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, 1998

         [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
                 For the transition period from _____ to _____

                        Commission File Number 0-4281
                         ALLIANCE GAMING CORPORATION
            (Exact name of registrant as specified in its charter)

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

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

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

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

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

                               (Title of Class)

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

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

The aggregate  market value of the common equity held by  non-affiliates  of the
registrant was approximately $76,697,000 as of September 21, 1998.

The  number of  shares of Common  Stock,  $0.10  par  value,  outstanding  as of
September  21, 1998  according  to the  records of  registrant's  registrar  and
transfer agent, was 34,261,167.

                      DOCUMENTS INCORPORATED BY REFERENCE

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


                                     1

<PAGE>

                          ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                           Year Ended June 30, 1998

                                    PART I

ITEM 1.  BUSINESS

Introduction

Alliance  is  a  diversified,   worldwide   gaming  company  that  (i)  designs,
manufactures and distributes gaming machines and computerized monitoring systems
for gaming  machines,  (ii) owns and  manages a  significant  installed  base of
gaming machines,  (iii) owns and operates two casinos and (iv) in Germany,  is a
full-service  supplier of  wall-mounted  gaming  machines and  amusement  games.
Alliance has achieved a leading market  position for each of its business units.
Operating  under the name Bally  Gaming and  Systems  the  Company is the second
largest  gaming  machine   manufacturer   in  North  America,   having  marketed
approximately  90,000  gaming  machines  during  the past  five  years;  it also
designs, integrates and sells highly specialized computerized monitoring systems
that provide casinos with networked  accounting and security  services for their
gaming  machines  with  approximately  90,000  game  monitoring  units  ("GMUs")
installed  worldwide.  The Company also owns, operates and services an installed
base of over 7,700 slot and video  gaming  machines  that are located  mostly in
non-casino venues in Nevada and Louisiana ("Route Operations").  Alliance is the
largest route operator in Nevada and the largest  operator of gaming machines at
racetracks  in  Louisiana.  Alliance  also  owns and  operates  what  management
believes is the most profitable dockside casino in Vicksburg,  Mississippi and a
locals casino in Sparks,  Nevada,  which  together have 21 table games and 1,200
gaming machines  (collectively,  "Casino  Operations").  In addition,  operating
under the Bally Wulff name, the Company  believes that it is a leading  supplier
of wall-mounted gaming machines and amusement games in Germany.

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

Business Units
Bally Gaming and Systems
Prior to May 1998,  the  operations  of Bally  Gaming and Systems  were  managed
separately without substantial integration. The market has seen a convergence of
the game management systems and the games themselves. Therefore, in May 1998 the
Company consolidated the operations of Bally Gaming and Systems.

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

      New Units by Market Segment         Percentage of New Gaming Units Sold
                                   Year ended     Six months      Years ended
                                  December 31,   ended June 30,     June 30,
                                       1995          1996          1997   1998
      Nevada and Atlantic City          42%           37%           47%    25%
      International                     30            45            40     49
      Riverboats                        12            11             5     15
      Indian Gaming                     14             7             7     10
      Other (principally VLTs)           2             -             1      1 
                                      ----          ----          ----  -----  
                                       100%          100%          100%  100%
                                       ===           ===           ===   ===
Markets  for Bally  Gaming.  Within the United  States,  Nevada  represents  the
largest   installed   base  of  gaming   machines  with  an  installed  base  of
approximately  180,000 machines as of June 30, 1998. The Company  estimates that
Atlantic City, the second largest market, had an installed base of approximately
35,000 machines as of June 30, 1998. Product sales of the Company's casino-style
gaming equipment in these markets are primarily to established  casino customers
either to replace  existing  machines or as par of an expansion or refurbishment
of the casino.  Also, because gaming machine revenues have increased at a higher
rate than table game revenues over the past decade, casino operators have tended
to increase floor space dedicated to gaming machines. In addition,  major casino
openings in Nevada,  expansions  of existing  casinos and the  proliferation  of
casinos in emerging  markets have created  additional  floor space available for
new  gaming  products  and  are  anticipated  to  further  increase  competitive
pressures on casino operators to replace existing equipment with new machines on
an accelerated basis.

Riverboat and dockside casinos began operating in 1991 and, as of June 30, 1998,
riverboat  and dockside  casinos  were  operating  in Indiana,  Iowa,  Illinois,
Mississippi,  Missouri and  Louisiana.  The estimated  installed  base of gaming
machines on riverboats or dockside casinos is  approximately  85,000 machines as
of June 30, 1998.

Casino-style  gaming  continues  to  expand  on Native  American  lands.  Native
American  gaming is regulated  under the Indian  Gaming  Regulatory  Act of 1988
which permits specific types of gaming.  The Company's  machines are placed only
with Native  American  gaming  operators who have  negotiated a compact with the
state and received approval by the U.S. Department of the Interior.  The Company
sells  machines to casinos on Native  American  lands in  Arizona,  Connecticut,
Iowa, Michigan, Minnesota, Mississippi, Montana, New Mexico, North Dakota, South
Dakota and Wisconsin.  Compacts have also been approved in Oregon,  Colorado and
Louisiana,  although Bally Gaming has made no deliveries in these jurisdictions.
In addition to the approved states,  compacts are under consideration in several
states, including Alabama, California, Maine, Massachusetts, Rhode Island, Texas
and  Washington.  The installed  estimated  base of all Native  American  gaming
machines as of June 30, 1998 was approximately 80,000 units.

Currently  casino  gaming  also is legal  in  Colorado  and  South  Dakota.  The
estimated  installed  base of machines in these  markets as of June 30, 1998 was
approximately 15,000 machines.

In 1997, Michigan voters approved the establishment of three casinos in the city
of Detroit.  Although voters recently  reaffirmed the first vote, there could be
other legal challenges  before temporary or permanent  casinos open. There is no
gaming presently in Detroit.

In addition to the domestic  markets,  the gaming  industry is also expanding in
international  markets. The Company's primary  international markets are Europe,
Canada  and  Latin  America,  and,  to a  lesser  extent,  the Far  East and the
Caribbean.  The Company conducts its business in Canada through its staff in the
United States. The Company has begun, and plans to continue,  expansion into the
Australian  market,  and has an office in Sydney,  Australia.  In July 1998, the
Company's  Australian  subsidiary,  BGI Australia  Pty,  Ltd.,  was approved for
licensing  by the New South Wales  Liquor  Administration  Board which  licenses
gaming operators and suppliers in New South Wales. The New South Wales market is
the  second  largest  gaming  machine  market  in the  world  with an  estimated
installed  base of 70,000 units at June 30, 1998.  The Company also  distributes
gaming machines,  manufactured by Bally Gaming,  through its direct and indirect
subsidiaries,  Bally Gaming International,  GmbH ("GmbH"), from its sales office
in Hannover,  Germany  principally  to  customers in Europe and Russia,  through
Bally Gaming Africa,  Pty. Ltd.,  from its sales office in  Johannesburg,  South
Africa,  principally  to customers on the African  continent and Bally Gaming de
Puerto Rico, Inc., principally to customers in Puerto Rico.

The percentage of Bally Gaming's  international  revenues by geographic area for
the periods indicated are set forth below:

<PAGE>



      New Units by Geographic Area   Percentage of New Gaming Units Sold
                                   Year ended     Six months      Years ended
                                  December 31,   ended June 30,     June 30,
                                      1995           1996         1997   1998
                                      ----           ----         ----   ----
      Europe                          51%             40%          33%    37%
      Canada                           22             31           26     35
      Latin America                    20             25           39     22
      Far East                          4              2            2      2
      Other                             3              2            -      4
                                    -----          -----         ----  -----
                                     100%            100%         100%   100%
                                     ===             ===          ===    ===

Markets for Systems.  Systems' primary markets for its  computerized  monitoring
systems are the United  States and, to a lesser  extent,  Canada,  New  Zealand,
Latin America,  Europe and the Caribbean.  Markets for Systems within the United
States  include  traditional  land-based  casinos  predominantly  in Nevada  and
Atlantic City, New Jersey,  Native American  casinos and riverboats and dockside
casinos. Domestically, the market for computerized monitoring systems is divided
equally between selling to new installations  and to existing  customers who are
either  expanding  their casino floors or are upgrading  their hardware to a new
product release.  Unlike the United States, 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 will increase accordingly.

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

The GameMaker can offer up to 10 different video games within one gaming device.
The ten games can be selected by the casino  from a game  library  that has over
600 games. The games simulate various card games, keno and popular reel-spinning
games.  The GameMaker  machines  contain bill  acceptors and many other features
believed to be popular with casinos and their customers.  The GameMaker machines
are available in upright, bar top and slant top cabinets. Revenues from sales of
GameMaker  machines  were  approximately  $27.4  million  during  the year ended
December  31,  1995,  $12.9  million for the six months  ended June 30, 1996 and
$34.9  million  and $22.7  million  for the years  ended June 30, 1997 and 1998,
respectively.

The ProSeries was the result of a comprehensive product development effort which
began in 1991. The development  process  included  extensive  testing of the new
products  in-house  and on casino  floors for  reliability  and  player  appeal.
Revenues  from sales of ProSeries  machines  were  approximately  $57.1  million
during the year ended December 31, 1995,  $38.5 million for the six months ended
June 30, 1996 and $66.6  million and $45.8  million for the years ended June 30,
1997 and 1998, respectively.

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

In addition,  Bally Gaming  sells and  services  used gaming  machines and sells
parts for  existing  machines.  Bally  Gaming  often  accepts  used  machines as
trade-ins toward the purchase of new gaming  equipment.  While a small secondary
market exists in the United States,  used machines are typically resold into the
international  market. Some used equipment is reconditioned for direct sale, but
much is sold in container lots on an "as is" basis through independent  brokers.
Sales of used  equipment  were $9.2 million  during the year ended  December 31,
1995,  $2.0  million for the six months ended June 30, 1996 and $5.4 million and
$3.6 million for the years ended June 30, 1997 and 1998, respectively.
The following table sets forth the  percentages of revenues  provided by each of
Bally Gaming's major product lines for the periods indicated:

                                            Percentage of Revenues
                                     Year ended    Six months     Years ended
                                    December 31,  ended June 30,    June 30,
                                        1995          1996        1997   1998
   Slot machines                         53%           63%         55%    53%
   Video gaming machines                 31            24          30     30
   Other (primarily used machines, 
     parts and services)                 16            13          15     17
                                        ---           ---         ---    ---
                                        100%          100%        100%   100%
                                        ===           ===         ===    ===

The Company  believes that video gaming  products and second feature bonus games
will continue to gain floor space in casinos.  Gaming machines have a mechanical
life that can  exceed 10  years.  However,  in the  established  markets,  Bally
Gaming's  experience is that casino  operators  usually  replace gaming machines
after three to seven years.  The factors which result in  replacement  of gaming
machines  sooner than their  mechanical  life  include  technological  advances,
development  of new  entertaining  games,  new sound  and  visual  features  and
changing  preferences of casino patrons.  Casinos  typically recoup the purchase
cost of their electronic  gaming machines in a few months,  which allows casinos
to replace machines with new models that are popular with casino patrons.

System  Products.  Bally Systems designs,  integrates,  and sells a computerized
monitoring  system ("SDS 6000") for slot and video gaming machines which provide
casino operators with on-line real time data relative to a machine's accounting,
security and cash monitoring functions.  The SDS 6000, when purchased along with
other third party  player  tracking  applications,  also  provides  data to, and
receives  data from  casinos to track  their  players to  establish  and compile
individual player profitability and other demographic  information.  SDS 6000 is
comprised primarily of (1) hardware consisting of microcontroller-based  printed
circuit boards which are installed within the slot and video machines as well as
card readers,  displays and keypads  which  provide  casinos with the ability to
track player gaming activity and to monitor access to slot and video machines by
the casino's employees,  (2) firmware developed by Systems which provides access
to the slot machine's and player's activity data gathered by the microcontroller
hardware,  and (3) business  applications  software  developed by Systems  which
manages the slot  machine's  and player's  activity  information.  This software
resides on Unix or PC based servers. Systems also provides software and hardware
support services,  including maintenance,  repair and training for purchasers of
its monitoring systems.

Product Development.  The Company believes that providing games and systems with
high  entertainment  value that are  preferred by the casino  patron is a key to
meeting the demands of casinos.  The Company  believes  that the use of existing
computer technology is accelerating which can give gaming machines and systems a
competitive advantage in the gaming industry. Total spending on product research
and  development  by Bally Gaming and Systems was $5.6  million  during the year
ended December 31, 1995, $2.9 million during the six months ended June 30, 1996,
and $6.7  million  and $12.7  million  during the years  ended June 30, 1997 and
1998,  respectively.  The increase in research and  development  spending in the
year ended June 30,  1998  resulted  from  increasing  the number of new product
platforms  introduced,  product  development efforts and growth in the number of
products to support with ongoing development.

Bally Gaming  develops  its  products  for both the  domestic and  international
market.  Bally Gaming's product  development  process is divided into two areas,
hardware  and  software.  Major areas of hardware  development  include  cabinet
style,  electronic  capability,  machine handle and coin and currency  handling.
Hardware development efforts are focused upon 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 other third parties, many of whom have entered into strategic
relationships  with the Company.  On an annual  basis,  Bally Gaming  expects to
introduce  approximately 25 new models to the market.  However, no assurance can
be made with respect to the rate of new model  introductions or the obtaining of
regulatory approvals in respect thereof.

Bally  Gaming  continues  to  focus  on  development  of new  innovative  gaming
machines.  Key  members  from the  marketing  and design  groups meet to analyze
machines  currently being marketed by Bally Gaming and its competitors to assess
their  strengths and weaknesses  and then suggest ideas for new machines.  These
ideas are  reviewed to determine  which  machines  should be further  developed.
Bally  Gaming  typically  pursues  15 to 20  projects  at any  given  time,  and
approximately  2 to 3 machines are submitted  for licensin each year.  These new
machines  are built in  limited  quantities  and then test  marketed  in various
locations  throughout  the U.S.  for three to six months.  Generally,  less than
one-half  of the  new  machines  tested  are put  into  full  scale  production.
Management believes this process of generating new ideas and then turning only a
limited  number of the ideas into  machines  which will reach the mass market is
responsible for the high quality of Bally Gaming's  machines and their continued
acceptance and success in the marketplace.

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

During the year ended June 30, 1998, the Company received regulatory approval in
certain jurisdictions to manufacture and distribute several new gaming machines.
Roll The  Dice(R) is the  Company's  first in a series of second  feature  bonus
games to be distributed on a recurring  revenue  basis.  The Company  intends to
introduce  new  games  for  this  platform  every  four to six  months.  Feature
Frenzy(R),  the Company's first  nine-line,  multi-coin video gaming machine was
developed  based on  successful  games in the  Australian  market.  Shipments to
customers  for trial of both of these  products  began in the quarter ended June
30, 1998. The Company recently began the field trial in Nevada for GameMagic(R),
a  high-resolution  graphics  multi-game video gaming machine offering up to ten
different  games  and is  awaiting  regulatory  approval  in  Nevada  and  other
jurisdictions. Shipments of GameMagic to customers in jurisdictions which do not
require regulatory approval of the games (primarily certain European markets and
the Caribbean) began in June 1998. The Company will seek regulatory approval for
all of the products in other gaming jurisdictions during fiscal 1999.

In May 1998,  the Company  began the field test  required  by the Nevada  Gaming
Control Board of its wide-area progressive jackpot system named "Thrillions(TM)"
at Hilton Gaming  Corporation's  Bally's Las Vegas casino under its  proprietary
name "Pay Day".  The system has been designed to allow patrons  playing  nickel,
quarter,  dollar etc. machines to compete for the same progressive  jackpot with
different odds of winning. The system also permits the casino patron to play for
more than one jackpot  meter with a single play of the  machine.  The system has
been  designed to allow  casinos to use their own branding for the product.  The
Company  will  begin  deployment  of the  Thrillions  product  once it  receives
approvals from gaming  regulators.  The Company has filed the Thrillions  system
with the New Jersey  regulators and plans to apply for approval with  regulators
of other gaming jurisdictions in fiscal 1999.

In March 1998,  Bally Gaming  introduced a product called Cash  Cage(TM),  which
dispenses paper tokens (currency or casino  customized scrip) from a bill hopper
in partial substitution for complete coin payouts. Cash Cage will be marketed as
a means to reduce hopper fills and jackpots  paid by hand . This new  technology
should  benefit  casinos in  several  ways:  improve  customer  satisfaction  by
eliminating  the need for customers to wait for a slot  attendant to fill a coin
hopper or pay certain levels of jackpots;  reduce  operating costs through fewer
coin hopper fills and hand payouts;  improve casino cage  accounting  efficiency
and increase security due to fewer operations performed by hand. The Company has
filed the Cash Cage system  with the Nevada  Gaming  Control  Board and plans to
apply for approval with regulators of other gaming jurisdictions in fiscal 1999.
Pursuant  to a long term  agreement,  the  Company  has  agreed to  license  JCM
American, a U.S. subsidiary of Japan Coin Machine Company, a leading supplier of
bill  acceptors  to  the  gaming  industry,   to  be  its  worldwide   exclusive
manufacturer and distributor of the Cash Cage technology,  for which the Company
will receive a royalty for each Cash Cage unit shipped.

Systems'  product  development  is also divided into hardware and software.  The
major areas of hardware development include microcontroller circuit board design
and programming as well as user interface devices such as card readers,  keypads
and  displays.  Systems  has  developed a modular and  extendible  hardware  and
software  architecture which allows new development to be focused upon achieving
greater  functionality,  product  reliability  and ease of  maintenance  for the
casino operator and achieving  greater visua appeal and ease of use for the slot
customer.  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 (1) periodic  product releases that include new features
which extend and enhance the SDS 6000 product, (2) periodic maintenance releases
which enable  casino  operators to correct  problems or improve the usability of
the system and (3) documentation needed to install and use the system.

In 1995,  the hardware and software  groups from  Systems,  as well as engineers
from Bally Gaming,  coordinated  efforts to develop a form of cashless  wagering
that uses  bar-coded  coupons which can be read by the bill  validators in Bally
Gaming's slot machines  which are connected to an SDS 6000 system.  Bally Gaming
and Systems  development groups continue to direct  development  efforts towards
other forms of cashless wagering for use on Bally Gaming's slot machines and the
SDS 6000 system.  The bar-coded  coupon product is currently in regulatory field
test in New Jersey, and has been submitted to the regulators in Nevada.

Sales and  Marketing.  Bally Gaming and Systems uses a direct sales force and an
independent  distributor  network to distribute  its products.  Bally Gaming and
Systems  North  America  sales  staff  consists of  approximately  28 people and
operates  offices in Nevada,  New Jersey,  Mississippi,  Illinois,  Colorado and
Florida.

Approximately 78% of new unit machine sales over the calendar year 1995, 81% for
the six months  ended June 30, 1996 and 89% and 80% for the years ended June 30,
1997 and 1998,  respectively were generated by Bally Gaming's direct sales force
other than those at GmbH. On a limited basis, Bally Gaming uses distributors for
sales to certain  international  jurisdictions.  Bally Gaming's  agreements with
distributors do not specify minimum  purchases but generally  provide that Bally
Gaming may terminate such  agreements if certain  performance  standards are not
met.  Approximately  8% of new gaming  machine unit sales for the calendar  year
1995,  2% for the six  months  ended  June 30,  1996 and 4% and 6% for the years
ended June 30, 1997 and 1998,  respectively,  were generated through independent
distributors. Approximately 8% of new gaming machine unit sales for the calendar
year  1995,  2% for the six months  ended  June 30,  1996 and 7% and 14% for the
years ended June 30, 1997 and 1998, respectively, were generated through GmbH.

Systems has  approximately  90,000 game  monitoring  units  installed,  of which
approximately  78,000 are in the United States. At June 30, 1998, Systems had 92
installed locations.  Approximately 78% of System's sales over the calendar year
1995,  93% for the six months  ended June 30, 1996 and 92% and 96% for the years
ended June 30, 1997 and 1998,  respectively  were  generated by the Bally Gaming
and Systems direct sales force.

In addition to  offering  an  expansive  product  line,  Bally  Gaming  provides
customized  services in response to specific  casino  requests.  These  services
include high quality  silkscreen  printing of gaming machine  glass,  customized
game  development  and  interior  design  services.  Bally  Gaming  also  offers
customized  design  services  that  utilize  computer  aided  design  and studio
software programs.  Bally Gaming's design department can generate a casino floor
layout and can create a proposed slot mix for customers.  I many of the emerging
markets,  Bally Gaming provides  assistance to customers including the selection
of related equipment such as slot stands,  chairs, etc. and a recommended layout
of the casino floor as well as a mix of machine models.

For the year ended June 30, 1998,  approximately  83% of Bally Gaming's slot and
video gaming machine sales were on terms of 90 days or less.  Approximately  17%
of Bally Gaming's sales, primarily in certain emerging markets such as riverboat
and Native American gaming casinos,  are financed over extended  periods as long
as 36 months and bear  interest at rates  ranging from 8% to 14%.  International
sales are generally  consummated on a cash basis or financed over three years or
less. In addition,  in certain  situations  Bally Gaming has participated in the
financing of other gaming related equipment manufactured by third parties in the
emerging markets. Systems offers limited financing terms, normally less than one
year, for sales to new installations. Most sales, however, are invoiced on a net
30-day  basis.  Management  believes  that  financing  of  customer  sales is an
important factor in certain emerging markets.

