  |              |   |      |  |       |  |              |  |     |   |             |  |          |   |        | 2,257  | 
|                                     | Accruals not currently deductible
for tax purposes                  |   |        | 946    |              |   |              | 6,217 |  |  |              |  |              |   |      |  |       |  |              |  |     |   |             |  |          |   |        | 7,163  | 
|                                     | Refinancing costs being amortized
for tax purposes                  |   |        | 4,378  |              |   |              |      |  |  |              |  |              |   |      |  |       |  |              |  |     |   |             |  |          |   |        | 4,378  | 
|                                     | Other                                                               |   |        | 10,878 |              |   |              | 217   |  |  |              |  |              |   |      |  |       |  |              |  |     |   |             |  |          |   |        | 11,095 | 
|                                     |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   |      |   |       |  |              |  |     |   |             |   |          |   |        |       
|Total gross deferred tax assets      |                                                                     |   | 48,247 |        |              |   | 12,262       |       |  |  |              |  |              |   |     |   |       |  |              |  |     |   |            |   |          |   | 60,509 |       
|Less: Valuation allowance            |                                                                     |   | (7,375 | )      |              |   |             |       |  |  |              |  |              |   |     |   |       |  |              |  |     |   |            |   |          |   | (7,375 | )     
|                                     |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   |      |   |       |  |              |  |     |   |             |   |          |   |        |       
|Deferred tax assets                  |                                                                     | $ | 40,872 |        |              | $ | 12,262       |       |  |  |              |  |              | $ |     |   |       |  |              |  |     | $ |            |   |          | $ | 53,134 |       
|                                     |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   |      |   |       |  |              |  |     |   |             |   |          |   |        |       
|Deferred tax liabilities:            |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   |      |   |       |  |              |  |     |   |             |   |          |   |        |       
|                                     | Property and equipment, principally
due to depreciation differences |   |        | 3,843  |              |   | $            | 2,230 |  |  |              |  |              |   | $    |  |       |  |              |  |     |   | $           |  |          |   | $      | 6,073  | 
|                                     | Intangibles                                                         |   |        | (2,004 | )            |   |              | 3,840 |  |  |              |  |              |   |      |  |       |  |              |  |     |   |             |  |          |   |        | 1,836  | 
|                                     | Other                                                               |   |        | 150    |              |   |              | 0     |  |  |              |  |              |   |      |  |       |  |              |  |     |   |             |  |          |   |        | 150    | 
|                                     |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   |      |   |       |  |              |  |     |   |             |   |          |   |        |       
|Total gross deferred tax liabilities |                                                                     |   | 1,989  |        |              |   | 6,070        |       |  |  |              |  |              |   |     |   |       |  |              |  |     |   |            |   |          |   | 8,059  |       
|                                     |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   |      |   |       |  |              |  |     |   |             |   |          |   |        |       
|Net deferred tax assets              |                                                                     | $ | 38,883 |        |              | $ | 6,192        |       |  |  |              |  |              | $ |     |   |       |  |              |  |     | $ |            |   |          | $ | 45,075 |       
|                                     |                                                                     |   |        |        |              |   |              |       |  |  |              |  |              |   |      |   |       |  |              |  |     |   |             |   |          |   |        |       

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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, 2003 are as follows (in 000s):