Systems  offers  its  customers  the  option of signing  separate  hardware  and
software  maintenance  agreements at the time of sale.  These agreements are for
periods of one year and automatically renew unless otherwise canceled in writing
by the customer or Systems. After an initial warranty period, typically 90 days,
the customer is invoiced a monthly  hardware and software  maintenance fee which
provides  essentially for repair and/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  December 31, 1995, the six months ended June 30, 1996 and the years ended
June  30,  1997  and  1998,  Bally  Gaming's  largest  customer   accounted  for
approximately 5%, 8%, 11% and 7% respectively of Bally Gaming's revenues,  while
Bally Gaming's 10 largest customers  accounted for  approximately  25%, 42%, 45%
and 48% of Bally Gaming's revenues during such periods, respectively.

The demand for  computerized  slot  monitoring  systems is driven by  regulatory
requirements in a given jurisdiction  and/or by a casino operator's  competitive
need to properly  track  machine and player  activity and  establish and compile
individual machine and player  profitability and other demographic  information,
all of which is of  particular  importance  to casinos in  developing  marketing
strategies.  Systems' revenues are derived approximately equally from selling to
new  installations  and to existing  customers  who are either  expanding  their
casino floors or upgrading their hardware to a new product release. For the year
ended  December 31, 1995, the six months ended June 30, 1996 and the years ended
June 30, 1997 and 1998,  Systems' ten largest  customers  (which include certain
multi-site  casino  operators  that  have  corporate  agreements  with  Systems)
accounted  for  approximately  92%,  84%,  70%  and  53% of  Systems'  revenues,
respectively.  Due to the  high  initial  costs  of  installing  a  computerized
monitoring  system,  customers  for such  systems  generally  have tended not to
change suppliers once they have installed such a system.

Future  growth of Bally Gaming and Systems will be based on  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.  Effective  July 1,  1998  all  assembly  of
Systems' products are being performed in the Las Vegas
facility.

Management  believes that its assembly  operations allow for rapid generation of
different models to fill orders quickly and efficiently. Another major advantage
of the existing  plant  operation is the system by which machines can be altered
in many ways  including  the size,  type and  color of glass,  sound and  payoff
patterns to produce a "customized" product for each customer. Bally Gaming keeps
an inventory of parts that allow machines to be altered  quickly to conform with
a particular customer's design/feature  request.  Bally Gaming produces products
for individual customer orders and  therefore  finished  goods  inventories  are
kept low. Bally Gaming 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").  Management  believes based on industry estimates made by analysts that
Bally Gaming has the second  largest  market share in North  America.  Worldwide
there are a number  of other  well  established,  well-financed  and  well-known
companies  producing  gaming  machines that compete with each of Bally  Gaming's
lines in each of Bally Gaming's markets. The other major competitors are AC Slot
and Coin,  Anchor  Gaming,  Casino  Data  Systems,  ("CDS"),  Innovative  Gaming
Corporation  of America,  Mikohn Gaming  Corporation,  Powerhouse  Technologies,
Inc.,  Shuffle  Master,  Inc.,  Sigma Games,  Inc.,  Silicon  Gaming,  Universal
Distributing of Nevada, Inc. and WMS Industries,  Inc.,  ("WMS"),  and companies
that market gaming machines under the brand names of Aristocrat, Atronic, Cirsa,
Novomatic and Sega Enterprises Ltd. Many of these companies look to expand their
market share by decreasing the Company's and IGT's current  market share.  Other
companies may enter the gaming machine  business and several of these  companies
offer or plan to offer second  feature  bonus games.  Only IGT and CDS currently
offer  wide-area  progressive  systems,  although  others  may enter  this area.
Competition  among gaming product  manufacturers,  particularly  with respect to
sales of gaming machines into new and emerging markets, is vigorous and is based
on which machines generate the most net win to the casinos, competitive customer
pricing and  financing  terms,  quality of the  product and having an  extensive
distribution and sales network.

Systems' main competition currently consists of IGT, CDS, and to a lesser extent
Gaming Systems International,  Mikohn Gaming Corporation, Acres Gaming, Inc. and
Logical Solutions  International and companies marketing systems under the brand
names of  Aristocrat  and Grips.  Competition  is keen in this market due to the
number of providers and the limited number of casinos and jurisdictions in which
they operate.  Pricing, product feature and function,  accuracy, and reliability
are all key factors in  determining a provider's  success in selling its system.
Management  believes the future success of its operations  will be determined by
its ability to bring new and innovative products to the market while maintaining
its base of loyal existing customers.

Wall Machines and Amusement Games

Industry Overview

Management   believes   that  the  German  wall  machine   market   consists  of
approximately 220,000 wall machine units. In addition, management believes there
are 56,000 token machine units in Germany.  German  regulations  currently limit
the useful life of wall machines to a period of four years. As a result,  annual
market demand for wall machines in Germany  approximates  40,000 to 55,000 units
with fluctuations  resulting primarily from economic conditions,  and regulatory
changes and new product  development.  Effective  January 1, 1996,  a regulatory
change took effect  requiring  all arcade  operators  to have at least 15 square
meters of space for each wall  machine and a maximum of 10 machines  per arcade.
Starting in mid-1995,  arcade  operators began removing wall machines from their
arcades  to meet the  requirements  of this new  regulation.  All wall  machines
manufactured  since 1992 have meters that monitor the amount inserted by players
and paid out by the machine.  Wall machines  without  meters were required to be
removed from  service by the end of 1996.  This led to an increase in demand for
metered wall  machines in the quarter  ending  December  31, 1996 which  carried
through the quarter ended March 31, 1997.  Management  believes that the size of
the wall machine market has declined slightly from prior years due to changes in
the arcade and tavern markets,  as well as the impact from the overall  slowdown
in the German  economy.  A portion of this annual demand is not available to the
Company as it relates to machines i arcades  operated by the  Company's two main
German competitors.

Wall machine sales into the arcade market account for  approximately  30% of the
total  wall  machine  sales  in  Germany.   A  significant   number  of  arcades
(approximately 10%) are owned by the two largest competitors,  Gauselmann AG and
NSM AG.  Generally  these  competitors  do not purchase wall machines from Bally
Wulff for their arcades.  Management  believes Bally Wulff's share of the German
wall machine market was  approximately 25% for the years ended December 31, 1995
and  1996,  and was 33% and 30% for the  years  ended  June 30,  1997 and  1998,
respectively.  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.  Legislation
presently  affecting the wall machine industry  relates to prescribed  licensing
procedures,  the  use,  installation  and  operation  of wall  machines  and the
taxation of wall machines.

Operations of Bally Wulff

Products. Bally Wulff's manufacturing operations were founded in Berlin in 1950.
Bally Wulff produces and distributes a variety of models of wall machines, under
the trade name "Bally Wulff" for operation in arcades,  hotels,  restaurants and
taverns  primarily in Germany.  These wall machines are  coin-operated,  armless
gaming devices similar to slot machines that award winnings for matching numbers
or symbols on three to five wheels or drums and differ  primarily in appearance,
graphic design,  theme,  pay-table and customer appeal. Each game costs up to 40
pfennigs  (approximately  $0.22 at the exchange rate of $1.00=DM 1.81 prevailing
as of June 30,  1998,  which rate is used  hereinafter)  to play,  although  the
player may deposit larger amounts to provide continuous play but not to increase
payoffs.  German  regulations limit the maximum payout to ten times the player's
stake (DM 4.00 or approximately $2.22 per game). Current models of wall machines
provide the player the  opportunity to win 100 special games on one play,  which
increases  the  potential  amount that can be won on the minimum  wager.  German
regulations  require a minimum  payback of 60% for wall machines,  although many
machines  are  generally  programmed  to pay back at  somewhat  higher  rates to
encourage play. Bally Wulff has also  manufactured  token machines for operation
in arcades, hotels, restaurants and taverns in Germany and may continue to do so
in the future on a selective basis.

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

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

                                                   Percentage of Revenues

                                      Year ended      Six months    Years ended
                                     December 31,    ended June 30,   June 30,
                                         1995            1996        1997   1998
                                         ----            ----        ----   ----

   Sale of wall machines manufactured 
     by Wulff                             39%             42%         52%    44%
   Leasing of wall machines manufactured 
     by Wulff                              3               4           6     10
   Recreational and amusement machines 
     and third party wall machines 
     distributed                          23              22          25     26
   Other (primarily used machines, 
     parts and service)                   35              32          17     20
                                         ---             ---         ---    ---
                                         100%            100%        100%   100%
                                         ===             ===         ===    ===

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

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

Total  spending  on product  research  and  development  by Bally Wulff was $3.6
million  during the year ended  December 31, 1995,  $1.8 million  during the six
months ended June 30, 1996,  and $3.3 million and $3.0 million  during the years
ended June 30, 1997 and 1998, respectively.

Sales and Marketing. Bally Wulff sells approximately 93% of its products through
its own sales  force of 58  individuals  located in 22 regional  sales  offices.
Independent  German   distributors   account  for  approximately  7%  of  sales.
Approximately  99% of  Wulff's  sales of new  wall  machines  are in the  German
market.  The sales offices are operated as  independent  profit  centers and are
assigned  geographic  areas for which they are responsible for sales,  servicing
the  machines  and  assisting  in  collecting   customers'  accounts  receivable
balances.

Bally  Wulff  devotes  substantial  time,  money  and  effort to  marketing  and
promoting its products. Bally Wulff takes an active part in the annual Amusement
Game Fair held in  Frankfurt,  Germany,  at which  Bally  Wulff  introduces  new
products. The next Amusement Game Fair will be held in November 1998.

The wall machines manufactured and sold by Bally Wulff generally sell for prices
ranging from DM 5,500 to DM 6,200 (approximately $3,000 to $3,500). Due to price
competition among the three largest manufacturers,  selling prices have declined
from 1997.  Management believes that such declines in prices may continue in the
future.  For the year  ended  June 30,  1998  approximately  85% of Bally  Wulff
machine sales were on terms of 90 days or less.  Remaining sales of machines are
financed by Bally Wulff generally over a 12-month period, with interest rates of
up to 12%. For this reason,  Bally Wulff  establishes an internal  credit rating
and credit limit for each  customer.  Under Bally  Wulff's  conditions  of sale,
title to a machine is  retained  by Bally  Wulff until the machine has been paid
for in full. In addition, Bally Wulff demands security.  Currently,  Bally Wulff
provides  customer  financing for approximately 15% of its sales, and management
expects  this  practice to increase  during  fiscal  1999.  Leasing  machines to
customers  accounted for 10% of total  revenues for the year ended June 30, 1998
compared  to 3%, 4% and 6% during  the year ended  December  31,  1995,  the six
months ended June 30, 1996, and the year ended June 30, 1997, respectively.  The
leasing market is the fastest growing revenue segment and the management expects
a continued  increase for the months ahead. In  approximately  70% of its sales,
Bally Wulff  accepts wall  machines  and/or  other  recreational  and  amusement
equipment  as  trade-ins  toward the  purchase  of new  machines.  To the extent
possible, the used machines are then resold.

Customers.  Each of Bally  Wulff's top 10 customers in 1998 has  maintained  its
relationship with Bally Wulff for over four years. For the year ended June 30,
1998, no single customer  accounted for more than 3% of Bally Wulff's  revenues,
while Bally Wulff's top 10 largest customers  accounted for approximately 11% of
Bally Wulff's  revenues.  For the year ended  December 31, 1995,  the six months
ended June 30,  1996 and the year ended June 30,  1997,  Bally  Wulff's  top ten
customers  accounted  for  approximately  10%,  15%  and  12% of  Bally  Wulff's
revenues,  respectively, while no single customer accounted for more than 3%, 6%
and 3% of Bally Wulff's revenues for such periods, respectively.

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

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

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

Competition. Germany's wall machine manufacturing industry is dominated by Bally
Wulff  and  two of its  competitors,  NSM,  AG and  Gauselmann,  AG.  Management
believes these three entities  collectively account for approximately 95% of the
entire market.  Bally Wulff competes with many companies in the  distribution of
coin-operated  amusement  games,  some of which  are  larger  and  have  greater
resources than Bally Wulff.  Bally Wulff's two major competitors own and operate
a significant  number of arcades,  which may give them a  competitive  advantage
arising  from a built-in  market for their  games and the ability to test market
new  games in their own  arcades.  Further,  increased  foreign  competition  in
Germany  may  have an  adverse  impact  on the  Company's  future  wall  machine
revenues.  Management  believes that the primary competitive factors in the wall
machine  coin-operated  amusement  game  market are the quality and depth of the
product  line,  price and customer  service  which  includes the ability to fill
orders quickly and efficiently.

Route Operations

Nevada Operations

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

<PAGE>

The following table sets forth certain  historical data concerning the Company's
Nevada route operations for the years ended June 30:


                                            1996        1997       1998

Average number of gaming machines owned     5,290      5,660      6,460
Average number of locations                   524        562        624
Average win per day per gaming machine     $48.60     $52.40     $53.70

At June 30, 1998 the Company operated approximately 7,060 machines on its Nevada
route.  The Company has grown the number of gaming  machines  owned and operated
principally through the strategic takeover of contracts at locations operated by
several mid-sized route operators.  Such  acquisitions have added  approximately
230 and 580 gaming  machines to the Nevada route during the years ended June 30,
1997 and 1998, respectively.

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

Revenue-sharing  arrangements  accounted for approximately  85%, 85%, and 87% of
revenues  and 77%,  77%,  and 77% of installed  machines,  respectively,  in the
Company's  Nevada route  operations for the years ended June 30, 1996, 1997, and
1998. At June 30, 1998,  the weighted  average  remaining  term of the Company's
revenue  sharing   arrangements  was  approximately   3.0  years.   Space  lease
arrangements  accounted for approximately 15%, 15%, and 13% of revenues and 23%,
23%, and 23% of installed machines,  respectively, in the Company's Nevada route
operations for the years ended June 30, 1996,  1997, and 1998. At June 30, 1998,
the weighted average remaining term of the Company's space leases was 2.8 years.
The  Company  has  historically  been  able to renew or  replace  revenues  from
expiring agreements with revenues generated by renewal or replacement contracts.
The Company has emphasized  return on investment  rather than increasing  market
share in renewing or entering into new contracts and has undertaken a systematic
review process to adjust its contract mix to emphasize  higher margin  contracts
and, where permissible, canceling or not renewing unprofitable contracts.

Sales and  Marketing.  As the  largest  route  operator  in Nevada,  the Company
believes that it is able to differentiate  itself from its competitors through a
full-service operation providing its customers support for marketing promotional
allowances  and using its advanced  design  capabilities  to provide  electronic
gaming  machines with  features  customized  to  customers'  needs.  The Company
developed and continues to implement a system called "Gamblers Bonus".  Gamblers
Bonus is a cardless slot players' club and player tracking system,  which allows
multiple local  establishments  to be linked together into a distributed  gaming
environment. Through this technology, the Company is able to provide its players
and customers with many of the same gaming choices otherwise available only in a
larger scale casino  environment such as  multi-location  progressive  jackpots,
bigger jackpot payouts and traditional players' club enhancements. Additionally,
the  Company  is  offering  a series of new and unique  games  available  only t
members of Gamblers Bonus.

Since  launching  Gamblers  Bonus,  the gaming machines linked to Gamblers Bonus
have  experienced  an  increase in net win per day per  machine.  As of June 30,
1998, the Company had the Gamblers Bonus installed in over 2,000 gaming machines
at  approximately  180 locations or 30 percent of the  installed  base of gaming
machines.  The Company believes Gamblers Bonus will continue to improve both the
revenues and operating  efficiencies of its Nevada route  operations and has the
potential to create additional  opportunities in the route operations segment of
the gaming industry.  Additionally,  the Company has been updating its installed
base of gaming machines with bill-acceptor  equipped  electronic gaming machines
which are also expected to improve revenues and operating efficiencies.

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

Customers.  The Company believes it has a diversified  customer base with no one
customer  accounting  for more than  10%,  6% and 5% of the  Company's  revenues
generated  from Nevada  route  operations  during the years ended June 30, 1996,
1997 and 1998,  although  approximately  14%, 13% and 11% of such  revenues were
generated  through  an  affiliated  group of such  customers  for such  periods,
respectively.  The affiliated group consists of eight  partnerships  each having
one  individual  partner who is common to all such  partnerships.  For the years
ended June 30, 1996,  1997 and 1998,  the ten largest  customers  accounted  for
approximately   26%,   23%  and  20%  of  Nevada  route   operations   revenues,
respectively.

Assembly  Operations.  In previous years,  the Company  manufactured  electronic
gaming machines for use in its Nevada route operations. The Company manufactured
approximately 64% of the electronic gaming machines currently used in the Nevada
route  operations.  The  Company  is  currently  using a third  party to perform
assembly  operations of the electronic  gaming machines used in the Nevada route
operations.  In July 1998,  the Company  received  regulatory  approval to begin
using the Bally GameMaker platform for gaming machines deployed on the Nevada 
route.

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

Louisiana Operations

Overview. On the basis of its Nevada route operations  expertise,  in March 1992
the Company  obtained a contract to operate  video poker gaming  machines in the
greater New Orleans,  Louisiana area through a subsidiary,  Video Services, Inc.
("VSI").  The Company entered into an operating agreement which runs through May
2002 (with a  five-year  renewal  option  under  certain  conditions)  with Fair
Grounds Corporation, and its affiliates,  Jefferson Downs Corporation and Finish
Line Management Corporation  (collectively,  "Fair Grounds"), for the Company to
be the exclusive  operator of video poker machines at the only racetrack and ten
associated  off-track  betting  parlors (OTB's) in the greater New Orleans area.
The Company  operates the game rooms where the video poker  machines are located
for each of the eleven facilities owned by Fair Grounds, for which it receives a
percentage  of the revenue  generated by the  machines.  As of June 30, 1998 the
Company had approximately 710 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, the Company owns 49% of the common stock
of VSI and three prominent members of the Louisiana business and legal community
own the remaining  51%. The Company,  however,  owns all the voting stock of VSI
and all of its officers and directors are Company  employees.  The Company has a
71% interest in dividends o VSI in the event dividends are declared. The Company
also formed two other  Louisiana  subsidiaries,  Southern Video  Services,  Inc.
("SVS") and Video Distributing  Services,  Inc. ("VDSI").  Both SVS and VDSI are
structured  in a manner  similar to VSI except  that the  Company is entitled to
receive  60% of any SVS  dividends.  Under the terms of its  contract  with Fair
Grounds,  the Company  must conduct any  additional  video poker  operations  in
Louisiana  other than gaming at racetracks  or OTB parlors  through SVS. T date,
SVS and VDSI have not engaged in business in Louisiana.

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

On November 5, 1996 voters in Louisiana  approved a  proposition  to allow video
poker to  continue in six of the seven  parishes  in which the Company  operates
OTB's in the greater New Orleans area. In addition,  voters approved video poker
in three  parishes in the greater New Orleans  area where the Company  currently
does not operate.  In the one parish in which the Company  operates  where video
poker was voted  down,  the  Company  will be  allowed  to  continue  to conduct
business  through June 30, 1999. The two OTB' in this parish  accounted for $2.2
million of revenues and  approximately 9% of operating income for VSI during the
year ended June 30, 1998. After June 30, 1999, the Company plans to redeploy the
video poker  machines  from these two closed sites to six other  sites,  pending
appropriate   approvals.   The  Louisiana   legislature  has  considered   other
legislation  to  curtail  video  poker  in the  past  and may do so again in the
future.

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

Competition.  The Company is subject to extensive  competition  for contracts to
operate video poker machines and the Company's racetrack and OTB parlors compete
with  various   riverboats,   truckstops  and  locations  with  liquor  licenses
throughout the New Orleans area. Each truckstop is permitted to operate up to 50
video poker  machines  and each tavern is permitted to operate up to three video
poker machines.  Louisiana has riverboat  gaming  statewide and three riverboats
are  currently  operating  in the  greater  New  Orleans  area.  Riverboats  are
permitted to have live table games and an unlimited  number of gaming  machines,
including slot machines.  Louisiana has also  authorized one land-based  casino,
permitted to include live table games and an unlimited number of gaming machines
in New  Orleans,  which  opened in May 1995;  however,  its  operator  filed for
bankruptcy  reorganization and ceased operations in November 1995. At present it
is anticipated that the land-based  casino will reopen following  reorganization
but completion of the facility is not expected to occur until October 1999.

Casino Operations

Overview.

Rainbow  Casino.  On July 16, 1994,  the Rainbow  Casino  located in  Vicksburg,
Mississippi  permanently  opened for business.  The project includes the Rainbow
Casino,  which is a 24,000-square  foot casino owned and operated by the Company
which as of June 30, 1998,  operated  approximately  780 gaming  machines and 15
table games as well as a 245-seat  restaurant.  The facility  also  includes the
89-room  Rainbow hotel and a 10-acre  indoor and outdoor  entertainment  complex
called Funtricity Entertainment Park, which was developed by a subsidiary of Six
Flags   Corporation.   Both  the  hotel  and  entertainment   park,  which  were
substantially  completed  in late May  1995,  are owned  and  operated  by third
parties.   The  Company  has  a  signed  a  letter  of  intent  to  acquire  the
entertainment  park for $0.5  million.  The park  closed in  September  1998 and
management is evaluating  alternative uses for the facility once the purchase is
consummated.  Rainbow  Casino is  marketed  as a  "locals"  casino and draws its
customers  principally from within a 75-mile radius of Vicksburg.  The Vicksburg
casino market  generated  approximately  $192.2 million in gaming revenue in the
twelve months ended June 30, 1998.

The Company is the general  partner of the  partnership  ("RCVP")  that owns the
Rainbow  Casino.  Pursuant to  transactions  consummated in March 1995,  Rainbow
Casino  Corporation,  an independent company that was the former general partner
of RCVP became a limited  partner  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  revenues  exceed $35.0 million but only on
such  incremental  amount),  for a period of 15  years.  The  Company  holds the
remaining  economic  interest  in the  partnership.  As part of the  refinancing
completed  in August 1997,  the Company  purchased  notes  payable to HFS Gaming
Corporation ("HFS") and National Gaming  Mississippi,  Inc. ("NGM") and acquired
the casino royalty previously due to HFS.

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 of the
cities of Reno and Sparks in northern Nevada.  Rail City is a 20,000 square-foot
casino which as of June 30, 1998 operated  approximately 420 gaming machines,  6
table  games,  and keno.  In  addition,  Rail City  Casino  includes  a 300-seat
restaurant, which was fully remodeled in th year ended June 30, 1998, and offers
a race and sports  book which is leased to an  independent  race and sports book
operator.  Rail City Casino is  convenient to both Reno and Sparks and caters to
the local market.

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

Competition.  Gaming of all types is available throughout Nevada and Mississippi
in numerous  locations,  including many locations which may compete  directly or
indirectly with the Company's casino  operations.  The operation of casinos is a
highly competitive  business.  The principal competitive factors in the industry
include the quality and location of the facility,  the nature and quality of the
amenities and customer  services offered and the  implementation  and success of
marketing  programs.  Many of  Rail  City  Casino's  competitors  include  large
casino-hotels  which  offer more  amenities  and may be  perceived  to have more
favorable  locations  than the Company.  The Rainbow Casino is the fourth gaming
facility to open in Vicksburg and as such faces substantial  direct  competition
for gaming  customers in the region.  In August 1997 it was  announced  the Lady
Luck Gaming  Corporation  and Horseshoe  Gaming,  LLC were going to form a joint
venture to develop a project  that would  include a dockside  casino,  hotel and
relate amenities. Previously, Horseshoe Gaming, LLC had announced a casino hotel
and auto racing  complex on the Big Black River which is between  Vicksburg  and
Jackson,  Mississippi.  The  legality  of that site for gaming is  currently  in
litigation.  At this time management does not know which, if any, of these sites
will be developed.  Both of these projects will be contingent on several factors
including regulatory approval and financing.

Patents, Copyrights and Trade Secrets

Bally  Gaming  is the  copyright  owner of both the  source  code and the  video
presentation of its games and has registered  many of these  copyrights with the
U.S.  Copyright Office.  Game version upgrades and new games are registered with
the U.S.  Copyright  office  as they are  finalized.  The  copyrights  expire at
various  dates  from the year 2000  through  2072.  Some  games,  cash  handling
mechanisms,  and  other  gaming  device  mechanisms  (either  currently  used or
reserved  for  future   development)   are  covered  either  by  pending  patent
applications or issued patents, both foreign and domestic.  The expiration dates
of these  patents vary and are based upon their  filing dates or issue date.  In
addition,  some of the games have trademarks registered with the U.S. Patent and
Trademark Office, state trademark registries, or both.

Bally Gaming is obligated  under  several  patent  agreements  to pay  royalties
ranging from  approximately  $25 to $100 per game depending on the components in
the  gaming  machines.  Additionally,  based on an  amendment  to the  trademark
licensing  agreement  between the Company  and Bally  Entertainment  Corporation
("BEC")  dated May 10,  1996,  Bally Gaming is obligated to pay a royalty of $35
per machine on new machines  sold  beginning  on June 18,  1996,  with a minimum
annual  royalty  payment of $1.0 million for the initial  five-year  term of the
amended  agreement,   which  is  subject  to  annual  renewals  by  the  Company
thereafter.  Royalty  expense for Bally  Gaming for the year ended  December 31,
1995,  the six months  ended June 30, 1996 and the years ended June 30, 1997 and
1998  was  $3.0  million,   $1.1   million,   $3.0  million  and  $2.2  million,
respectively.  The Company has over two hundred  registered or pending trademark
applications in the United States and around the world, including the registered
U.S. trademark, Gamblers Bonus.

Employees and Labor Relations

As of June 30, 1998,  the Company  employed  approximately  1,270 persons in the
State of  Nevada,  VSI  employed  80  persons  in the State of  Louisiana,  RCVP
employed  480  persons  in  the  State  of  Mississippi,  the  Company  employed
approximately 40 persons in various other states and 20 persons in various other
countries  and  Bally  Wulff  employed  460  persons  in  Germany.  None of such
employees  is  covered  by a  collective  bargaining  agreement.  Bally  Wulff's
employees,  however, are covered by German regulations which apply industry-wide
and are developed,  to some extent, through negotiations between representatives
of the metal working  industry  employers and the trade union  representing  the
employees.  These  regulations  are  in  the  nature  of  collective  bargaining
agreements  and cover the general  terms and  conditions of such items as wages,
vacations and work hours. The regulations  codify what are considered the common
standards  of  employment  in the German  metal  working  industry.  The Company
believes its relationships with its employees are satisfactory.

Gaming Regulations and Licensing

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

Any person which  acquires a  controlling  interest in the Company would have to
meet the  requirements  of all  governmental  bodies that regulate the Company's
gaming business. A change in the make-up of the Company's board of directors and
management would require the various gaming authorities to examine the
qualifications of the new board and management.

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

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

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

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

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

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

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

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

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

The Nevada Act requires  any person who acquires  more than 5% of any class of a
Registered  Corporation's  voting  securities to report the  acquisition  to the
Nevada  Commission.  The Nevada Act requires that beneficial owners of more than
10% of any class of a Registered  Corporation's  voting  securities apply to the
Nevada Commission for a finding of suitability within 30 days after the chairman
of the Nevada Board mails written notice  requiring  such filing.  If there is a
default in the payment of dividends fo six  consecutive  dividend  payment dates
for the Company's 11 1/2%  Non-Voting  Junior  Convertible  Pay-in-Kind  Special
Stock,  Series E (the "Series E Preferred  Stock"),  it will qualify as a voting
security  under the terms of the Nevada Act and will be considered as a separate
class of voting  securities  for purposes of determining  beneficial  ownership.
Under  certain  circumstances,  an  "institutional  investor," as defined in the
Nevada Act,  that acquires more than 10%, but not more than 15%, of a class of a
Registered  Corporation's  voting  securities may apply to the Nevada Commission
for a waiver of finding of suitability if the  institutional  investor holds the
securities for investment purposes only. An institutional  investor shall not be
deemed to hold  voting  securities  for  investment  purposes  unless the voting
securities  were acquired and are held in the ordinary  course of business as an
institutional  investor  and  not  for  the  purpose  of  causing,  directly  or
indirectly,  the election of a majority of the members of the board of directors
of the  Registered  Corporation,  any change in the corporate  charter,  bylaws,
management,  policies or operations of the Registered  Corporation or any of its
gaming  affiliates,  or any  other  action  the  Nevada  Commission  finds to be
inconsistent  with holding the Registered  Corporation's  voting  securities for
investment purposes only. Activities that are not deemed to be inconsistent with
holding voting  securities for investment  purposes only include:  (i) voting on
all matters voted on by stockholders;  (ii) making financial and other inquiries
of management of the type normally made by securities analysts for informational
purposes and not to cause a change in its  management,  policies or  operations;
and (iii) such other  activities  as the Nevada  Commission  may determine to be
consistent  with  investment  only intent.  If the  beneficial  holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit  detailed  business and  financial  information  including a list of
beneficial owners. The applicant is required to pay all costs of investigation.

Any  person who fails or  refuses  to apply for a finding  of  suitability  or a
license within 30 days after being ordered to do so by the Nevada  Commission or
the chairman of the Nevada Board may be found unsuitable.  The same restrictions
apply to a record owner if the record owner,  after  request,  fails to identify
the beneficial owner. Any stockholder  found unsuitable and who holds,  directly
or indirectly,  any beneficial  ownership of the common stock beyond such period
of time  as may be  prescribed  by the  Nevada  Commission  may be  guilty  of a
criminal  offense.  The Company is subject to  disciplinary  action if, after it
receives  notice that a person is unsuitable to be a stockholder  or to have any
other relationship with the Company, the Intermediary Companies or the Corporate
Licensees, the Company (i) pays that person any dividend or interest upon voting
securities  of the  Company,  (ii) allows that person to  exercise,  directly or
indirectly,  any voting right conferred through  securities held by that person,
(iii) pays  remuneration  in any form to that  person for  services  rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable
person to  relinquish  his  voting  securities,  including,  if  necessary,  the
immediate  purchase of said  voting  securities  for cash at fair market  value.
Additionally,  the Clark  County  Board has taken the  position  that it has the
authority  to  approve  all  persons  owning  or  controlling  the  stock of any
corporation controlling a gaming license.

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

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

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

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

The Nevada Legislature has declared that some corporate  acquisitions opposed by
management,  repurchases  of voting  securities  and corporate  defense  tactics
affecting Nevada corporate gaming licensees and Registered Corporations that are
affiliated  with those  operations  may be  injurious  to stable and  productive
corporate  gaming.  The Nevada Commission has established a regulatory scheme to
ameliorate  the  potentially  adverse  affects of these  business  practices  on
Nevada's  gaming  industry  and to  promote  Nevada's  policy to: (i) assure the
financial  stability of corporate  gaming licensees and their  affiliates;  (ii)
preserve the beneficial  aspects of conducting  business in the corporate  form;
and (iii)  promote a neutral  environment  for orderly  governance  of corporate
affairs.  Approvals  are,  in certain  circumstances,  required  from the Nevada
Commission before a Registered  Corporation can make 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'  respective  operations are conducted.  Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly,  quarterly or annually and are based on either (i) a percentage  of the
gross revenues  received,  (ii) the number of gaming devices operated,  or (iii)
the number of games operated.  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 the State of Nevada.

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

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

Louisiana. The manufacture,  distribution, servicing and operation of video draw
poker devices  ("Devices")  in Louisiana is subject to the Louisiana  Video Draw
Poker Devices Control Law and the Rules and Regulations  promulgated  thereunder
(the "Louisiana Act").  Until May 1, 1996,  licensing and regulatory control was
maintained by 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"). The Louisiana legislature passed a bill which created a single
gaming  control board for the  regulation of gaming in Louisiana.  This Board is
called the Louisiana  Gaming Control Board (the "Louisiana  Board") and oversees
all licensing for all forms of legalized gaming in Louisiana  (including  gaming
on Native American lands).  The Division will continue to perform  investigatory
functions for the Louisiana  Board.  The laws and  regulations  of Louisiana are
based on policies of maintaining  the health,  welfare and safety of the general
public and  protecting  the video  gaming  industry  from  elements of organized
crime,  illegal  gambling  activities  and other  harmful  elements,  as well as
protecting  the public from illegal and  unscrupulous  gaming to ensure the fair
play of devices.

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

The  Louisiana  Board may deny,  impose a condition on or suspend or
revoke a license,  renewal or  application  for a license for  violations of any
rules and  regulations of the Louisiana Board or any violations of the Louisiana
Act. In addition,  fines for  violations  of gaming laws or  regulations  may be
levied  against  the  Louisiana  Licensees  and the  persons  involved  for each
violation of the gaming laws.  The issuance,  condition,  denial,  suspension or
revocation is deemed a pure and absolute  privilege  and is a 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%  ownership,  income or profits  interest in an  applicant  for or holder of a
license or who is a key employee, or who has the ability to exercise significant
influence over the licensee.  All persons or entities investigated must meet all
suitability  requirements and qualifications for a licensee. The Louisiana Board
may deny an application for licensing for any cause it may deem reasonable.  The
applicant for licensing must pay a filing fee, which also covers 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.

In addition to being licensed as a  manufacturer  of devices under the Louisiana
Act,  Bally  Gaming has been  licensed  as a  manufacturer  under the  Louisiana
Riverboat Economic  Development and Gaming Control Act (the "Louisiana Riverboat
Act"). Gaming's application for a permanent manufacturer's license as it relates
to the  land-based  casino in New  Orleans  was  pending  before  the  Louisiana
Economic  Development and Gaming Corporation  ("LEDGC") at the time the operator
of  the  land-based  casino  filed  for  bankruptc   reorganization  and  ceased
operations, resulting in the termination of funding for and effective closure of
the LEDGC  regulatory  operations.  The authority and duties of LEDGC  regarding
licensing  and  regulation  of the  land-based  casino  will now fall within the
jurisdiction  of  the  Louisiana   Board.   The  Louisiana  Board  has  recently
promulgated  regulations  governing  its  operation  and the Company has been in
contact with representatives of the Louisiana Board to coordinate the submission
of all  materials  required  for the  Louisiana  Board to issue the Company such
licenses, permits and approvals as may be required.

Mississippi. The manufacture and distribution of gaming and associated equipment
and the ownership and operation of casino  facilities in Mississippi are subject
to extensive state and local regulation,  primarily the licensing and regulatory
control by the Mississippi Gaming Commission (the "Mississippi  Commission") and
the Mississippi State Tax Commission.

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

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

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

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

Gaming and  manufacturer  and  distributor  licenses are not  transferable,  are
issued for a two-year  period  and must be renewed  every two years  thereafter.
RCVP was granted a renewal of its gaming license by the  Mississippi  Commission
in 1998 and the license must be renewed in June 2000.  BGI was granted a renewal
of its  manufacturer  and  distributor  license in 1998 and such license must be
renewed in June 2000.  No person may  become a  stockholder  of, or receive  any
percentage of profits from, a licensed  subsidiary of a holding  company without
first  obtaining  licenses and approvals from the  Mississippi  Commission.  The
Company and its  affiliates  have  obtained  the  necessary  approvals  from the
Mississippi Commission.

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

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

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

Any  person who fails or  refuses  to apply for a finding  of  suitability  or a
license  within  30  days  after  being  ordered  to do so  by  the  Mississippi
Commission may be found  unsuitable.  Any person found unsuitable and who holds,
directly or  indirectly,  any  beneficial  ownership  of the  securities  of the
Company beyond such time as the Mississippi  Commission prescribes may be guilty
of a  misdemeanor.  The  Company  is subject to  disciplinary  action if,  after
receiving  notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company or its licensed  subsidiaries,  the Company:
(i) pays the unsuitable person any dividend or other  distribution on the voting
securities of the Company; (ii) recognizes the exercise, directly or indirectly,
of any voting rights  conferred 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 t pursue all lawful  efforts  to  require  the  unsuitable  person to
divest  himself  of the  securities,  including,  if  necessary,  the  immediate
purchase of the  securities for cash at fair market value.  Management  believes
that  compliance by the Company with the  licensing  procedures  and  regulatory
requirements of the Mississippi  Commission will not affect the marketability of
the Company's securities.

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

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

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

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

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

The  Mississippi  legislature  has  declared  that some  corporate  acquisitions
opposed by  management,  repurchases of voting  securities  and other  corporate
defense  tactics  that affect  corporate  gaming  licensees in  Mississippi  and
corporations  whose stock is  publicly  traded  that are  affiliated  with those
licensees  may be  injurious  to stable and  productive  corporate  gaming.  The
Mississippi  Commission  has  established a regulatory  scheme to ameliorate the
potentially adverse effects of these business practices upo Mississippi's gaming
industry  and to promote  Mississippi's  policy  to:  (i)  assure the  financial
stability of corporate gaming operators and their affiliates;  (ii) preserve the
beneficial  aspects of  conducting  business in the  corporate  form;  and (iii)
promote a neutral  environment for the orderly  governance of corporate affairs.
Approvals  are,  in  certain   circumstances,   required  from  the  Mississippi
Commission  before  the  Company  may make  exceptional  repurchases  of  voting
securities  above the current  market price  (commonly  called  "greenmail")  or
before  a  corporate  acquisition  opposed  by  management  may be  consummated.
Mississippi's  gaming  regulations  will  also  require  prior  approval  by the
Mississippi Commission if the Company adopts a plan or recapitalization proposed
by its  board  of  directors  opposing  a  tender  offer  made  directly  to the
stockholders for the purpose of acquiring control of the Company.

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

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

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

The Mississippi  Commission has adopted a regulation requiring as a condition of
licensing  or  license  renewal  that a gaming  establishment's  plan  include a
500-car  parking   facility  in  close  proximity  to  the  casino  complex  and
infrastructure facilities, which will amount to at least 25% of the casino cost.
Management of the Company believes it is in compliance with this requirement.

In  Mississippi,  two referenda  have been proposed  which,  if approved,  would
repeal  legalized  gaming in  Mississippi  and impose a two year  period for all
gaming operations to terminate. A Mississippi State Circuit Court ruled that the
first of the proposed  referenda was invalid  because,  among other reasons,  it
failed to include required information regarding its anticipated affect on state
government  revenues.  Proponents of the referenda have filed an appeal with the
Mississippi  State Supreme Court to review the Circuit Court ruling.  The second
referendum  proposal  included the same language on  government  revenues as the
first and similarly  was ruled  invalid by a Mississippi  State Circuit Court on
the same grounds as the first. Any such referendum may be resubmitted, but first
must be  approved  by the  Mississippi  Secretary  of State  and  signatures  of
approximately 98,000 registered voters must be gathered and certified by October
7, 1998,  in order for the proposal to be included on the November  1999 ballot.
If the  October 7, 1998  deadline  is not met,  however,  the  proponents  could
attempt to place  such a  proposal  on the  November  2000  ballot or the ballot
during another statewide election in subsequent years.

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

New Jersey.  BGI has previously been licensed by the New Jersey  Commission as a
gaming-related casino service industry ("CSI") in accordance with the New Jersey
Casino Control Act (the "Casino Control Act"). Due to the change of ownership of
BGI as a result of the merger with Alliance Gaming Corporation, and by operation
of state law,  BGI's CSI license was deemed to have lapsed.  Prior to the change
of  ownership  of BGI and in  anticipation  of same,  the Company  submitted  an
application for qualification.  The New Jersey Commission deemed the application
complete and as a result thereof,  since the merger, the Company's operations in
New Jersey continue  uninterrupted by full regulatory  consent, to transactional
waivers which have been granted by the New Jersey Casino Control Commission with
consent of the New Jersey Division of Gaming Enforcement,  and which the Company
believes  should  continue  to be  granted  by the  New  Jersey  Casino  Control
Commission  on  six-month   blanket  terms  for  parts  and  service  and  on  a
sale-by-sale basis for all other products pending final regulatory action on the
Company's now pending application for CSI qualification.

In considering  the  qualifications  of an applicant for a CSI license,  the New
Jersey Commission may require the officers, directors, key personnel,  financial
sources and  stockholders (in particular those with holdings in excess of 5%) of
the applicant and its holding and  intermediary  companies to demonstrate  their
qualifications.  In this regard,  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 sale,  distribution
or operation of gaming machines. All currently required filings have been made.

The United States  Congress has created the National  Gambling Impact and Policy
Commission  to conduct a  comprehensive  study of all  matters  relating  to the
economic  and  social  impact of  gaming  in the  United  States.  The  enabling
legislation  provides that, not later than two years after the enactment of such
legislation,  the commission would be required to issue a report  containing its
findings and  conclusions,  together with  recommendations  for  legislation and
administrative  actions.  Any such  recommendations,  if enacted into law, could
adversely affect the  gaming  industry  and  have a  material  adverse  effect  
on the  Company's business,  financial  condition  or  results of  operations.  

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

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

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

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

The Spielverordnung (gaming ordinance) specifically governs wall machines. These
regulations  limit  game  payouts  to DM 4.00  (approximately  $2.22)  per game,
require a minimum payout percentage, detail where the machines may be installed,
how many may be installed and by whom, which games are prohibited, the technical
requirements of the machines and technical  review and approval.  Operators must
comply with  regulations  that  specify  how many  machines  may operate  within
defined  square foot areas (15 square meters per machine,  with a maximum of ten
machines  per  location).  In taverns,  restaurants,  hotels and  certain  other
establishments, no more than two gaming machines are permitted.

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

Subject to  certain  exceptions,  a  value-added  tax (VAT) of 16% is  generally
assessed on the sale or supply of any goods and  services in Germany.  Since the
total amount paid for particular goods or services is considered to be the gross
price in calculating such tax, the actual rate is 13.79%. The basis for taxation
is the cash  remaining  in the  machines.  The rule  requiring a minimum  payout
percentage  is applied to the amount  remaining  in the cash box net of such VAT
Depending on the  municipality  in which machine is located,  operators may also
have to pay a monthly leisure tax on each machine of up to DM 600 (approximately
$332).  The  government  in the German state of North Rhine  Westfalia  recently
modified regulations that permitted local municipalities to independently impose
rate increases on taxes on gaming machine operators beginning January 1, 1999.

During  fiscal 1996,  Bally Wulff  increased  the amount of tax reserves by $1.0
million (to a total reserve of $1.4 million) as a result of  developments  in an
ongoing  quadrennial  audit of Wulff's tax  returns  for the years 1988  through
1991. The German tax authorities  have proposed  preliminary  adjustments  which
range from $1.4 million (which has been accrued) to $5.0 million. The German tax
authorities  have not yet issued  the final  assessment  from their  quadrennial
audit.