|                                     |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   |             |   |          |   |         |        | 
|------------------------------------ | ------------------------------------------------------------------- | - | ------- | ------ | ------------ | - | ------------ | ----- | ------------ | - | ------------ | ----- | --- | - | ----------- | - | -------- | - | ------- | ------ | 
|                                     |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   | Reclas-     |   | Alliance
|                                     |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   | sifications |   | Gaming  
|                                     |                                                                     |   |         |        |              |   |              |       |              |   | Non-         |       | and |   | Corporation
|                                     |                                                                     |   |         |        |              |   | Guaranteeing |       | Guaranteeing |   | Elimina-     |       | and
|                                     |                                                                     |   | Parent  |        | Subsidiaries |   | Subsidiaries |       | tions        |   | Subsidiaries
|                                     |                                                                     |   |         |        |              |   |              |       |              |   |             
|Deferred tax assets:                 |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   |             |   |          |   |         |       
|                                     | Net operating loss carry forwards                                   |   | $       | 14,072 |              |   | $            |      |              |   | $            |      |     |   | $           |  |          |   | $       | 14,072 | 
|                                     | Capital loss carry forwards                                         |   |         | 25,375 |              |   |              |      |              |   |              |      |     |   |             |  |          |   |         | 25,375 | 
|                                     | Foreign tax credit carry forwards                                   |   |         |       |              |   |              | 949   |              |   |              |      |     |   |             |  |          |   |         | 949    | 
|                                     | Inventory obsolescence reserves                                     |   |         | (278   | )            |   |              | 2,311 |              |   |              |      |     |   |             |  |          |   |         | 2,033  | 
|                                     | Bad debt reserves                                                   |   |         | 465    |              |   |              | 1,595 |              |   |              |      |     |   |             |  |          |   |         | 2,060  | 
|                                     | Accruals not currently deductible
for tax purposes                  |   |         | 1,473  |              |   |              | 7,733 |              |   |              |      |     |   |             |  |          |   |         | 9,206  | 
|                                     | Refinancing costs being amortized
for tax purposes                  |   |         | 2,277  |              |   |              |      |              |   |              |      |     |   |             |  |          |   |         | 2,277  | 
|                                     | Other                                                               |   |         | 5,920  |              |   |              | 227   |              |   |              |      |     |   |             |  |          |   |         | 6,147  | 
|                                     |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   |             |   |          |   |         |        | 
|Total gross deferred tax assets      |                                                                     |   | 49,304  |        |              |   | 12,815       |       |              |   |             |       |     |   |             |   |          |   | 62,119  |       
|Less: Valuation allowance            |                                                                     |   | (11,491 | )      |              |   |             |       |              |   |             |       |     |   |            |   |          |   | (11,491 | )     
|                                     |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   |             |   |          |   |         |        | 
|Deferred tax assets                  |                                                                     | $ | 37,813  |        |              | $ | 12,815       |       |              | $ |             |       |     | $ |            |   |          | $ | 50,628  |       
|                                     |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   |             |   |          |   |         |        | 
|Deferred tax liabilities:            |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   |             |   |          |   |         |       
|                                     | Property and equipment, principally
due to depreciation differences |   | $       | 4,023  |              |   | $            | 3,580 |              |   | $            |      |     |   | $           |  |          |   | $       | 7,603  | 
|                                     | Intangibles                                                         |   |         | (1,723 | )            |   |              | 3,275 |              |   |              |      |     |   |             |  |          |   |         | 1,552  | 
|                                     | Other                                                               |   |         | 697    |              |   |              |      |              |   |              | 1,635 |     |   |             |  |          |   |         | 2,332  | 
|                                     |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   |             |   |          |   |         |        | 
|Total gross deferred tax liabilities |                                                                     |   | 2,997   |        |              |   | 6,855        |       |              |   | 1,635        |       |     |   |            |   |          |   | 11,487  |       
|                                     |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   |             |   |          |   |         |        | 
|Net deferred tax assets              |                                                                     | $ | 34,816  |        |              | $ | 5,960        |       |              | $ | (1,635       | )     |     | $ |            |   |          | $ | 39,141  |       
|                                     |                                                                     |   |         |        |              |   |              |       |              |   |              |       |     |   |             |   |          |   |         |        | 

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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|16. |  | RESERVES AND ALLOWANCES                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The following tables represent the activity for each of the fiscal years
ended June 30, 2001, 2002 and 2003 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, 2001         |  | $            | 13,182 |           |  | $          | 1,751 |      |  | $ | 6,297 |            |  | $ | 8,636 | 
|Year ended June 30, 2002         |  | $            | 8,636  |           |  | $          | 2,521 |      |  | $ | 2,693 |            |  | $ | 8,464 | 
|Year ended June 30, 2003         |  | $            | 8,464  |           |  | $          | 1,537 |      |  | $ | 2,993 |            |  | $ | 7,008 | 
|Inventory valuation allowance:   |  |              |        |           |  |            |       |      |  |   |       |            |  |   |       | 
|Year ended June 30, 2001         |  | $            | 6,383  |           |  | $          | 5,352 |      |  | $ | 4,607 |            |  | $ | 7,128 | 
|Year ended June 30, 2002         |  | $            | 7,128  |           |  | $          | 5,340 |      |  | $ | 4,654 |            |  | $ | 7,814 | 
|Year ended June 30, 2003         |  | $            | 7,814  |           |  | $          | 926   |      |  | $ | 2,237 |            |  | $ | 6,503 | 
|Other assets valuation reserve:  |  |              |        |           |  |            |       |      |  |   |       |            |  |   |       | 
|Year ended June 30, 2001         |  | $            | 1,788  |           |  | $          |      |      |  | $ |      |            |  | $ | 1,788 | 
|Year ended June 30, 2002         |  | $            | 1,788  |           |  | $          |      |      |  | $ |      |            |  | $ | 1,788 | 
|Year ended June 30, 2003         |  | $            | 1,788  |           |  | $          |      |      |  | $ |      |            |  | $ | 1,788 | 