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

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

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

<PAGE>

ITEM 2.  PROPERTIES

The  following  table sets forth  information  regarding  the  Company's  leased
properties  (exclusive  of space  leases in  connection  with its gaming  device
routes) as of June 30, 1998,  all of which are fully utilized  unless  otherwise
noted:                                                                         
                                                                  Annual
                                                    Building      Rental
Location          Use                              Square Feet   Payments
                                                          (In 000s)

Las Vegas, NV     Subleased                           72,000    $  515
Las Vegas, NV     Nevada route operations             18,500       182
Las Vegas, NV     Advanced Product Development Group   7,100        85
Sparks, NV        Administrative offices and 
                    warehousing                       38,300       274
Sparks, NV        Sales offices and warehousing       11,000       122
Absecon, NJ       Sales offices and warehousing       15,800        54
Carson City, NV   Proprietary gaming development       1,500        15
Biloxi, MS        Sales offices                        6,400        24
Golden, CO        Sales offices                        1,500        17
Rosemont, IL      Sales offices                        4,900        23
Dania, FL         Sales offices                        3,400        37
Elko, NV          Sales office and route operations    4,200        22
Laughlin, NV      Sales offices                          600         9
Atlantic City, NJ Administrative offices                 750         9
San Juan, 
  Puerto Rico     Sales offices                        1,000        12
Sidney, Australia Sales offices                        1,700        56
Johannesburg, So. Sales offices                        1,000        28
Las Vegas, NV     Warehousing                        103,500       390
Berlin, Germany   Administrative offices and 
                    manufacturing                    108,500       520
Hannover, Germany Administrative offices and 
                    warehousing                       20,100       217
Sparks, NV        Route operations                    12,100        77
Carson City, NV   Route operations                     2,500         9
Winnemucca, NV    Route operations                     1,200         5
Pahrump, NV       Route operations                       800         5
Las Vegas, NV     Route location                       8,000       453
Las Vegas, NV (1) Ground lease                           ---       330
Sparks, NV (2)    Ground lease                           ---         5
Vicksburg, MS     Administrative offices               2,700        19
Vicksburg, MS     Administrative offices               1,200         9
New Orleans, LA   Louisiana route operations           6,000        57
Covington, LA     OTB operation                        2,500        36
Metairie, LA      OTB operation                       11,000        54
New Orleans, LA   OTB operation                        5,100        26

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


<PAGE>

The following table sets forth  information  regarding  properties  owned by the
Company as of June 30, 1998,  all of which are fully utilized  unless  otherwise
noted:

                                             Building
Location          Use                       Square Feet
                                              (In 000s)
Las Vegas, NV     Administrative offices and
                  manufacturing   (a)         150,000
Reno/Sparks, NV   Casino (a)                   35,000
Vicksburg, MS     Casino                       24,000
Vicksburg, MS     Administrative offices        3,200
Vicksburg, MS     Vacant- Land                    ---
Las Vegas, NV     Tavern/Land                   5,000
No Las Vegas, NV  Land/Parking                    ---

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

In  addition,  the Company  leases 21 bar and tavern  properties  that have been
subleased to other operators in connection with its Nevada route operations. The
properties range in size from approximately 1,750 square feet to 7,700 square 
feet. The remaining terms of the leases  range  from 10 months to 13 years with 
monthly  payments  ranging  from approximately $1,800 to $10,500.

In addition to the principal facilities, the Company has 21 leased locations and
two owned  locations in Germany which are  primarily  used for sales and service
offices as well as for warehousing  purposes.  The properties range in size from
approximately 3,300 square feet to 14,200 square feet. The leased locations have
terms of occupancy  varying  from 6 months to eight years with monthly  payments
ranging from approximately $1,000 to $9,000.

See Note 8 of Notes to Consolidated  Financial  Statements for information as to
the Company's lease commitments with respect to the foregoing rental properties.
The Company  believes its  facilities are suitable for its needs and the Company
has no future expansion plans that would make these properties inadequate.

ITEM 3.  LEGAL PROCEEDINGS

Litigation

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

In an action filed on December 2, 1996,  the Company was named as a defendant in
an action  brought by  Canpartners  Investments  IV and  Cerberus  Partners,  in
federal  district  court for the Southern  District of New York relating to loan
commitment  letters from August 1995,  contemplating  that the plaintiffs  would
lend  approximately  $30 million to partially  fund the  Company's  then pending
hostile  tender  offer for BGII.  In August 1998 the Company and the  plaintiffs
settled the litigation for approximately $2.0 million

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

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

Not applicable.

                                    PART II

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

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

                                             Price Range of
                                               Common Stock
                                              High      Low

      Fiscal Year Ended June 30, 1997
            1st Quarter                      $ 4.00   $ 2.00
            2nd Quarter                        4.38     3.00
            3rd Quarter                        4.56     3.38
            4th Quarter                        4.00     3.07

      Fiscal Year Ended June 30, 1998
            1st Quarter                       $6.31    $3.63
            2nd Quarter                        6.44     4.00
            3rd Quarter                        5.94     4.75
            4th Quarter                        5.37     3.87

As of September 8, 1998 the Company had approximately 1,700 holders of record of
its Common Stock.

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

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

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

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

                                                    Fiscal Years Ended June 30,
                                            1994     1995(1)   1996(2)   1997(5)    1998
                                                 (In 000's, Except Per Share Amounts)
<S>                                        <C>      <C>       <C>       <C>       <C>                
Statements of Operations Data
Revenues:  
   Gaming equipment and systems            $    65  $    ---  $ 10,575  $134,734  $109,597
   Wall machines and amusement games           ---       ---     3,356   131,934    98,611
   Route operations                        102,830   106,854   109,938   127,028   148,507
   Casino operations                        20,159    25,134    48,509    51,450    60,657
                                           -------   -------   -------   -------   -------
                                           123,054   131,988   172,378   445,146   417,372
                                     
Costs and expenses:
   Cost of gaming equipment and systems         20       ---     7,213    84,496    61,684
   Cost of wall machines and amusement 
     games                                     ---       ---     2,022    68,426    54,241
   Cost of route operations                 76,332    79,887    84,212    95,716   114,645
   Cost of casino operations                14,955    14,231    22,046    22,269    25,930
   Selling, general and administrative      23,334    28,649    31,640   109,474   102,096
   Depreciation and amortization             9,530     9,520    10,988    22,606    22,838
   Direct acquisition costs (3)                ---     1,669    55,843       ---       ---
   Unusual items                             6,351     2,293     5,498       700      (325)
                                           -------   -------   -------   -------    ------
                                           130,522   136,249   219,462   403,687   381,109
                                           -------   -------   -------   -------   -------
Operating income (loss)                     (7,468)   (4,261)  (47,084)   41,459    36,263

Other income (expense)
   Interest income                           2,084     2,798     1,571     1,620       813
   Interest expense                         (6,830)   (8,133)   (8,897)  (23,626)  (28,600)
   Rainbow royalty (4)                         ---      (810)   (4,070)   (4,722)     (587)
   Rainbow Royalty Buyout (4)                  ---       ---       ---       ---   (19,000)
   Minority interest                          (506)     (397)     (963)   (1,092)   (2,002)
    Other, net                                (167)      317       301       139     1,025
                                            ------      ----      ----     -----    ------

Income (loss) before income taxes          (12,887)  (10,486)  (59,142)   13,778   (12,088)
Income tax provision                          (241)     (265)     (755)   (7,993)   (3,185)
Income (loss) before extraordinary item    (13,128)  (10,751)  (59,897)    5,785   (15,273)
Extraordinary loss without tax benefit         ---       ---       ---       ---   (42,033)
Net income (loss)                          (13,128)  (10,751)  (59,897)    5,785   (57,306)

Special stock dividends                        ---       ---      (362)  (11,264)   (3,551)
Premium on repurchase/redemption of
   Series B Special Stock                      ---       ---       ---      (710)  (16,553)
Net loss applicable to common shares      $(13,128) $(10,751) $(60,259)  $(6,189) $(77,410)

Basic net loss per common share            $ (1.28)  $ (0.95)  $ (4.64)  $ (0.19)  $ (2.42)
                                          ========  ========  ========  ========  ========

Other Data
Operating income (loss) before unusual
   items and direct acquisition costs$      (1,117)   $ (299) $ 14,257  $ 42,159   $35,938
</TABLE>


ITEM 6.  SELECTED FINANCIAL DATA (continued)
<TABLE>
<CAPTION>

                                                           As of June 30,                                      .
                                               ---------------------------------------
                                            1994      1995     1996      1997(5)    1998
                                            ----      ----     ----      ------     ----
                                                            (In 000's)
<S>                                        <C>       <C>       <C>       <C>       <C>    
Balance Sheet Data
Cash and cash equivalents and

  securities available for sale            $49,574   $37,414   $48,057   $28,924   $23,487
Working capital                             50,926    31,476   111,009   110,795   119,480
Total assets                               119,416   126,348   375,504   352,016   366,837
Total long term debt,
  including current maturities              90,726   101,397   191,344   173,839   325,953
Series B Special Stock                         ---       ---    51,552    58,981       ---
Total stockholders' equity (deficiency)     15,099     9,985    69,846    53,555  (23,748)
</TABLE>

(1) The Company acquired  the general partnership interest in the Rainbow Casino
Vicksburg Partnership, L.P. (RCVP) on March 29, 1995 and began consolidating the
results of RCVP on that date.

(2) The  Company  acquired  BGII on June 18,  1996.  Therefore  the  results  of
operations for the year ended June 30, 1996 include the results of operations of
BGII  for  the  last  twelve  days  of  that  fiscal  year.  See  note  2 to the
Consolidated Financial Statements.

(3)Includes non-cash accounting loss on debenture conversion of $30.1 million in
fiscal  year 1996 as a result of the  conversion  of the  Company's  Convertible
Debentures into equity securities.
           
(4) Represents  royalty fee related to the HFS  financing at the Rainbow
Casino.  The Company  repurchased this royalty obligation from HFS on August 12,
1997.

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



<PAGE>


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

Resources In August 1997 the Company completed a series of related  transactions
as described below (the "Refinancing")  which consisted of the private placement
of $150.0 million of Senior Subordinated Notes and the closing of $230.0 million
of bank  financing.  The  bank  financing  provides  for (i)  term  loans in the
aggregate  amount of up to $140.0 million,  comprised of a $75.0 million tranche
with a 7 1/2-year term (the "Tranche B Term Loan"), a $40.0 million tranche with
an 8-year term (the "Tranche C Term Loan") and a $25.0 million  tranche with a 7
1/2-year term (the "Delayed Draw Term Facility," and together with the Tranche B
Term Loan and the Tranche C Term Loan, the "Term Loan  Facilities");  and (ii) a
$90.0  million  revolving  credit  facility  with a 6-year term (the  "Revolving
Credit Facility"). The borrowing base for the revolving credit facility consists
of eligible receivables and inventory, as defined in the credit agreement and at
June 30, 1998 totaled $72.1 million.

As  part of the  Refinancing,  the  Company  used  the  proceeds  of the  Senior
Subordinated Note offering,  together with borrowings under the Revolving Credit
Facility  and the  Term  Loan  Facilities  and  cash on  hand,  to fund  (a) the
repurchase  at a premium of  substantially  all of the  Company's 12 7/8% Notes,
plus  accrued  interest  to August  8, 1997  totaling  $183.7  million,  (b) the
redemption at liquidation value of all of the Company's Series B Preferred Stock
on September 8, 1997 totaling  $77.6  million,  (c) the purchase from HFS Gaming
Corporation  of the right to receive  royalty  payments based on revenues of the
Rainbow  Casino  and the  purchase  of  related  debt owed to an HFS  affiliate,
National Gaming Mississippi,  Inc. on August 12, 1998 totaling $26.3 million and
(d) the  payment  of  transaction  fees and  expenses  totaling  $16.5  million.
Additionally,  in July 1997 the Company redeemed the remaining  balance of its 7
1/2 Convertible Debentures at a price of 104, or a total of $1.7 million.

On a pro  forma  basis  for the year  ended  June 30,  1998,  assuming  the
Refinancing  had occurred on July 1, 1997,  the Company  would have reported net
income  available  to common  shares of $0.8 million and net income per share of
$0.02 or a $2.44  improvement  over the reported net loss per share of $2.42. In
conjunction with the Refinancing,  the Company incurred charges of approximately
$77.6 million,  including the $27.7 million  premium on the repurchase of the 12
7/8% Notes,  $16.6 million for the difference between the carrying value and the
liquidation  value of the Series B  Preferred  Stock and $19.0  million  for the
Rainbow Casino royalty buyout.  On an ongoing basis the Company will continue to
be highly leveraged and will have significant  interest costs;  however,  in the
near term the  Company  will have lower  overall  fixed  costs and only  limited
principal payments required on its long-term indebtedness.

At June 30, 1998, the Company had $23.5 million in cash and cash equivalents and
$37.1 million in  unborrowed  availability  on its revolving  lines of credit in
accordance with borrowing base limitations in the credit agreement.  
In addition the Company had working capital of  approximately  $119.5 million,  
an increase of approximately $8.7 million from June 30, 1997 which is explained 
below.  Consolidated cash and cash equivalents at June 30, 1998 includes  
approximately  $14.4 million of cash which is utilized in Casino and Route 
Operations which is held in vaults,  cages or change banks.  

The Credit  Agreement for the bank financing has both financial and  operational
covenants.  On August 31,  1998,  the Company  obtained a consent  from its bank
group which cured a technical  default under the Credit Agreement related to the
transfer  of assets  from a  non-domestic  subsidiary  to a domestic  subsidiary
related to the formation of a wholly-owned subsidiary,  Bally Gaming Africa Pty.
Ltd., as well as a consent to a change in the definition of Restricted  Payments
to allow for an unrestricted amount of up to $7.0 million of Restricted Payments
(as  defined in the Credit  Agreement).  As of June 30,  1998 the  Company is in
compliance  with these  covenants.  The Company is also in  compliance  with the
operational  covenants  contained in the indenture  for the Senior  Subordinated
Notes.

Management  believes  that cash flow from  operating  activities,  cash and cash
equivalents held and the $90.0 million Revolving Credit Facility,  as limited by
the borrowing base, will provide the Company with sufficient  capital  resources
and  liquidity.  At June 30,  1998,  the  Company  did not have any  significant
commitments for capital expenditures.

Working Capital

The following  table  presents the components of  consolidated  working capital 
at June 30, 1997 and 1998:

                                  Balances at June 30,
                                 1997      1998   Change
                                       (In $000's)

    Cash and cash equivalents              $28,924   $23,487   $(5,437)
    Accounts and notes receivable, net      87,701    93,459     5,758
    Inventories, net                        37,329    42,418     5,089
    Other current assets                     9,627    11,711     2,084
       Total current assets                163,581   171,075     7,494

    Accounts payable                        14,270    10,477     3,793
    Accrued liabilities                     37,392    39,122    (1,730)
    Current maturities of long-term debt     1,124     1,996      (872)
       Total current liabilities            52,786    51,595     1,191

       Net working capital                $110,795  $119,480    $8,685
                                          ========  ========    ======

The primary  fluctuations  contributing  to the increase in working capital
were: (i) reductions in accounts payable based on timing of payments, (ii) a net
increase in accounts receivable resulting from the reversal of the provision for
doubtful  receivables  related  to the Alpha  Hospitality  obligation  discussed
below,  partially  offset  by  decreases  in  accounts  receivable  due to  cash
collections  and lower  revenues,  (iii) an  increase  in  inventory  due to new
product sales expected in the first quarter o fiscal year 1999, (iv) an increase
in prepaid  assets due to higher  prepaid  gaming  taxes and  insurance,  (v) an
increase in accrued liabilities due to higher accrued interest payable, (vi) the
impact of foreign exchange  fluctuations between the dollar and the deutschemark
on all working capital  categories,  and (vii) the  corresponding  impact of the
above listed items on cash and cash equivalents.

Cash Flow

During the year ended June 30,  1998,  the Company used $8.7 million of
cash in operating  activities  resulting  from a net loss less an  extraordinary
loss and  depreciation  and  amortization,  offset by an increase in inventories
primarily at Bally Gaming and Systems, increases in prepaid taxes and insurance,
and a net reduction in accounts  payable and accrued expenses and a net increase
in accounts receivable.

During the year ended June 30, 1998,  the Company used $25.1  million of cash in
investing   activities   primarily  resulting  from  $15.5  million  in  capital
expenditures  and cash  payments  made  related to taking over the  contracts of
locations operated by several mid-sized route operators.

During the year ended June 30,  1998,  $28.5  million was  provided by financing
activities.  The refinancing transaction provided proceeds of $303.7 million, of
which $175.8 million was used to repay  outstanding debt, $77.6 million was used
to  repurchase  the Series B Special  Stock,  and $44.2  million was used to pay
other  transaction fees and expenses.  Additionally,  during the year ended June
30,  1998,  the Company had a net increase in  borrowings  on its credit line of
$25.4 million.

The Company  believes  that the  analysis  of EBITDA is a useful  adjunct to net
income, cash flow and other GAAP measurements.  However, this information should
not be  construed as an  alternative  to net income or any other GAAP measure of
performance as an indicator of the Company's performance or to GAAP-defined cash
flows generated by operating, investing and financing activities as an indicator
of cash flows or a measure of liquidity.

Customer  Financing  Management  believes that customer financing terms and
leasing have become an increasingly  important  competitive factor for the Bally
Gaming  and  Systems  and Wall  Machine  and  Amusement  Games  business  units,
respectively.  Competitive conditions sometimes require Bally Gaming and Systems
to grant  extended  payment terms on gaming  machines,  systems and other gaming
equipment,  especially for sales in emerging markets. While these financings are
normally collateralized by such equipment,  the resale valu of the collateral in
the event of default  may be less than the  amount  financed.  Accordingly,  the
Company will have greater  exposure to the financial  condition of its customers
in emerging markets than has historically  been the case in established  markets
like Nevada and Atlantic  City.  Bally Wulff  provides  customer  financing  for
approximately  15% of  its  sales  and  also  provides  lease  financing  to its
customers.  Lease terms are generally for six months, but are also available for
12 and 43 month terms.
         
Year 2000

The Year 2000 readiness issue,  which is common to most businesses,  arises
from the inability of  information  systems,  and other time and date  sensitive
products  and  systems,   to  properly  recognize  and  process   date-sensitive
information  on and beyond  January 1, 2000.  The result could create  errors in
information or system failures. Assessments of the potential cost and effects of
Year 2000  issues  vary  significantly  among  businesses,  and it is  extremely
difficult to predict the actual impact. Recognizing this uncertainty, management
has and is continuing to actively analyze, assess and plan for various Year 2000
issues across its businesses.
        
The Year 2000 issue has an impact on both information  technology ("IT") systems
and non-IT systems,  such as its manufacturing  systems and physical  facilities
including,  but  not  limited  to,  security  systems  and  utilities.  Although
management  believes  that a majority of the  Company's IT systems are Year 2000
ready, such systems still have to be tested for Year 2000 readiness. The Company
plans to replace or upgrade those  systems that are  identified as non-Year 2000
ready during calendar 1999. Certain IT systems previously identified as non-Year
2000  compliant are being  upgraded or replaced which should be complete by June
30, 1999.  Non-IT system issues are more difficult to identify and resolve.  The
Company is actively  identifying non-IT Year 2000 issues concerning its products
and services,  as well as its physical facility  locations.  As non-IT areas are
identified,  management  formulates  the  necessary  actions  to ensure  minimal
disruption to its business  processes.  Management is in the process of engaging
outside  consultants to assist and advise management in this assessment process.
Although  management  believes that its efforts will be successful and the costs
will be  immaterial  to its  consolidated  financial  position  and  results  of
operations,  it  also  recognizes  that  any  failure  or  delay  could  cause a
disruption in its business and have a significant  financial impact. To minimize
this  potential  impact,  the  Company is  actively  planning  and  designing  a
contingency plan to support critical  business  processes.  

The Company has also initiated  efforts to ensure the Year 2000 readiness of its
products and services. The Company is actively evaluating its strategy and legal
obligations for any communication to its customers. As part of its assessment of
current  products and  services,  the Company is currently  upgrading  all Bally
Systems  SDS  customers  to version  7.0  software,  for which the  Company  has
developed a year 2000 compliance  "patch" which is currently being  distributed.
The  Company  plans to have all  customers  upgraded  to version 7.0 by December
1998,  and have the patch  installed  by July 1999.  The  Company  is  currently
shipping  version  7.1 of the  software,  which  is also  year  2000  compliant.
Customers are also being advised that the IBM or Unix operating systems they are
using must also be  upgraded  to versions  that are year 2000  compliant.  Bally
Systems has  obtained the  operating  system  upgrades  from the vendors and has
offered to assist users in installing  the upgrade.  The Company has also tested
most of the  products  manufactured  in the United  states and Germany in recent
years to determine compliance with Year 2000 and plans to advise customers what,
if any, non-compliance issues exist before December 31, 1998.

Based upon the results of research and investigation,  management will formulate
further plans as necessary. The Year 2000 readiness of its customers varies, and
the Company is  encouraging  its  customers  to evaluate  and prepare  their own
systems.  These  efforts by customers to address Year 2000 issues may affect the
demand for certain products and services;  however, the impact to the revenue or
any change in revenue patterns is highly uncertain.

The Company has also initiated  efforts to assess the Year 2000 readiness of its
key suppliers and business partners.  The Company's  direction in this effort is
to ensure the  adequacy of  resources  and  supplies to minimize  any  potential
business interruptions.  Management plans to complete this part of its Year 2000
readiness  plan in the earlier part of calendar  1999.  As part of the Company's
contingency plans,  management will begin to identify and solidify relationships
with and access to alternative suppliers and resources to ensure the support and
continuation of its critical business operations.

The Year 2000 issue  presents  a number of other  risks and  uncertainties  that
could impact the Company,  such as public  utility  failures,  potential  claims
against it for damages arising from products and services that are not Year 2000
compliant, and the response ability of certain government and gaming commissions
of the various  jurisdictions  where the Company  conducts  business.  While the
Company  continues  to believe  the Year 2000  issues  described  above will not
materially affect its consolidated  financial position or results of operations,
it remains uncertain as to what extent, if any, the Company may be impacted.

Results of Operations

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

                                                     Years Ended June 30,
                                              1996(a)        1997         1998
                                                         (In $000's)
       Revenues by business unit:
       Bally Gaming and Systems              $132,329     $134,734     $109,597
       Wall Machines and Amusement Games      107,094      131,934       98,611
       Route Operations                       109,938      127,028      148,507
       Casino Operations                       48,509       51,450       60,657
          Total Revenues                     $397,870     $445,146     $417,372

       EBITDA by business unit:
       Bally Gaming and Systems               $15,716      $16,671      $10,808
       Wall Machines and Amusement Games       13,376       29,719       18,661
       Route Operations                        16,691       20,200       24,577
       Casino Operations                       15,107       17,352       20,781
       Corporate expenses                     (17,108)     (19,177)     (16,051)
       Unusual item                            (8,827)        (700)         325
          Total EBITDA                        $34,955      $64,065      $59,101

       Operating income by business unit:
       Bally Gaming and Systems               $13,836      $10,616      $ 5,238
       Wall Machines and Amusement Games        7,628       23,332       13,094
       Route Operations                         9,268       13,082       16,432
       Casino Operations                       13,041       15,407       18,736
       Corporate expenses                     (19,759)     (20,278)     (17,562)
       Unusual items                           (8,827)        (700)         325
          Total Operating Income              $15,187      $41,459      $36,263

(a) To enhance the  comparability,  the operating results for 1996 are presented
on a pro forma basis  assuming the BGII  acquisition  had occurred  prior to the
start of the 1996 year. The  acquisition  of BGII actually  occurred on June 18,
1996.

<PAGE>

1998 Compared with 1997

Bally Gaming and Systems

For the year ended June 30, 1998, Bally Gaming and Systems reported  revenues of
$109.6 million, a decrease of 19%, compared to revenues of $134.7 million in the
prior year.  The decrease is due primarily to a 26% decrease in shipments of new
gaming  machines  to  approximately   13,400  units  compared  to  shipments  of
approximately  18,200 in the prior year. The volume decline  resulted  primarily
from customers delaying purchase until the upgraded products were made available
in March 1998 and a lower  number of new casino  openings  compared to the prior
year.  By  market  segment,  Bally  Gaming's  unit  sales for the  current  year
consisted of approximately  3,300 units to the Nevada and Atlantic City markets,
6,600  units to  international  markets and 3,500  units to  riverboats,  Native
American and other domestic  markets.  Bally Gaming  reported  revenues from the
sale of new gaming  machines of $68.9  million,  a decrease of 29%,  compared to
$96.7  million in the prior year due to lower unit  volume and a 3%  decrease in
the  average  selling  prices  of new  machines  due to a higher  percentage  of
international  sales  which  tend to be lower  priced.  Bally  Systems  reported
revenues  of $22.0  million,  a decrease  of 1%,  compared  to revenues of $22.3
million in the prior year period. Bally Systems revenues resulted primarily from
shipments to new  installations  such as Casino Windsor,  John Ascuaga's Nugget,
Flamingo Hilton- Laughlin and Harrah's Cherokee Smokey Mountain.

For the year ended June 30, 1998,  gross profit margins improved to 44% from 37%
in the prior year period. The gross margin improvement resulted primarily from a
greater  proportion of higher  margin  Systems  sales and lower  provisions  for
inventory  obsolescence  in the current  year  period.  Bally Gaming and Systems
reported  operating  income of $5.2  million,  a decrease  of 51%,  compared  to
operating income of $10.6 million in the prior year period. The operating income
decrease resulted primarily from lower revenues and higher selling,  general and
administrative  expenses,  principally  a $6.0 million  increase in research and
development, partially offset by the gross margin improvement.

Wall Machines and Amusement Games

For the year ended June 30, 1998,  Wall  Machines and Amusement  Games  reported
revenues of $98.6  million,  a decrease  of 25%,  compared to revenues of $131.9
million in the prior year.  The decrease in revenues  resulted  primarily from a
24% decrease in shipments of new wall machine  units,  a 18% decrease in average
selling  price of new machines and a 13%  decrease in amusement  game  revenues,
partially  offset by a 29% increase in leased wall machine  revenues.  The prior
year period was favorably affected by a change in German  regulations  effective
January 1, 1997,  requiring all wall  machines to have internal  meters to track
play.  The currency  translation  impact of the  fluctuation  of the German mark
versus the U.S.  dollar  reduced  revenues by $12.2  million  during the current
year.

The Wall Machines and  Amusement  Games  business  unit  continued to expand its
leasing  program  whereby new wall machines are leased to customers  pursuant to
operating leases which provide a stream of revenues and cash flows over the term
of the leases  which  range from six months to three and one half  years.  As of
June 30,  1998,  a total of 5,700 wall  machines  were  deployed  in the leasing
program compared to 4,800 at June 30, 1997, an increase of 21%.

For the year ended June 30, 1998, gross profit margin decreased to 45% from
48% in the prior year.  The gross margin  decrease  resulted  primarily from the
unfavorable impact of lower production volume at the Wall Machines and Amusement
Games' production  facility and an 18% decrease in average selling price for new
wall machines,  partially  offset by an increase in higher margin lease revenue.
Wall Machines and Amusement Games reported  operating income of $13.1 million, a
decrease  of 44%,  compared  to $23.3  million  in the prior  year  period.  The
decrease in operating income resulted primarily from the aforementioned decrease
in  revenues  and gross  margins,  partially  offset by a decrease  in  selling,
general and administrative expenses,  principally lower marketing costs, a lower
provision for doubtful receivables and lower depreciation expense.

Route Operations

For the year ended June 30, 1998,  the Route  Operations  business unit reported
total revenues of approximately  $148.5 million, an increase of 17%, compared to
revenues  of $127.0  million  in the prior  year.  Revenues  from  Nevada  route
operations increased to approximately $127.4 million or 18% over the prior year.
This  improvement  was  attributable  to an  increase in the average net win per
gaming  machine  per day of 3% to $53.70  from  $52.40 in the prior  year and an
increase in the weighted  average number of gaming  machines  during the current
year of 14% to  6,460  units as  compared  to 5,660  units  in the  prior  year.
Gamblers'  Bonus,  a cardless  slot  players  club and player  tracking  system,
continued  to have a  favorable  impact  on the net win per day.  As of June 30,
1998, the Gamblers' Bonus product was installed in over 2,000 gaming machines at
approximately  180 locations  statewide or 30% of its  installed  base of gaming
machines. Revenues from route operations in Louisiana improved to $21.1 million,
an increase of 12%  compared to the prior  year.  This  increase  was the result
primarily of an  improvement  in the net win per gaming machine per day of 4% to
$77.40 from $74.10 in the prior year and a 7% increase in the average  number of
machines to 750 from 700 in the prior year.

For the year ended June 30, 1998, cost of revenues for Route Operations  totaled
$114.6  million,  an increase of 20%  compared to costs of $95.7  million in the
prior year. As a percentage of revenues, costs of revenues increased to 77% from
75% in the prior year. Cost of revenues for Nevada route  operations  increased,
as a  percent  of  related  revenues,  to 79% from 77% in the  prior  year.  The
increase was due primarily to lower margins on new and renewed locations (due to
competitive pressures) and higher payroll benefit costs coupled with an increase
in direct labor costs associated with the recent contracts taken over from other
route  operators.  Costs of revenues for route  operations  in  Louisiana,  as a
percent of related revenues,  remained relatively flat at 64% between periods as
the increase in costs were in line with the increase in revenues.  Cost of route
revenues for Route Operations  includes rents under both space lease and revenue
sharing arrangements,  gaming taxes and direct labor including payroll taxes and
benefits.

For the fiscal year ended June 30,  1998,  the Route  Operations  business  unit
reported  operating  income of $16.4  million,  an increase  of 26%  compared to
operating  income of $13.1  million  in the prior  year.  The  operating  income
improvement   resulted  from  the  aforementioned   increase  in  revenues,   an
improvement in selling,  general, and administrative expenses as a percentage of
revenues,  and a lower  provision for doubtful  receivables for the Nevada route
operations,  partially offset by the aforementioned  increase in operating costs
as a percentage of revenues and an increase in depreciation as the result of the
increased number of gaming machines deployed.

Casino Operations

For the year ended June 30, 1998, the Casino  Operations  business unit reported
revenues of $60.7  million,  an  increase of 18%,  compared to revenues of $51.5
million in the prior year. This improvement is due to a 19% increase in revenues
at the Rainbow  Casino and a 14%  increase in revenues at the Rail City  Casino.
The  improvement  at the Rainbow Casino was  attributable  to an increase in the
average  gaming  machine  net win per day of 14% to $150  from $131 in the prior
year. The  improvement at the Rail City Casino was  attributable to the enhanced
marketing  programs including the new Rail City Casino Players Club which led to
an increase in the average gaming machine net win per day of 23% to $60 from $49
in the prior year.

For the year ended June 30,  1998,  the cost of revenues  for Casino  Operations
increased 16% to $25.9 million compared to $22.3 million in the prior year. As a
percentage of revenues,  the costs of revenues  remained  relatively flat at 43%
for both  periods.  As a percent of related  revenues,  cost of revenues for the
Rainbow Casino  remained  relatively flat at 37% between periods as the increase
in costs were in line with the increase in  revenues..  Cost of revenues for the
Rail City Casino, as a percent of related revenues,  improved to 62% from 64% in
the prior year due primarily to the  achievement  of higher  revenues  without a
corresponding  increase in direct gaming costs. Cost of casino revenues includes
cost of goods sold,  gaming taxes, rent and direct labor including payroll taxes
and benefits.

For the year ended June 30, 1998, the Casino  Operations  business unit reported
operating  income of $18.7  million,  an increase of 22%,  compared to operating
income of $15.4 million in the prior year. The operating  income  improvement is
due primarily to the  aforementioned  increase in revenues  while both operating
costs and selling, general and administrative costs, as percentages of revenues,
remained flat between periods.

Unusual Items

During the year ended June 30, 1998, the Company recorded the following  unusual
items:

(1) The Company settled a dispute with Alpha  Hospitality  and General  Electric
Credit  Corporation  concerning  certain  customer notes receivable on which the
Company had certain recourse  obligations.  The Company contributed $2.5 million
to the final  settlement with the holder of the notes, and reversed $6.0 million
of reserves previously established for these recourse obligations.  In addition,
as part of the  settlement  the Company  became the sole owner of  approximately
566,000  shares of Alpha  Hospitality  common  stock which  trades on the NASDAQ
Small Cap market.  Pursuant to the  limitations  provided for in the  settlement
agreement, the Company has sold 235,000 shares of Alpha Hospitality through June
30, 1998.
(2) As a result of settling a dispute over the  exclusive  use of certain
technologies and changes in gaming  regulations,  the Company evaluated the cash
flow of certain of its technology  assets,  in accordance with the provisions of
Financial  Accounting  Standards  Board  Statement No. 121,  "Accounting for the
Impairment of Long-Lived  Assets and  Long-Lived  Assets to be Disposed of," and
determined  certain items met the definition of having become  impaired.  During
the year ended June 30,  1998 the Company  recorded  write-downs  totaling  $2.8
million for these items.  
(3) The  Company  accrued  $0.7  million for the  present  value of  contractual
payments due to a former member of the board of directors who was not re-elected
to the board at the December 1997 annual shareholders meeting.
(4) The Company accrued $0.6 million as  restructuring  charges for Bally Gaming
and Systems.  
(5)  The  Company  recorded  a $1.6  million  charge  for  final  settlement  of
litigation related to the acquisition of BGII.

During  the year ended June 30,  1997,  the  Company  incurred  $0.7  million in
unusual  items  related  primarily  to  separation  costs of Alliance  personnel
subsequent to the BGII acquisition.

Consolidated

Total  revenues  for the year  ended  June 30,  1998 were  approximately  $417.4
million,  a decrease of 6%  compared to revenues of $445.1  million in the prior
year.  The decrease is primarily  due to the  decreases in revenues at the Bally
Gaming  and  System  and Wall  Machines  and  Amusement  Games  business  units,
partially offset by the increases in revenues at the Route Operations and Casino
Operations business units.

Cost of  revenues  for the year ended  June 30,  1998 was  approximately  $256.5
million, a decrease of 5% compared to costs of $270.9 million in the prior year.
This  decrease is due to the  decreases  in costs at the Bally Gaming and System
and Wall  Machines and  Amusement  Games  business  units,  partially  offset by
increases in costs at the Route Operations and Casino Operations business units.
Cost of revenues as a percentage  of total  revenues  increased  slightly to 62%
from 61% in the prior year period.

Selling,  general and  administrative  expenses for the year ended June 30, 1998
were  approximately  $86.3 million, a decrease of 13% compared to costs of $99.5
million in the prior year.  This decrease is due to the decreases in expenses at
the Bally  Gaming and  Systems,  Wall  Machines  and  Amusement  Games and Route
Operations  business  units,  a  decrease  in  corporate  administrative  costs,
principally  lower  payroll  and related  expenses,  and a lower  provision  for
doubtful  receivables,  partially offset by an increas in expenses at the Casino
Operations business unit.

Research  and  development   costs  for  the  year  ended  June  30,  1998  were
approximately  $15.8  million,  an  increase  of 59%  compared to costs of $10.0
million in the prior year.  This  increase is due to an increase in costs at the
Bally Gaming and Systems  business unit to develop and support a greater  number
of products,  partially  offset by a decrease in costs at the Wall  Machines and
Amusement Games business unit.

Depreciation  and  amortization  for the  year  ended  June 30,  1998 was  $22.8
million,  an increase of 1% compared to depreciation  and  amortization of $22.6
million in the prior fiscal year.  This increase is due primarily to an increase
in  amortization  of deferred  financing  costs and an increase in  depreciation
related to the growth in the number of gaming  machines  deployed  for the Route
Operations,  partially  offset by a decrease at the Wall  Machines and Amusement
Games business unit.

As  a  result  of  the  refinancing   transaction,   the  Company   recorded  an
extraordinary  loss of $42.0  million,  which  included  $27.7  million  for the
premium  on the 12 7/8%  Senior  Notes,  $5.0  million in  transaction  fees and
expenses,  and $9.3 million for the write-off of deferred  financing  costs. The
Company also recorded a $19.0 million charge for the cost of the Rainbow Royalty
Buyout. Additionally,  the Company recorded a $16.6 million charge to equity and
a  corresponding  increase in the net loss  applicable  to common shares for the
difference  between the carrying value and the liquidation value of the Series B
Special Stock, all of which was redeemed on September 8, 1997 at the liquidation
price of $100 per share, plus accrued dividends.

Interest Income and Expense and Income Taxes

Net  interest  expense  in the year  ended  June 30,  1998,  increased  to $27.8
million,  an  increase  of 26%  compared  to the net  interest  expense of $22.0
million in the prior year.  The increase is  primarily  due to a higher level of
debt resulting from the Company's new 10% Senior Subordinated Notes due 2007 and
the Term Loan  Facilities  and  revolving  credit  facility  which  replaced the
Company's  12 7/8% Senior  Secured  Notes and the 15% Series B Special  Stock as
part  of the  refinancing  of  the  Company's  capital  structure  completed  in
September 1997, resulting in substantially lower overall fixed charges.

The Company  recorded an income tax  provision of $3.2 million in the year ended
June 30, 1998,  compared to a provision  of $8.0 million in the prior year.  The
current year  provision is due  primarily to income taxes for the Wall  Machines
and Amusement  Games business unit and domestic state income taxes.  At June 30,
1998,  the Company has net operating  loss carry forwards for federal income tax
purposes of  approximately  $44.2  million  which are available to offset future
federal taxable income, if any, expiring in the years 2007 through 2013. At June
30, 1998 the Company has  foreign  tax credit  carry  forwards of  approximately
$12.8  million  and  alternative  minimum  tax credit  (AMT)  carry  forwards of
approximately  $1.7 million.  Foreign tax credits are available to offset future
taxes due in the U.S. on future  foreign  taxable income and expire between 1999
and 2003 unless  utilized  prior to such time.  AMT credits are  available to be
carried forward  indefinitely and may be utilized against regular U.S. corporate
tax to the extent it does not exceed  computed  AMT  calculations.  In addition,
approximately  $21.3 million of the net operating loss carryforwards are limited
to annual  utilization  of $4.7  million per year  subject to certain  carryover
provisions pursuant to Section 382 of the Internal Revenue Code.

1997 Compared with 1996

General

To enhance the  comparability  for the  following  discussion  of the results of
operations,  the  operating  results for 1996 are presented on a pro forma basis
assuming the BGII  acquisition had occurred prior to the start of the 1996 year.
The acquisition of BGII actually occurred on June 18, 1996.

Bally Gaming and Systems

For the year ended June 30, 1997, Bally Gaming and Systems reported  revenues of
$134.7 million, an increase of 2%, compared to revenues of $132.3 million in the
prior year. Bally Gaming and Systems reported shipments of approximately  18,200
new gaming  machines,  an increase of 1% compared to shipments of  approximately
18,000 in the prior  year.  The volume  improvement  resulted  primarily  from a
general  increase in replacement  demand from existing casinos offset by a lower
number  of new  casino  openings  in the year  ended  June 30,  1997.  By market
segment,   Bally   Gaming's  unit  sales  for  the  current  year  consisted  of
approximately  8,300 units to the Nevada and Atlantic City markets,  7,600 units
to  international  markets and 2,300 units to  riverboats,  Native  American and
other domestic markets. Bally Gaming and Systems reported revenues from the sale
of new gaming  machines of $96.7 million,  an increase of 6%,  compared to $91.3
million in the prior year due to higher unit volume and higher  average  selling
prices of ne machines.  Bally Systems  reported  revenues of $22.3  million,  an
increase of 22%, compared to revenues of $18.2 million in the prior year period.
Bally Systems revenue improvement resulted primarily from increased shipments to
new installations  such as New York-New York,  Casino Niagara,  Casino Rama, and
the Harrah's Riverboat and Players Island Casinos in St. Louis.

For the year ended June 30, 1997,  gross profit margins improved to 37% from 35%
in the prior year period. The gross margin improvement resulted primarily from a
higher  average  sales  price for new  machines  and the impact of higher  Bally
Systems  sales.  Bally  Gaming and Systems  reported  operating  income of $10.6
million, a decrease of 23%, compared to operating income of $13.8 million in the
prior year period. The operating income decrease resulted primarily from greater
selling,  general and  administrative  expenses  (including  higher research and
development  costs)  and  the  impact  of  greater   depreciation  expense  from
amortizing  goodwill and other  intangibles as a result of the BGII acquisition,
partially offset by the aforementioned revenue and gross margin increases.
Wall Machines and Amusement Games

For the year ended June 30, 1997,  Wall  Machines and Amusement  Games  reported
revenues of $131.9 million,  an increase of 23%,  compared to revenues of $107.1
million in the prior year. The revenue  improvement  resulted  primarily from an
87% increase in new wall machine units sold as Wall Machines and Amusement Games
expanded its market share due to popularity of its product  offerings  and, to a
lesser extent,  demand  increased as a result of a change in German  regulations
effective  January 1, 1997,  requiring all wall machines to have internal meters
to track play.  In addition,  Wall  Machines and  Amusement  Games  enhanced its
leasing  program  whereby new wall machines are leased to customers  pursuant to
operating leases which provide a stream of revenues and cash flows over the term
of the leases  which range from six months to three and one half years.  For the
year ended June 30, 1997, Wall Machines and Amusement Games leased approximately
4,000 new wall  machines,  which is a 300%  increase from the prior year period.
Revenues  were  unfavorably  impacted by a decrease in  amusement  game sales as
operators weighted their mix of capital  expenditures  toward new wall machines.
The currency translation impact of the fluctuation of the German mark versus the
U.S. dollar reduced revenues by $12.2 million during the current year.

For the year ended June 30, 1997,  gross profit margin  improved to 48% from 39%
in the prior year.  The gross margin  improvement  resulted  primarily  from the
favorable  impact of greater  production  volume in Wall  Machines and Amusement
Games' production facility. Wall Machines and Amusement Games reported operating
income of $23.3  million,  an increase of 207%,  compared to $7.6 million in the
prior year period. The operating income improvement  resulted primarily from the
aforementioned  revenue  and  gross  margin  increases,  partially  offset by an
increased provision for doubtful receivables as well as higher selling,  general
and administrative expenses due to increased marketing costs.

Route Operations

For the year ended June 30, 1997,  the Route  Operations  business unit reported
total revenues of approximately  $127.0 million, an increase of 16%, compared to
revenues  of $109.9  million  in the prior  year.  Revenues  from  Nevada  route
operations increased approximately $15.0 million (16%) over the prior year. This
increase  was  attributable  to an  increase  in the  average net win per gaming
machine per day of 8% to $52.40 from $48.60 in the prior year and an increase in
the weighted  average number of gaming machines during the current year of 7% to
5,660 units as compared to 5,290  units in the prior year.  Gamblers'  Bonus,  a
cardless  club and player  tracking  system  launched  in December  1995,  had a
favorable  impact on the net win per day.  As of June 30,  1997,  the  Gamblers'
Bonus  product was  installed  in  approximately  1,500  gaming  machines at 130
locations statewide.  Revenues from route operations in Louisiana increased $2.0
million (12%)  primarily as a result of an improvement in the net win per gaming
machin per day of 8% to $74.10  from  $68.50 in the prior year and a 3% increase
in the average number of machines to 700 from 680 in the prior year.