|17. |  | INTERIM FINANCIAL INFORMATION (Unaudited)                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Following is the unaudited quarterly results of the Company for the years
ended June 30, 2002 (adjusted for the August 21, 2001 and
April 9, 2002 two-for-one stock splits) and 2003 (in 000s, except per share data).

|                                           |  |         |        |        |  |       |        |        |  |   |        |  |  |   |         |  
|------------------------------------------ |  | ------- | ------ | ------ |  | ----- | ------ | ------ |  | - | ------ |  |  | - | ------- | -
|                                           |  | Quarter
|                                           |  |        
|2002                                       |  | First   |        | Second |  | Third |        | Fourth
|                                           |  |         |        |        |  |       |        |       
|Revenues                                   |  | $       | 63,494 |        |  | $     | 69,390 |        |  | $ | 76,730 |  |  | $ | 86,460  |  
|Operating income                           |  |         | 13,099 |        |  |       | 11,885 |        |  |   | 16,850 |  |  |   | 15,274  |  
|Non-cash tax benefit                       |  |         |       |        |  |       |       |        |  |   |       |  |  |   | 37,000  |  
|Net income from continuing operations      |  |         | 5,928  |        |  |       | 4,419  |        |  |   | 8,835  |  |  |   | 47,815  |  
|Income (loss) from discontinued operations |  |         | 1,500  |        |  |       | 8,397  |        |  |   | 7,064  |  |  |   | (20,109 | )
|Basic income per share - continuing        |  | $       | 0.15   |        |  | $     | 0.10   |        |  | $ | 0.18   |  |  | $ | 0.98    |  
|Diluted income per share - continuing      |  | $       | 0.14   |        |  | $     | 0.09   |        |  | $ | 0.18   |  |  | $ | 0.96    |  
|Basic income per share                     |  | $       | 0.17   |        |  | $     | 0.29   |        |  | $ | 0.33   |  |  | $ | 0.57    |  
|Diluted income per share                   |  | $       | 0.16   |        |  | $     | 0.27   |        |  | $ | 0.32   |  |  | $ | 0.56    |  

F-37



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##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                           |  |         |        |        |  |       |         |        |  |   |         |  |  |   |         |  
|------------------------------------------ |  | ------- | ------ | ------ |  | ----- | ------- | ------ |  | - | ------- |  |  | - | ------- | -
|                                           |  | Quarter
|                                           |  |        
|2003                                       |  | First   |        | Second |  | Third |         | Fourth
|                                           |  |         |        |        |  |       |         |       
|Revenues                                   |  | $       | 81,329 |        |  | $     | 103,405 |        |  | $ | 101,698 |  |  | $ | 121,128 |  
|Operating income                           |  |         | 17,371 |        |  |       | 22,431  |        |  |   | 21,740  |  |  |   | 28,394  |  
|Net income from continuing operations      |  |         | 6,239  |        |  |       | 9,349   |        |  |   | 9,796   |  |  |   | 15,045  |  
|Income (loss) from discontinued operations |  |         | 19     |        |  |       | 2,504   |        |  |   | 2,984   |  |  |   | (26,413 | )
|Basic income per share - continuing        |  | $       | 0.13   |        |  | $     | 0.19    |        |  | $ | 0.20    |  |  | $ | 0.30    |  
|Diluted income per share - continuing      |  | $       | 0.13   |        |  | $     | 0.19    |        |  | $ | 0.19    |  |  | $ | 0.30    |  
|Basic income (loss) per share              |  | $       | 0.13   |        |  | $     | 0.24    |        |  | $ | 0.26    |  |  | $ | (0.23   | )
|Diluted income (loss) per share            |  | $       | 0.13   |        |  | $     | 0.24    |        |  | $ | 0.25    |  |  | $ | (0.23   | )



| | The amounts shown in the tables above differ from those previously
reported in the Companys Form 10-Qs due to the Companys decision in
June 2003 to report its route operations and Bally Wulff segments as
discontinued operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-38