For the year ended June 30, 1997, cost of revenues for Route Operations  totaled
$95.7 million, an increase of $11.5 million (14%) compared to the prior year. As
a percentage of revenues,  costs of revenues improved to 75.4% from 76.6% in the
prior year.  Cost of  revenues  for Nevada  route  operations  increased  14% as
compared to the prior year, but, as a percent of related  revenues,  improved to
77.3% from 79.0% in the prior year due primarily to higher  revenues while costs
associated with new and renewed  contracts  remained  relatively  flat. Costs of
revenues for route  operations in Louisiana  increased 13% primarily as a result
of the increase in revenues. As a percent of related revenues,  cost of revenues
for route  operations  in  Louisiana  increased to 64.2% from 63.3% in the prior
primarily  due to a slight  increase in the  percentage  of revenues paid to the
Fairgrounds  Racetrack.  Cost of route  revenues for Route  Operations  includes
rents under both space lease and revenue sharing arrangements,  gaming taxes and
direct labor, including payroll taxes and benefits.

In the year ended June 30, 1996, Nevada route operations  incurred unusual items
totaling $2.1 million. Reserves were increased by $1.4 million for certain parts
inventories which became obsolete and were  subsequently  disposed of due to the
impact of recent  technological  changes to gaming  devices being  deployed as a
result of the new  Gambler's  Bonus  product.  In  addition  an  accrual of $0.7
million was  established  to reserve for the present  value of the future  lease
payments for one small casino  location for which cash flows  received under the
participation  agreement are currently  inadequate to service the building lease
paid by the Company.

For the fiscal year ended June 30,  1997,  the Route  Operations  business  unit
reported  operating  income of $13.1  million,  an increase  of 41%  compared to
operating  income  of $9.3  million  in the prior  year.  The  operating  income
improvement  resulted  from the  aforementioned  increase  in  revenues  and the
improvement  in  operating  costs as a  percentage  of revenues  and the lack of
unusual items in the current year,  partially  offset by an increase in selling,
general, and administration expenses,  primarily greater marketing costs at both
operations and an increased  provision for doubtful  receivables  for the Nevada
route operations.


Casino Operations

For the year ended June 30, 1997, the Casino  Operations  business unit reported
revenues of $51.5  million,  an  increase of 13%,  compared to revenues of $45.4
million in the prior year excluding  revenues from closed casinos and taverns as
described  below.  This increase is due to a 17% increase at the Rainbow  Casino
and a 2% increase at the Rail City Casino. The improvement at the Rainbow Casino
was attributable to the continuing impact of its direct marketing  campaigns and
a higher  average  market  share  than in the prior  year.  Revenues  during the
current year at the Rail City Casino were  adversely  impacted by severe weather
in the Reno area during the third  quarter and an internal  remodeling  project,
which has now been completed.

For the year ended June 30,  1997,  the cost of revenues  for Casino  Operations
increased  13% to $22.3  million  compared  to $19.8  million  in the prior year
excluding cost of revenues from closed  casinos and taverns.  As a percentage of
revenues,  the costs of revenues improved slightly to 43.3% compared to 43.6% in
the prior  year.  As a percent of related  revenues,  cost of  revenues  for the
Rainbow  Casino  increased to 37.1% from 36.4% in fiscal 1996  primarily  due to
increased  costs  associated  with taking over operations at the newly remodeled
restaurant.  Cost of revenues for the Rail City Casino,  as a percent of related
revenues, improved to 64.1% from 64.7% in the prior year due primarily to higher
revenues while direct costs remained  relatively stable. Cost of casino revenues
includes cost of goods sold, gaming taxes, rent and direct labor including taxes
and benefits.

For the year ended June 30, 1997, the Casino  Operations  business unit reported
operating  income of $15.4  million,  an increase of 14%,  compared to operating
income of $13.5  million  in the prior  year  excluding  operating  from  closed
casinos  and  taverns.  The  operating  income  improvement  resulted  from  the
aforementioned  increase in revenues and reduced operating costs as a percentage
of  revenues,   partially  offset  by  an  increase  in  selling,   general  and
administrative  costs,  principally  due to increased  marketin  efforts at both
locations.  The Rainbow  Casino  royalty fees paid to HFS during the fiscal year
ended June 30, 1997 totaled $4.7 million.

Revenues and Expenses for Closed Casinos and Taverns

During the year ended June 30,  1996,  the  Company  disposed  of or  terminated
operations  at several small  casinos and taverns as these  operations  were not
deemed to be compatible with the Company's  long-term  strategy.  No revenues or
expenses  were  reported for these  properties in the fiscal year ended June 30,
1997. For the fiscal year ended June 30, 1996, revenues for these properties are
included in Casino  Operations  revenues and totaled $3.1  million.  The related
costs of revenues  are  included in cost of Casino  Operations  and totaled $2.3
million. The related selling,  general and administrative  expenses totaled $1.1
million.

Consolidated

The following discussion of the Company's consolidated results of operations for
the  year  ended  June  30,  1997  is  presented  in  comparison  to the  actual
consolidated  results of operations for the prior year which include the results
of  operations  of the Bally Gaming and Systems and Wall  Machines and Amusement
Games  business  units for only the last  twelve days of the year ended June 30,
1996.

Total  revenues  for the year  ended  June 30,  1997 were  approximately  $445.1
million,  an increase of $272.7  million (158%) over revenues of $172.4 in prior
year.  This  increase is  primarily  due to the  incremental  revenues of $252.7
million from Bally  Gaming and Systems  sales and Wall  Machines  and  Amusement
Games  sales,  as well as the  aforementioned  increases in revenues at both the
Route Operations and Casino Operations business units.

Cost of revenues for the year ended June 30, 1997 were approximately  $270.9, an
increase  of $155.4  million  (135%)  compared  to $115.5  in prior  year.  This
increase is due to the  incremental  cost of revenues of $143.7 million and from
Bally Gaming and Systems sales and Wall Machines and Amusement  Games sales,  as
well as the  aforementioned  increases  in cost of  revenues  at both the  Route
Operations and Casino Operations business units.

Selling,  general and  administrative  expenses for the year ended June 30, 1997
were approximately  $99.5 million,  an increase of $68.2 million (218%) compared
to costs of $31.3 for the prior  year.  This  increase  is due to the  impact of
including the Bally Gaming and Systems and the Wall Machines and Amusement Games
business  units  expenses for the entire year and higher legal and  professional
fees in the current year,  partially  offset by cost savings such as elimination
of certain duplicative costs.

Research  and  development  costs for the year  ended  June 30,  1997 were $10.0
million,  an increase of $9.6 million from the prior year.  The increase was due
to the impact of  including  the  research  and  development  costs of the Bally
Gaming and Systems and the Wall Machines and Amusement  Games business units for
the entire year.

Depreciation  and amortization for the fiscal year ended June 30, 1997 was $22.6
million,  an increase of 105% compared to depreciation and amortization of $11.0
million in the prior fiscal year. This increase is due to the inclusion of Bally
Gaming  and  Systems  and Wall  Machine  and  Amusement  Game  depreciation  and
amortization in the entire fiscal year, higher  depreciation and amortization in
the Route  Operations  business unit and the impact of  amortizing  goodwill and
other intangibles resulting from the BGI acquisition.

During the year ended June 30, 1996,  the Company  expensed  direct  acquisition
costs related to the  acquisition of BGII,  totaling  $55.8 million.  Such costs
included the $30.1 million non-cash, accounting loss on the debenture conversion
portion of the financing for the acquisition, plus legal, accounting,  financial
advisory, printer, SEC filing fees and other related expenses.
During  the year ended June 30,  1997,  the  Company  incurred  $0.7  million in
unusual  items  related  primarily  to  separation  costs of Alliance  personnel
subsequent  to the BGII  acquisition.  During the year ended June 30, 1996,  the
Company  incurred  $5.5 million in unusual  items  including a provision of $3.4
million to fully  reserve the net book value of assets  that the Company  deemed
impaired and the aforementioned  unusual items at its Route Operations  business
unit of $2.1 million.

Interest Income and Expense and Income Taxes

Net  interest  expense  in the year  ended  June 30,  1997,  increased  to $22.0
million,  an  increase  of 201%  compared  to the net  interest  expense of $7.3
million in the prior  year.  The  increase is due  primarily  to interest on the
Company's 12 7/8% Senior  Secured Notes due 2003 which were issued in June 1996,
partially  offset by lower interest  expense on the Company's 7 1/2% Convertible
Debentures  due 2003,  substantially  all of which were converted into equity as
part of the financing of the BGII acquisition.

The Company  recorded an income tax  provision of $8.0 million in the year ended
June 30, 1997,  compared to a provision  of $0.8 million in the prior year.  The
current  year  provision is due  primarily to income taxes at Wall  Machines and
Amusement Games and domestic state income taxes.  The effective tax rate is 58%,
which resulted from taxable income  currently being generated in Germany,  which
has a higher  effective  rate than in the U.S. At June 30, 1997, the Company has
net  operating   loss  carry   forwards  for  federal  income  tax  purposes  of
approximately $21.5 million which are available to offset future federal taxable
income,  if any,  expiring in the years 2007 through  2011. At June 30, 1997 the
Company has foreign tax credit carry forwards of approximately $11.8 million and
alternative  minimum tax credit  (AMT)  carry  forwards  of  approximately  $1.5
million.  Foreign tax credits are  available  to offset  future taxes due in the
U.S. on future  foreign  taxable  income and expire between 1998 and 2002 unless
utilized  prior to such time.  AMT credits are  available to be carried  forward
indefinitely  and may be utilized  against  regular  U.S.  corporate  tax to the
extent it does not exceed computed AMT calculations.  In addition, the Company's
annual  limitation with respect to net operating  losses is limited  pursuant to
Section 382 of the Internal Revenue Code.

Risk Factors

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995

The information contained in this Form 10-K and the Company's other filings with
the  Securities  Exchange  Commission may contain  "forward-looking"  statements
within the meaning of section 27A of the Securities Act of 1933, as amended, and
Section 21E of the  Securities  Act of 1933,  as amended,  and is subject to the
safe harbor created  thereby.  Such  information  involves  important  risks and
uncertainties  that  could  significantly  affect  results  in the  future  and,
accordingly, such results may differ from those expressed in any forward looking
statements  herein.  Future  operating  results may be  adversely  affected as a
result of a number of factors.  Set forth below are  certain  important  factors
that could cause actual results to differ materially from those in such "looking
forward" statements.

High Leverage; Ability to Service Debt

After  the  completion  of the  Refinancing,  the  Company  has a  substantially
increased amount of indebtedness.  As of June 30, 1998 the aggregate outstanding
principal  amount of the  Company's  long-term  indebtedness  including  current
maturities was $326.0 million.  The Company also has available to it up to $37.1
million in unborrowed  capacity under the Revolving  Credit  Facility.  On a pro
forma basis after giving effect to the  Refinancing  (assuming  the  Refinancing
occurred June 30, 1997) and the use of proceed  thereof,  the Company's ratio of
earnings to fixed charges  (excluding  the imputed fixed charges for  contingent
rental expense related to revenue-sharing  agreements in its Route Operations of
approximately  $23.0 million  annually)  would have been 1.1x for the year ended
June 30,  1998.  The Company had a net  capital  deficiency  at June 30, 1998 of
$23.7 million.

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

The Company's obligations to make principal and interest payments on outstanding
indebtedness,  and to  comply  with  the  covenants  in the  Indenture  and  the
agreements governing borrowings under the new credit facility, will have several
important  effects on its future  operations  including the  following:  (i) the
portion of the Company's  cash flow from  operations  which will be dedicated to
the payment of principal and interest on its indebtedness  will not be available
for other  purposes;  (ii) certain of the Company's  borrowings  are at variable
rates of  interest,  which  could  result  in  higher  expense  in the  event of
increases  in  interest  rates;  (iii) the  Company  may be more  vulnerable  to
downturns in its business or in the general  economy and may be restricted  from
making  acquisitions,   introducing  new  technologies  or  exploiting  business
opportunities;  and (iv) the Company's ability to obtain additional financing in
the future for working capital, capital expenditures, general corporate or other
purposes may be impaired.  Additionally,  the Company's ability to meet its debt
service  obligations  and to reduce  its total debt will be  dependent  upon the
Company's  future  performance,  which will be subject to general  economic  and
regulatory conditions and to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control.

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

Operating History--Recent Losses

The Company  incurred a net loss of $59.9  million  (including  $55.8 million of
costs  related to the BGII  acquisition)  for the year ended June 30, 1996,  net
income of $5.8  million for the year ended June 30, 1997 and a net loss of $57.3
million  (including  $61.0 million of costs related to the  Refinancing) for the
fiscal year ended June 30, 1998.  During the year ended June 30, 1998, the Bally
Gaming  and  Systems  and  Wall  Machine  and  Amusement  Games  business  units
experienced a decrease in revenues of 19% and 25%, respectively, which adversely
effected  the  Company's  financial  results  from  operations.  There can be no
assurance  that the  Company  will be  profitable,  and that  there  will not be
similar or other unusual or non-recurring charges, in the future.

Competition

Bally  Gaming  and  Systems.   The  market  for  gaming  machines  is  extremely
competitive, and there are a number of established, well-financed and well-known
companies  producing  machines that compete with each of Bally Gaming's  product
lines in each of Bally Gaming's 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  entere or may  enter the  gaming
machine market.  Management believes that some of these competitors have greater
capital   resources   than  the  Company.   Competition   among  gaming  machine
manufacturers,  particularly  with respect to sales of gaming  machines into new
and emerging  markets,  is based on competitive  customer  pricing and financing
terms, appeal to the player and quality of the product,  and having an extensive
distribution and sales network.  Sales to established casinos in Nevada normally
require completion of a successful trial period for the machines in the casino.

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

Wall  Machines  and  Amusements  Games.  Germany's  wall  machine  manufacturing
industry  is  dominated  by Bally Wulff and two of its  competitors.  Management
believes  these  three  entities  collectively  account for more than 95% of the
entire market for wall machines  (which exists almost  exclusively  in Germany).
Bally Wulff's two major  competitors have greater resources than the Company and
own and operate a significant number of arcades,  which gives them a competitive
advantage arising from a built-in market for their games and the ability to test
market new games in their own arcades.  In addition,  wall machines  compete for
floor space in arcades with token machines,  which are not subject to the strict
German licensing requirements governing wall machines.

Route Operations.  The competition for obtaining and renewing route contracts in
Nevada is high and  continues to  intensify.  Such  competition  has, over time,
reduced the Company's  gross profit  margins for such  operations.  In addition,
such  competition  has required the Company to provide  financial  incentives to
retain or obtain certain route  locations.  Such  incentives  include  long-term
lease   commitments,   guarantees   of  leases  in  favor  of  owners  of  local
establishments,  substantial  advance  deposits,  payments  of lease  rentals in
advance and loans for  buildings  and  tenant-improvement  costs.  Although  the
Company believes that it now has adequate procedures for evaluating and managing
such risks,  historically  substantial  losses have been  incurred in connection
with such transactions  reflecting,  in part, former management's willingness to
accept higher levels of risk to further its policy of emphasizing  market share.
Notwithstanding the change in the Company's business strategy to one emphasizing
profitability  rather than market  share,  the future  success of the  Company's
Route Operations will continue to be dependent to some extent on its ability and
willingness  to provide  such  financial  inducements.  Although the Company has
historically  generated sufficient new route contracts to offset the loss of old
route contracts, due to increased competition,  the increased sophistication and
bargaining  power of customers and possibly  other factors not yet known,  there
can be no assurance that the Company will be able to obtain new route  contracts
or renew or extend its route contracts upon their expiration or termination,  or
that,  if renewed or extended,  the terms will be  favorable to the Company.  In
Louisiana, the Company's Route Operations at the racetrack and OTBs compete with
various  truck stops and  locations  with  liquor  licenses  throughout  the New
Orleans area, as well as riverboat  gaming and one  land-based  casino which may
re-open in New Orleans.

Casino  Operations.  The  operation  of  casinos  is also a  highly  competitive
business.  The principal competitive factors in the industry include the quality
and  location  of the  facility,  the nature and  quality of the  amenities  and
customer  services  offered  and the  implementation  and  success of  marketing
programs.  In  Sparks,  Nevada,  the  principal  competition  for the  Company's
operations comes from larger casinos focusing on the local market. The Company's
Rainbow Casino in Vicksburg,  Mississippi faces intense direct  competition from
other gaming facilities serving this market.  Competition from casinos in nearby
locations may also be reducing the market area from which Vicksburg casinos draw
most of their patrons. Moreover, additional potential gaming sites remain in and
around  Vicksburg  and  Sparks;  some of these  sites  may be  closer  to larger
population centers and, if developed,  might enjoy a competitive  advantage over
the  Company's  casinos.  In August 1997 it was  announced  the Lady Luck Gaming
Corporation  and  Horseshoe  Gaming,  LLC were going to form a joint  venture to
develop a project  that  would  include a  dockside  casino,  hotel and  related
amenities.  Previously,  Horseshoe Gaming,  LLC had announced a casino hotel and
auto  racing  complex  on the Big Black  River  which is between  Vicksburg  and
Jackson,  Mississippi.  The  legality  of that site for gaming is  currently  in
litigation.  At this time management does not know which, if any, of these sites
will be developed.  Both of these projects will be contingent on several factors
including regulatory approval and financing.

Product Development

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

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

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  upon the public's
acceptance  of these  markets  and an  ongoing  regulatory  approval  process by
Federal,  state and local governmental  authorities.  The Company cannot predict
which new  jurisdictions  or markets,  if any,  will  approve the  operation  of
electronic gaming machines,  the timing of any such approval or the level of the
Company's  participation  in any such  markets or that  jurisdictions  currently
permitting gaming will continue to do so in the future.

Foreign Operations

The Company's  business in foreign  markets is subject to the risks  customarily
associated  with such  activities.  These risks include  fluctuations in foreign
currency exchange rates and controls,  expropriation,  nationalization and other
economic,  tax and regulatory  policies of local governments as well as the laws
and policies of the United States  affecting  foreign trade and investment.  The
Company does not generally  enter into foreign  exchange  contracts to hedge its
exposure to foreign exchange rate fluctuations.
Dependence on Key Personnel

The success of the Company will be dependent,  to a significant extent, upon 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 upon
the Company's  operations.  In December 1996, the Company's  President and Chief
Executive  Officer  stepped down as the Company's  strategic  direction  changed
after the BGII acquisition. In June, 1997, the Company named Morris Goldstein as
its President and Chief Executive Officer.
Strict Regulation by Gaming Authorities

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

Gaming was previously  licensed by the New Jersey Commission as a gaming-related
casino service industry,  which is required by the New Jersey Casino Control Act
in order for the Company to sell gaming  devices and systems in New Jersey.  Due
to the change of ownership of Bally Gaming as a result of the BGII  acquisition,
Bally  Gaming's  New  Jersey  license  was  invalidated.  Prior to the change of
ownership of Bally Gaming and in anticipation of same, the Company  submitted an
application for casino service  industry  licensure.  The New Jersey  Commission
deemed the application complete and, as a result, since the BGII acquisition the
Company's  operations  in New Jersey have  continued  uninterrupted  pursuant to
transactional  waivers which have been granted by the New Jersey Commission on a
six-month  blanket basis for parts and service and on a  sale-by-sale  basis for
all other products pending final action on the Company's license application.

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

The Company  has  benefited  from the growth in  population  in Nevada,  as with
growth more gaming venues are created.  Certain local  politicians have proposed
limiting or curtailing the number or type of venues where gaming is authorized.

The Company currently has an agreement with Fair Grounds Corporation,  Jefferson
Downs  Corporation  and Finish Line  Management  Corporation to be the exclusive
operator of video poker machines at the only  racetrack and ten associated  OTBs
in the  greater  New Orleans  area.  On  November  5, 1996  voters in  Louisiana
approved a  proposition  to allow  video  poker to  continue in six of the seven
parishes  in which the  Company  operates  off-track  betting  locations  in the
greater New Orleans  area.  In addition,  voters  approved  video poker in three
parishes in the greater New Orleans  area where the Company  currently  does not
operate.  In the one parish in which the Company  operates where video poker was
voted down, the Company will be allowed to continue to conduct  business through
June 30,  1999.  For the year ended June 30,  1998,  the two  off-track  betting
locations   in  this  parish   accounted   for  $2.2  million  of  revenues  and
approximately  9% of  operating  income of the  Company's  Route  Operations  in
Louisiana or less than 1 of the Company's  operating  income.  These  operations
also depend on the  financial  viability of the  racetrack,  which is beyond the
control of the Company. See "Business--Gaming Regulations and Licensing".

Gaming Taxes and Value Added Taxes

Gaming operators are typically subject to significant taxes and fees in addition
to corporate  income  taxes,  and such taxes and fees are subject to increase at
any time.  Any  material  increase  in these  taxes or fees,  which  could occur
prospectively or  retroactively,  would adversely  affect the Company.  Sales of
Bally  Wulff's  products in Germany are  generally  subject to value added taxes
("V.A.T.").  During 1995, Bally Wulff increased the amount of V.A.T. reserves by
$1.0 million as a result of development to date in an ongoing  quadrennial audit
of Bally  Wulff's tax returns for the years 1988  through  1991.  The German tax
authorities have proposed preliminary adjustments which range from approximately
$1.4  million  (which has been  accrued)  to  approximately  $5.0  million.  The
government in the German State of North Rhine Westphalia  recently  modified its
regulations that permit local  municipalities to independently impose additional
taxes on gaming machine  operators  beginning  January 1, 1999. In the past, the
imposition of tax rate  increases has adversely  affected  Bally Wulff's  sales.
There can be no assurance that municipalities will not impose new taxes or raise
existing taxes in the future.

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

Change of Control

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

Currency Rate Fluctuations

The  company  derives  revenues  from its  non-U.S.  subsidiaries,  all of which
revenues  are  denominated  in their  local  currencies,  and their  results are
affected by changes in the relative  values of non-U.S.  currencies and the U.S.
dollar.  Most of the  currencies  in  countries in which the Company has foreign
operations  weakened versus the U.S. dollar in 1997 and 1998,  which resulted in
assets and  liabilities  denominated in local  currencies to be translated  into
fewer dollars.  The currency rate changes also resulted in an unfavorable impact
on consolidated  revenues of approximately $12.1 million or 3% and $12.2 million
or 3% and on operating  income  (loss) of $2.2 million or 5% and $1.6 million or
4% during the years  ended  June 30,  1997 and 1998,  respectively.  Transaction
losses,  resulting from  transactions  denominated in currencies  other than the
functional currencies of the Company or its subsidiaries, totaled less than $1.0
million for each of the years ended June 30, 1997 and 1998. The Company does not
currently utilize hedging instruments.

Market risks

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

The Company has  performed a sensitivity  analysis of its financial  instruments
which consist of the Company's cash and cash  equivalents  and debt. The Company
has no derivative financial instruments. In performing the sensitivity analysis,
the  Company  defines  risk of  loss as the  hypothetical  impact  on  earnings,
resulting from changes in the market interest rates or currency exchange rates.

The results of the sensitivity analysis at June 30, 1998, are as follows:

Interest Rate Risk:

The  Company  had total  debt as of June 30,  1998 of $326.0  million,  of which
$139.1 million of borrowings under the Term Loan Facilities and $22.7 million of
borrowings  on the  Revolving  Credit  Facility are at a floating  rate based on
LIBOR and $12.3 million of German  borrowings on revolving credit facilities are
at a floating rate based on the  Eurodeutschmark  borrowing  rate.  Although the
maturity  dates for these  borrowings  are in excess of five  years,  the Credit
Agreement generally requires that the Compan borrow in individual tranches, each
not to exceed six months,  which subjects the Company to interest rate risks. If
the LIBOR and  Eurodeutschmark  rates were each to  increase  or decrease by 100
basis points, with all other factors remaining constant, earnings would decrease
or increase by approximately  $1.8 million on a pre-tax basis, all other factors
remaining constant.

Foreign Currency Exchange Rate Risk:

The Company has subsidiaries with the following  functional  currencies:  German
Deutschemark,  Australian  Dollar  and South  African  Rand,  although  the only
subsidiaries currently with material amounts of assets, liabilities and revenues
are in Germany. If the German deutschemark was to decline 10 percent against the
U.S.  dollar,  there be a  corresponding  decrease in  earnings  reported in the
consolidated group, when compared to the equivalent level of German deutschemark
earnings,   of  approximately  $0.9  million.   Such  a  change  in  the  German
deutschemark would result in an immaterial transaction loss, but would result in
a  charge  to the  cumulative  translation  account,  which  is a  component  of
stockholder's equity, of approximately $7.3 million, all other factors remaining
constant.


<PAGE>


ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Item 6 of this Report- "Risk Factors-  Currency Rate  Fluctuations  and
Market Risks."

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

Not applicable.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


<PAGE>


ITEM 14.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, 1997 and 1998            F-2

      Consolidated Statements of Operations for the Years Ended 
        June 30, 1996, 1997 and 1998                                      F-3

      Consolidated Statements of Stockholders' Equity for the Years 
        Ended June 30, 1996, 1997 and 1998                                F-4

      Consolidated Statements of Cash Flows for the Years Ended 
        June 30, 1996, 1997 and 1998                                      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).

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

3.1  Restated   Articles  of  Incorporation   of  the  Registrant,   as  amended
     (incorporated  herein by reference to Exhibit 3.1 to  Alliance's  Form S-2,
     Registration Number 33-72990).
          
3.2  Revised  and  Amended  By-Laws of the  Registrant  (incorporated  herein by
     reference to Alliance's Form 10-Q for the quarter ended December 31, 1997.)

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

<PAGE>

Exhibit
Number     Description

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

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

4.3  First Amendment and Consent among Alliance Gaming Corporation,  Bally Wulff
     Vertriebs GmbH, Bally Wulff Automaten GmbH and various lenders,  and Credit
     Suisse  First  Boston,   dated  August  8,  1997  (incorporated  herein  by
     reference).

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

4.11 First  Amendment to the Rights  Agreement  dated as of  September  15, 1998
     between  the  Company  and  American   Stock   Transfer  &  Trust   Company
     (incorporated herein by reference).

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

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

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

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

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

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

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

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

Exhibit
Number     Description

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

10.10 Warrant Agreement,  dated as of September 21, 1993, by and between  United
     Gaming, Inc. and Kirkland-Ft.  Worth Investment Partners,  L.P. relating to
     warrants to purchase  2.75  million  shares of Common  Stock  (incorporated
     herein by reference to Alliance's Form 8-K dated September 21, 1993).

10.11 Warrant Agreement,  dated as of September 21, 1993, by and between  United
     Gaming,  Inc. and Gaming  Systems  Advisors,  L.P.  relating to warrants to
     purchase  1.25  million  shares of  Common  Stock  (incorporated  herein by
     reference to Alliance's Form 8-K dated September 21, 1993).

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

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

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

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

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

10.22 Warrant Agreement, dated as of August 2, 1993, between United Gaming, Inc.
     and Alfred H. Wilms  (incorporated  herein by reference to Alliance's  Form
     S-2, Registration Number 33-72990).

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

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

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

Exhibit
Number     Description

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

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

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

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

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

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

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

10.53 Second Amendment to Trademark License  Agreement and Settlement Agreement,
     dated March 31, 1995, by and between Bally  Entertainment  Corporation  and
     Bally  Gaming  International,  Inc.  (incorporated  herein by  reference to
     Exhibit I,  included  in BGII's  Current  Report on Form 8-K dated April 3,
     1995).  
10.54 Third  Amendment  to Trademark  License  Agreement  and  Settlement
     Agreement,   dated  May  10,  1996,  by  and  between  Bally  Entertainment
     Corporation,   Alliance  Gaming  Corporation  and  BGII  Acquisition  Corp.
     (incorporated by reference to exhibit 10.77 to S-2  Registration  Statement
     No. 333-02147).
     
10.55 1991 Incentive  Plan of Bally  Gaming  International,  Inc.  (incorporated
     herein by reference to exhibit 10(iii)(a)  included in BGII's  Registration
     Statement No. 33-42227 on Form S-1, effective November 8, 1991).*

10.56 Amendment No. 1 to the 1991 Incentive  Plan of Bally Gaming International,
     Inc.  effective  February  6, 1993  (incorporated  herein by  reference  to
     exhibit 10(iii)(b) included in BGII's  Registration  Statement No. 33-42227
     on Form S-1 effective November 1, 1991).*

10.57 Amendment No. 2 to 1991 Incentive Plan of Bally Gaming International, Inc.
     (incorporated  herein by  reference  to exhibit  99(e)  included  in BGII's
     Registration  Statement  No.  33-71154  on Form S-3  filed on  November  1,
     1993).*
<PAGE>

Exhibit
Number     Description

10.58 Amendment No 3 to 1991 Incentive Plan of Bally Gaming  International, Inc.
     (incorporated by reference to Annex III of S-4  registration  statement No.
     333-01527).*

10.59 1991 Non-Employee  Directors'  Option Plan of Bally Gaming  International,
     Inc.  (incorporated  herein by reference to exhibit 10(iii)(f)  included in
     BGII's  Annual  Report on Form 10-K for the fiscal year ended  December 31,
     1991).*

10.60 Amendment No. 1 to the 1991 Non-Employee  Directors'  Option Plan of Bally
     Gaming  International,  Inc.  (incorporated  herein by reference to exhibit
     10(iii)(g)  included  in BGII's  Annual  Report on Form 10-K for the fiscal
     year ended December 31, 1991).*

10.61 Amendment No. 2 to the 1991  Non-Employee  Directors' Option Plan of Bally
     Gaming International,  Inc.  (incorporated by reference to S-4 registration
     statement No. 333-01527).*

10.62 Amendment No. 3 to the 1991  Non-Employee  Directors' Option Plan of Bally
     Gaming  International,  Inc.  (incorporated by reference to Annex IV of S-4
     registration statement No. 333-01527).*

10.64 Bally Gaming  International,  Inc. 1994 Stock Option Plan for Non-employee
     Directors,   as  amended  (incorporated  herein  by  reference  to  exhibit
     10(iii)(k)  included  in BGII's  Annual  Report on Form 10-K for the period
     ended December 31, 1994.)

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

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

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

10.74 Employment  Agreement, dated as of June 24, 1996,  between the Company and
     Scott D.  Schweinfurth  (incorporated by reference to the Company quarterly
     report on Form 10-Q for March 31, 1997).*

10.75 Employment  Agreement, dated as of June 17, 1997 between the Company and 
     Morris Goldstein. (incorporated herein by reference to the Company's Annual
     Report on Form 10-K dated June 30 1997).*

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


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

<PAGE>

Exhibit
Number      Description

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

10.79 Amendment Number 1 to the  agreement  between  the  Company  and  Kirkland
     Investment Corporation dated July 1, 1997 (incorporated herein by reference
     to the Company's Annual Report on Form 10-K dated June 30 1997).
             
10.80 Employment Agreement, dated July 1, 1997 between the Company and Robert L.
     Miodunski.  (incorporated  by reference to the Company  quarterly report on
     Form 10-Q for March 31, 1998).*

10.81 Employment  Agreement, dated July 1, 1997  between  the  Company  and John
     Hudson (incorporated herein by reference).*

11   Computation of earnings (loss) per share.

21   Subsidiaries of the Registrant.

23.1 Consent of KPMG Peat Marwick LLP

27.1 Financial Data Schedule

*     Management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K:

     There were no  reports  filed on Form 8-K for the  three  months  ended 
     June 30, 1998.

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

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


<PAGE>





                                  SIGNATURES

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

ALLIANCE GAMING CORPORATION                       DATED:   September  22, 1998


By    /s/ Morris Goldstein
      Morris Goldstein,
      Director, President and Chief
      Executive 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/ Morris Goldstein       Director, President and Chief      September 22, 1998
Morris Goldstein           Officer (Principal Executive 
                           Officer)


/s/ Scott D. Schweinfurth  Sr. Vice President, Treasurer      September 22, 1998
Scott D. Schweinfurth      Financial Officer (Principal 
                           Financial and Accounting Officer)


/s/ Jacques Andre          Director                           September 22, 1998
Jacques Andre


/s/ Anthony DiCesare       Director                           September 22, 1998
Anthony DiCesare


/s/ Michael Hirschfeld     Director                           September 22, 1998
Michael Hirschfeld


/s/ Joel Kirschbaum        Director                           September 22, 1998
Joel Kirschbaum


/s/ David Robbins          Director and Chairman of the       September 22, 1998
David Robbins              Borad

/s/ Morton Topfer          Director                           September 22, 1998
Morton Topfer




<PAGE>



                         INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Alliance Gaming Corporation:

We have audited the accompanying  consolidated balance sheets of Alliance Gaming
Corporation  and  Subsidiaries  as of June 30,  1997  and  1998 and the  related
consolidated  statements of operations,  stockholders'  equity  (deficiency) and
cash flows for each of the years in the  three-year  period ended June 30, 1998.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Alliance  Gaming
Corporation  and  Subsidiaries  as of June 30, 1997 and 1998, and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended June 30, 1998, in conformity  with  generally  accepted  accounting
principles.




                                                           KPMG Peat Marwick LLP





Las Vegas, Nevada
August 14, 1998










                                    F-1

<PAGE>



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

                                    ASSETS
                                                         June 30,      June 30,
                                                           1997         1998
Current assets:
  Cash and cash equivalents                              $28,924       $23,487
   Accounts and notes receivable, net of allowance 
    for doubtful accounts of $21,929 and $11,932          87,701        93,459
   Inventories, net of reserves of $8,856 and $6,797      37,329        42,418
   Other current assets                                    9,627        11,711
                                                          ------       -------
           Total current assets                          163,581       171,075
                                                         -------       -------

Long-term notes receivable, net of allowance for 
 doubtful accounts of  $1,972 and $1,109                   8,981         7,931
Leased gaming equipment, net of accumulated 
 depreciation of $4,116 and $4,020                         7,902         7,325
Property, plant and equipment, net of accumulated 
 depreciation and amortization of $39,695 and $46,090     74,647        77,905
Excess of costs over net assets of acquired businesses,
 net of accumulated amortization of  $1,723 and $3,199    62,098        59,952
Intangible assets, net of accumulated amortization 
 of $9,626 and $13,358                                    18,231        26,732
Deferred tax assets, net of valuation allowance           11,776        11,467
Other assets, net of reserves of $3,502 and $3,488         4,800         4,450
                                                          ------        ------
                                                        $352,016      $366,837

LIABILITIES AND STOCKHOLDERS' EQUITY ( DEFICIENCY)
Current liabilities:
  Accounts payable                                       $14,270      $10,477
  Accrued liabilities                                     37,392       39,122
  Current maturities of long term debt                     1,124        1,996
                                                          ------       ------
    Total current liabilities                             52,786        51,595
Term loan facilities                                           -       137,800
Senior Subordinated Notes due 2007, net                        -       149,245
Senior Secured Notes, net                                151,224            -
Other long term debt, less current maturities             21,491        36,912
Other liabilities                                         12,433        12,718
                                                         -------       -------
      Total liabilities                                  237,934       388,270
                                                         -------       -------

Minority interest                                          1,546         2,315
Series B Special Stock, $.10 par value, $100 
 liquidation value; 754,198 shares issued and 
 outstanding as of June 30, 1997                          58,981            -
Commitments and contingencies 
 Stockholders' equity (deficiency):
  Special Stock, 10,000,000 shares authorized:
   Series E, $100 liquidation value; 123,689 shares
    and 137,317 shares issued and outstanding             12,368        13,732
  Common Stock, $.10 par value; 175,000,000 shares 
   authorized,31,852,000 shares and 32,122,000 shares 
   issued and outstanding                                  3,185         3,212
  Additional paid-in capital                             138,590       122,980
  Cumulative translation adjustment                      (11,719)      (13,946)
  Accumulated deficit                                    (88,869)     (149,726)
   Total stockholders' equity (deficiency)                53,555       (23,748)
                                                          ------        ------
                                                        $352,016      $366,837

         See accompanying notes to consolidated financial statements.


                                    F-2

<PAGE>

                 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS

                     (In 000's, except per share amounts)

                                                     Years Ended June 30,
                                                 1996        1997        1998
Revenues:
    Gaming equipment and systems               $10,575    $134,734    $109,597
    Wall machines and amusement games            3,356     131,934      98,611
    Route operations                           109,938     127,028     148,507
    Casino operations                           48,509      51,450      60,657
                                               -------     -------     -------
                                               172,378     445,146     417,372
                                               -------     -------     -------
Costs and expenses:
      Cost of gaming equipment and systems       7,213      84,496      61,684
  Cost of wall machines and amusement games      2,022      68,426      54,241
  Cost of route operations                      84,212      95,716     114,645
  Cost of casino operations                     22,046      22,269      25,930
  Selling, general and administrative           31,270      99,520      86,318
  Research and development costs                   370       9,954      15,778
  Depreciation and amortization                 10,988      22,606      22,838
  Direct acquisition costs                      55,843          -           -
  Unusual items                                  5,498         700        (325)
                                               -------      ------      ------
                                               219,462     403,687     381,109
                                               -------     -------     -------

Operating income (loss)                        (47,084)     41,459      36,263

Other income (expense):
    Interest income                              1,571       1,620         813
    Interest expense                            (8,897)    (23,626)    (28,600)
    Rainbow royalty                             (4,070)     (4,722)       (587)
    Rainbow royalty buyout                           -           -     (19,000)
    Minority interest                             (963)     (1,092)     (2,002)
    Other, net                                     301         139       1,025
                                                 -----       -----      ------

Income (loss) before income taxes              (59,142)     13,778     (12,088)
Income tax provision                              (755)     (7,993)     (3,185)
                                               --------    --------    --------

Net income (loss) before extraordinary item    (59,897)      5,785     (15,273)
Extraordinary loss, without tax benefit             -           -      (42,033)
Net income (loss)                              (59,897)      5,785     (57,306)

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

Basic and diluted loss per share:
  Loss before extraordinary item                $(4.64)     $(0.19)     $(1.11)
  Extraordinary loss                                 -          -        (1.31)
                                                ------      ------       -----
   Net loss                                     $(4.64)     $(0.19)     $(2.42)
                                                ======      ======      ======


Weighted average common shares outstanding      13,000      31,822      31,998
                                                ======      ======      ======


         See accompanying notes to consolidated financial statements.


                                    F-3

<PAGE>



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

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

                                                                                                                            Total
                                                           Initial Series                                                   Stock-
                                                           and Series E      Additional           Unrealized Cumulative   holders'
                                        Common Stock       Special Stock      Paid-in    Accum.    Loss on   Translation   Equity
                                     Shares     Dollars   Shares    Dollars   Capital    Deficit  Securities Adjustment (Deficiency)
<S>                                  <C>     <C>           <C>    <C>        <C>        <C>        <C>        <C>        <C>      
Balances at June 30, 1995            11,654  $   1,165     1,333  $     133  $  32,134  $ (23,131) $    (316) $    --    $   9,985

Net loss                               --         --        --         --         --      (59,897)      --         --      (59,897)
Shares issued for acquisition and
  related financing                   2,145        215      --         --        7,496       --         --         --        7,711
Initial Series Special Stock
  converted into common stock         1,333        133    (1,333)      (133)      --         --         --         --         --
Conversion of subordinated
  debentures                         15,136      1,513       113     11,316     95,151       --         --         --      107,980
Common stock issued in
  private placement                   1,495        150      --         --        4,250       --         --         --        4,400
Special Stock dividend                 --         --        --         --         --         (362)      --         --         (362)
Net change in unrealized loss on
  securities available for sale        --         --        --         --         --         --          316       --          316
Foreign currency translation
  adjustment                           --         --        --         --         --         --         --         (287)      (287)
                                  ---------  --------- ---------  ---------  ---------  ---------  ---------  ---------  ---------
Balances at June 30, 1996            31,763      3,176       113     11,316    139,031    (83,390)      --         (287)    69,846

Net income                             --         --        --         --         --        5,785       --         --        5,785
Shares issued upon exercise of
   options                               92          9      --         --          281       --         --         --          290
Adjustments to acquisition
   consideration                         (3)      --        --         --          (12)      --         --         --          (12)
Special Stock dividends                --         --          10      1,052       --      (11,264)      --         --      (10,212)
Special Stock repurchase premium       --         --        --         --         (710)      --         --         --         (710)
Foreign currency translation
   adjustment                          --         --        --         --         --         --         --      (11,432)   (11,432)
                                  ---------  --------- ---------  ---------  ---------  ---------  ---------  ---------  ---------
Balances at June 30, 1997            31,852      3,185       123     12,368    138,590    (88,869)      --      (11,719)    53,555

Net loss                               --         --        --         --         --      (57,306)      --         --      (57,306)
Shares issued upon exercise of
   options                              250         25      --         --          830       --         --         --          855
Special Stock dividends                --         --          14      1,479       --       (3,551)      --         --       (2,072)
Conversion of Series E Special
   Stock to common stock                 20          2      --         (115)       113       --         --         --         --
Special Stock redemption premium       --         --        --         --      (16,553)      --         --         --      (16,553)
Foreign currency translation
  adjustment                           --         --        --         --         --         --         --       (2,227)    (2,227)
                                  ---------  --------- ---------  ---------  ---------  ---------  ---------  ---------  ---------
Balances at June 30, 1998            32,122  $   3,212       137  $  13,732  $ 122,980  $(149,726) $    --    $ (13,946) $ (23,748)
                                  =========  ========= =========  =========  =========  =========  =========  =========  =========
</TABLE>


         See accompanying notes to consolidated financial statements.




                                    F-4

<PAGE>





                 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (In 000's)
                                                  Years Ended June 30,
                                              1996        1997        1998
Cash flows from operating activities:
  Net income (loss)                         $ (59,897)    $ 5,785    $(57,306)
   Adjustments to reconcile net income (loss)
    to net cash provided by (used in) 
    operating activities:
    Depreciation and amortization              10,988      22,606      22,838
    Amortization of debt discounts                245         807          44
    Extraordinary item                            ---         ---      42,033
    Loss on debenture conversion               30,079         ---         ---
    Write down of other assets                  6,095       1,075       2,329
    Loss on sale of assets                        105       1,233         133
    Provision for losses on (recovery of) 
     receivables                                1,020       9,059      (7,194)
    Other                                       1,544        (651)        (51)
  Change in  operating  assets and  liabilities,  
   net of  effects of  businesses acquired:
    Accounts and notes receivable              (5,934)     (4,601)      1,946
    Inventories                                 5,844      (6,898)     (9,221)
    Other current assets                          (95)     (1,549)     (3,012)
    Accounts payable                           (1,889)     (1,970)     (3,793)
    Accrued liabilities                        12,780        (760)      2,594
                                               ------       ------     ------
     Net cash provided by (used in) operating 
      activities                                  885      24,136      (8,660)

Cash flows from investing activities:
  Acquisitions of businesses, net of cash 
   acquired                                   (79,209)        ---         ---
  Additions to property, plant and equipment   (8,101)    (13,257)    (15,541)
  Proceeds from disposal of property, plant 
   and equipment                                2,282         254          55
  Proceeds from sales of securities available 
   for sale                                    13,516         ---         ---
  Additions to other long-term assets          (5,091)     (8,574)     (9,633)
                                               ------      ------      ------
     Net cash used in investing activities    (76,603)    (21,577)    (25,119)

Cash flows from financing activities:
  Conversion/refinancing fees and expenses     (3,333)        ---     (32,752)
  Capitalized debt issuance costs             (10,472)        ---     (11,456)
  Proceeds from long-term debt                155,892         ---     303,734
  Reduction of long-term debt                 (51,446)     (6,774)   (179,747)
  Net change in credit lines                      ---     (11,578)     25,398
  Issuance of Series B Special Stock, net of 
   discount                                    15,000         ---         ---
  Issuance of common stock                      4,400         ---         ---
  Repurchase/redemption of Series B Special 
   Stock                                          ---      (3,879)    (77,568)
  Proceeds from exercise of stock options         ---         767         855
                                               ------       -----      ------
     Net cash provided by (used in) financing 
      activities                              110,041     (21,464)     28,464

  Effect of exchange rate changes on cash         ---        (228)       (122)
                                               ------       ------      ------
  Cash and cash equivalents:
     Increase (decrease) for year              34,323     (19,133)     (5,437)
     Balance, beginning of year                13,734      48,057      28,924
                                               ------      ------      ------
     Balance, end of year                     $48,057     $28,924     $23,487
                                              =======     =======     =======

         See accompanying notes to consolidated financial statements.




<PAGE>


                 ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   Years Ended June 30, 1996, 1997 and 1998

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS

      Description of business

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

      Principles of consolidation

      The accompanying consolidated financial statements include the accounts of
      Alliance Gaming  Corporation,  and its  wholly-owned  and partially owned,
      controlled subsidiaries.  In the case of Video Services, Inc. ("VSI"), the
      Company owns 100% of the voting stock.  The Company is entitled to receive
      71% of dividends  declared by VSI, if any, at such time that dividends are
      declared.  Effective  June 18,  1996,  the Company  acquired  Bally Gaming
      International,  Inc. ("BGII");  the results of operations o BGII have been
      included in the accompanying  consolidated financial statements since that
      date. All significant  intercompany  accounts and  transactions  have been
      eliminated.  Certain  reclassifications  have  been  made  to  prior  year
      financial statements to conform with the current year presentation.

      Cash and cash equivalents

      Cash equivalents consist of highly liquid debt instruments  purchased with
      an original  maturity of three  months or less at the date of purchase and
      are carried at cost, which approximates market value. Also, includes $14.4
      million which is utilized in Casino and Route  Operations which is held in
      vaults, cages or change banks.

      Inventories  Inventories are stated at the lower of cost,  determined on a
      first-in,   first-out  basis,  or  market.   Cost  elements  included  for
      work-in-process and finished goods include raw materials,  freight, direct
      labor and manufacturing overhead. 

      Inventories, net of reserves, consist of the following at June 30, 1997 
      and 1998:
                                           1997             1998
                                              (In 000's)
                  Raw materials           $9,356          $12,075
                  Work-in-process          1,683            2,668
                  Finished goods          26,290           27,675
                                          ------           ------
                    Total                $37,329          $42,418
                                         =======          =======

      Property, plant and equipment and leased gaming equipment

      Property,  plant and equipment are stated at cost and depreciated over the
      estimated  useful lives or lease terms,  if less,  using the straight line
      method  as  follows:  buildings  and  improvements,  30-39  years;  gaming
      equipment, 3-7 years; furniture,  fixtures and equipment,  3-10 years; and
      leasehold  improvements,  5-20 years. Leased gaming equipment is stated at
      cost and depreciated over estimated useful lives ranging from 3-4 years.
<PAGE>
      
      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 at June 30, 1997
      and 1998:
                                                            1997          1998
                                                                (In 000's)
         Land and land improvements                       $21,610       $21,058
         Buildings and leasehold improvements              30,027        29,926
         Gaming equipment                                  46,247        50,341
         Furniture, fixtures and equipment                 16,458        22,670
         Less accumulated depreciation and amortization   (39,695)      (46,090)
                                                           ------        ------
         Property, plant and equipment, net               $74,647       $77,905
                                                          =======       =======

      Excess of costs over net assets of acquired businesses

      The  excess of the cost  over the fair  value of net  assets  of  acquired
      businesses  is  generally  amortized  on the  straight-line  method over a
      period of 40 years.

      Intangible assets

      Intangible   assets  consist   primarily  of  costs  associated  with  the
      acquisition of location  leases which are  capitalized and amortized using
      the straight-line method over the terms of the leases, ranging from one to
      24 years,  with an average life of  approximately  10 years,  and deferred
      issuance  costs for  financings  which are amortized  over the life of the
      related financing.

      Accrued liabilities 

      Accrued liabilities  consists of the following at June 30, 1997 and 1998:

                                                       1997             1998
                                                            (In 000's)
                  Payroll and related costs          $ 6,974          $ 9,150
                  Interest                               566            8,782
                  Professional and consulting fees     1,564            3,569
                  Sales, use and income taxes          7,922            3,380
                  Litigation settlement                  428            2,000
                  Other                               19,938           12,241
                                                      ------           ------ 
                      Total                          $37,392          $39,122
                                                     =======          =======

      Estimates

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

      Impairment recognition

      Management  evaluates  the  carrying  value of all  long-lived  assets  to
      determine  recoverability  based on an analysis of  non-discounted  future
      cash flows. Based on its most recent analysis, management believes that no
      material  impairment in the value of long-lived  assets exists at June 30,
      1998.
<PAGE>

      Revenue recognition

      The Company sells equipment and systems on normal credit terms (90 days or
      less),  or over  terms of  generally  up to 36 months  or more or  through
      payments  from net  winnings of the machines  until the purchase  price is
      paid.  Revenue  from  sales of  gaming  machines  and  amusement  games is
      normally  recognized at the time products are shipped and title has passed
      to the customer.  Revenue from sales of software  included in computerized
      monitoring systems is recognized at the time the system is accepted by the
      customer,  which normally  coincides with  installation  of the equipment.
      Revenue from sales of hardware included in computerized monitoring systems
      is recognized at the time the product is shipped.

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

      Unusual items

      The Company discloses as a separate  component of operating income (loss),
      income and expense items that are unusual and infrequently occurring.

      During the year ended June 30, 1998,  the Company  recorded the  following
      unusual items:
      (1) The  Company  settled a dispute  with Alpha  Hospitality  and  General
      Electric Credit  Corporation  concerning certain customer notes receivable
      on which  the  Company  had  certain  recourse  obligations.  The  Company
      contributed  $2.5 million to the final  settlement  with the holder of the
      notes,  and reversed $6.0 million of reserves  previously  established for
      these  recourse  obligations.  In addition,  as part of the settlement the
      Company  became the sole owner of  approximately  566,000  shares of Alpha
      Hospitality  common  stock  which  trades on the NASDAQ  Small Cap market.
      Pursuant to the limitations provided for in the settlement agreement,  the
      Company has sold  235,000  shares of Alpha  Hospitality  through  June 30,
      1998.
      (2)As a result of  settling a dispute  over the  exclusive  use of certain
      technologies and changes in gaming regulations,  the Company evaluated the
      cash flow of certain of its  technology  assets,  in  accordance  with the
      provisions  of Financial  Accounting  Standards  Board  Statement No. 121,
      "Accounting for the Impairment of Long-Lived  Assets and Long-Lived Assets
      to be Disposed of," and  determined  certain  items met the  definition of
      having  become  impaired.  During the year ended June 30, 1998 the Company
      recorded write-downs totaling $2.8 million for these items.
      (3) The Company  accrued $0.7 million for the present value of contractual
      payments  due to a former  member  of the board of  directors  who was not
      re-elected to the board at the December 1997 annual shareholders meeting.
      (4) The Company  accrued  $0.6  million as  restructuring  charges to more
      fully  integrate  Bally  Gaming and Systems.  
      (5) The Company  recorded a $1.6 million  charge for final  settlement  of
      litigation related to the acquisition of BGII.

      During the year ended June 30, 1997 the Company  incurred  unusual charges
      of  $0.7  million  related  primarily  to  separation  costs  of  Alliance
      personnel subsequent to the BGII acquisition.

      During the year ended June 30, 1996 the Company  incurred  unusual charges
      for the write off of its  investments in projects in Kansas and one Native
      American development project,  totaling $3.4 million.  Also in fiscal year
      1996 the Company  incurred  unusual  charges in its route  operations  for
      reserves  for certain  parts  inventories  which  became  obsolete  due to
      technological  changes to gaming devices being deployed as a result of the
      new  Gambler's  Bonus  product,  as well as an accrual to reserve  for the
      present value of the future lease  payments for one small casino  location
      for which cash  flows  received  under the  participation  agreement  were
      inadequate  to service the building  lease paid by the  Company,  totaling
      $2.1 million.
<PAGE>

      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.

      Income taxes

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

      Loss per share of common stock

      In February 1997, the Financial Accounting Standard Board issued Statement
      of Financial  Accounting  Standards No. 128,  "Earnings Per Share",  which
      supersedes  APB Opinion No. 15. This statement  replaces  primary EPS with
      basic EPS, and generally  requires dual  presentation of basic and diluted
      EPS.  For the years ended June 30,  1996 and 1997,  the basic EPS does not
      differ  from the  primary  EPS and  dilutive  EPS does not differ from the
      basic EPS because for these periods the Company  reported net losses which
      would result in anti-dilution.

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

                                                  Fiscal Years ended June 30,  
                                                1996        1997        1998
                                                          (in 000's)
         Stock options                          2,832       4,647       5,434
         Warrants                              10,125      10,125      10,125
         Convertible preferred stock            1,924       2,041       2,335
                                               ------      ------      ------
                                               14,881      16,813      17,894
                                               ======      ======      ======
         Adjusted for application of the
           treasury stock method                1,045         596       2,028
                                                =====       =====       =====

      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, 1998 for the Company's financial instruments  approximate fair
      value.

      Recently Issued Accounting Pronouncements

      In June 1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
      Income" which  establishes  requirements  for disclosure of  comprehensive

<PAGE>

      income and becomes  effective for the Company for the year ending June 30,
      1999.  Comprehensive  income  includes  items  such  as  foreign  currency
      translation adjustments which are currently being presented by the Company
      as a component of stockholders' equity. This is a disclosure item only and
      will have no impact on reported earnings per share.

      In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
      an Enterprise and Related  Information"  which  establishes  standards for
      disclosure  about operating  segments in annual  financial  statements and
      selected  information  in  interim  financial  reports.  SFAS No. 131 also
      establishes standards for related disclosures about products and services,
      geographic  areas and major  customers  and will  supersede  SFAS No.  14,
      "Financial  Reporting  for  Segments  of a Business  Enterprise."  The new
      standard  becomes  effective for years  beginning after December 15, 1997.
      This is a  disclosure  item  only  and will  have no  impact  on  reported
      earnings per share.

2.    ACQUISITION

      On June  18,  1996,  the  Company  completed  the  acquisition  of all the
      outstanding   shares  of  BGII.  The   consideration   paid  consisted  of
      approximately  $77.2 million in cash, $3.0 million in the Company's common
      stock and $36.6  million  in the  Company's  Series B Special  Stock.  The
      acquisition  was accounted for as a purchase and the results of operations
      of BGII  have  been  included  in the  consolidated  financial  statements
      beginning on June 18,  1996.  The purchase  price was  allocated  based on
      estimated  fair  values at the date of the  acquisition.  During  the year
      ended June 30,  1997 the  Company  made  certain  adjustments  aggregating
      approximately $6.6 million to the goodwill originally recorded, related to
      the settlement of certain pre-acquisition contingencies.

      During the year ended June 30,  1996,  the Company  incurred  direct costs
      including a $30.1 million  non-cash  accounting loss on the exchange offer
      component of the financing  for the  acquisition  plus legal,  accounting,
      transaction financing fees, public and investor relations,  printing costs
      and  related  costs.  The direct  acquisition  costs  have been  presented
      separately in the Company's  consolidated  statements  of  operations,  as
      management  believes that such presentation  provides  additional relevant
      information.

3.    RECEIVABLES

      The Gaming  Equipment and Systems and Wall  Machines and  Amusement  Games
      business  units grant  customers  payment  terms under  contracts of sale.
      These  contracts  are  generally  for  terms of one to three  years,  with
      interest at  prevailing  rates,  and are generally  collateralized  by the
      related  equipment  sold,  although  the  value  of  such  equipment,   if
      repossessed,  may be less than the  receivable  balance  outstanding.  See
      "Concentration of Credit Risk". The Company's Nevada route operations from
      time to time make  loans to  location  operators  for  build-outs,  tenant
      improvements and initial operating  expenses,  which are generally secured
      by the personal guarantees of the operators and the locations' assets. The
      majority  of the  loans  bear  interest  rates  between  8% to 14% and are
      expected  to be repaid over a period of time not to exceed the life of the
      revenue sharing  arrangement and have due dates ranging from November 1998
      to July 2011.

      The following table represents, at June 30, 1998, scheduled collections of
      accounts and notes receivable (net of allowances for doubtful accounts) by
      fiscal year:

                               Years ending June 30,
                                    (In 000's)
         1999      2000     2001      2002     2003  Thereafter    Total
        $93,459   $5,400   $1,219     $364     $232     $716      $101,390
        ================================================================== 

      4.    DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION

      In August 1997 the Company  effected a series of related  transactions (as
described below, the "Refinancing").  Long-term debt and lines of credit at June
30, 1997,  prior to the Refinancing and at June 30, 1998, after the refinancing,
consisted of the following:

<PAGE>
                                                            1997        1998
                                                                (In 000's)
      10 % Senior Subordinated Notes due 2007, net of      $   -     $149,245
         unamortized discount of  $755                         
      Term loan facilities:
         Tranche B Term Loan                                   -       74,438
         Tranche C Term Loan                                   -       39,700
         Delayed Draw Term Facility                            -       25,000
      Revolving Credit Facility                                -       34,971 
      12 7/8%  Senior Secured Notes due 2003, net of
         unamortized discount of  $2,776                  151,224          -
      7 1/2% Convertible  subordinated  debentures 
         due 2003,  unsecured                               1,642          -
      National Gaming Mississippi, Inc., note payable, 
         secured by the assets of the Rainbow Casino        6,569          -
      Bally Wulff revolving lines of credit                 9,611          - 
      Other, secured by related equipment                   4,793       2,599
                                                            -----       -----
                                                          179,839     325,953
      Less current maturities                               1,124       1,996 
                                                            -----       -----
                                                         $172,715    $323,957

      The  Refinancing  consisted of the private  placement of $150.0 million of
      Senior  Subordinated  Notes  and the  closing  of $230.0  million  of bank
      financing. The bank financing provides for (i) term loans in the aggregate
      amount of up to $140.0 million,  comprised of a $75.0 million tranche with
      a 7 1/2-year  term (the "Tranche B Term Loan"),  a $40.0  million  tranche
      with an 8-year  term (the  "Tranche  C Term  Loan"),  and a $25.0  million
      tranche with a 7 1/2-year term (the "Delayed Draw Term Facility" and
      together  with the  Tranche B Term Loan and the  Tranche C Term Loan,  the
      "Term  Loan  Facilities");  and  (ii) a  $90.0  million  revolving  credit
      facility (the  "Revolving  Credit  Facility")  with a 6-year term. Each of
      these credit  facilities is variable rate  borrowings in accordance with a
      credit grid.  The interest  rates at the highest  level of the credit grid
      and maturity dates are as follows:

                                              Initial           Maturity
                                               Rate               Date
            Tranche B Term Loan            LIBOR + 2.75%     January 31, 2005  
            Tranche C Term Loan            LIBOR + 3.00%     July 31, 2005  
            Delayed Draw Term Facility     LIBOR + 2.75%     January 31, 2005 
            Revolving Credit Facility      LIBOR + 2.25%     July 31, 2005

      The  Revolving  Credit  Facility  also  allows  for  German   Deutschemark
      borrowings  at the  Eurodeutschemark  rate plus 2.25% (or 5.9% at June 30,
      1998).

<PAGE>
           
      As part of the  Refinancing,  the Company  used the proceeds of the Senior
      Subordinated  Note offering,  together with borrowings under the Revolving
      Credit Facility, the Term Loan Facilities and cash on hand to fund (a) the
      repurchase  at a premium of  substantially  all of the  Company's  12 7/8%
      Senior  Secured  Notes plus  accrued  interest to August 8, 1997  totaling
      $183.7  million,  (b) the  redemption at  liquidation  value of all of the
      Company's  Series B Special  Stock on  September  8, 1997  totaling  $77.6
      million, (c) the purchase from HFS Gaming Corporation ("HFS") of the right
      to receive  royalty  payments  based on revenues of the Rainbow Casino for
      $19.0 million (the "Rainbow Royalty Buyout"), (d) the repayment of related
      debt owed to an HFS affiliate,  National Gaming Mississippi, Inc. ("NGM"),
      on August  12,  1997  totaling  $7.3  million,  (e)  repayment  of amounts
      outstanding  under the domestic and foreign  revolving lines of credit and
      (f) the payment of transaction  fees and expenses  totaling $16.5 million.
      At June 30, 1998,  borrowings  under the $90.0  million  Revolving  Credit
      Facility  totaled  $35.0  million,  of which  $12.3  million  were  German
      Deutschemark  borrowings.  Based  on the  terms  of the  Revolving  Credit
      Facility,  the Company would have been able to borrow an additional  $37.1
      million as of June 30, 1998. The borrowing  base for the revolving  credit
      facility  includes  eligible   receivables  and  inventory  (as  defined).
      Additionally,  in July 1997 the Company redeemed the remaining  balance of
      the %  Convertible  Debentures  at a price  of  104%,  or a total  of $1.7
      million.

      The bank facility is collateralized by substantially all domestic property
      and is  guaranteed by each  domestic  subsidiary of the U.S.  Borrower and
      German  Subsidiaries (both as defined),  other than the entity which holds
      the Company's interest in its Louisiana  operations and other non-material
      subsidiaries  (as  defined),  and secured by both a U.S. and German Pledge
      Agreement  (both as  defined).  The bank  facility  contains  a number  of
      maintenance  covenants  and it and the  indenture  have other  significant
      covenants  that,  among other things,  restrict the ability of the Company
      and certain of its  subsidiaries  to dispose of assets,  incur  additional
      indebtedness  and issue  preferred  stock,  pay  dividends  or make  other
      distributions,   enter  into  certain   acquisitions,   repurchase  equity
      interests (as defined) or subordinated indebtedness,  issue or sell equity
      interests of the Company's subsidiaries (as defined), engage in mergers or
      acquisitions,  or engage in certain  transactions  with  subsidiaries  and
      affiliates, and that otherwise restrict corporate activities.

      The Senior  Subordinated  Notes bear interest at 10%, are due in 2007, and
      are general unsecured  obligations of the Company,  ranking subordinate in
      right of payment to all Senior Debt (as defined) of the Company, including
      indebtedness under the bank financing.  The Senior Subordinated Notes will
      be fully and  unconditionally  guaranteed  on a joint and  several  senior
      subordinated  basis  by  all  existing  and  future  domestic   Restricted
      Subsidiaries  (as defined) of the Company,  subject to certain  exceptions
      including  the  partially-owned  entities  through  which its  Mississippi
      casino and  Louisiana  route  operations  are  conducted.  The  Subsidiary
      Guarantees  (as  defined)  are  general   unsecured   obligations  of  the
      Guarantors,  ranking subordinate in right of payment to all Senior Debt of
      the  Guarantors.  The Company will be able to designate  other  current or
      future  subsidiaries  as  Unrestricted  Subsidiaries  (as  defined)  under
      certain circumstances.  Unrestricted  Subsidiaries will not be required to
      issue a  Subsidiary  Guarantee  and  will  not be  subject  to many of the
      restrictive  covenants  set forth in the  Indenture  pursuant to which the
      Senior  Subordinated  Notes were issued.  The  Indenture for the Company's
      Senior   Subordinated   Notes  contains   various   covenants,   including
      limitations  on  incurrence  of  additional  indebtedness,  on  restricted
      payments and on dividend and payment  restrictions  on  subsidiaries.  The
      Senior  Subordinated  Notes may not be redeemed  for the first five years.
      Upon the  occurrence of a Change of Control (as  defined),  the holders of
      the Senior  Subordinated  Notes will have the right to require the Company
      to  purchase  their  notes  at a price  equal  to  101%  of the  aggregate
      principal amount thereof,  plus accrued and unpaid interest to the date of
      purchase.

      As a result of the Refinancing  described  above,  the Company recorded an
      extraordinary  loss of  $42.0  million  consisting  of the  $27.7  million
      premium  paid to  repurchase  the Senior  Secured  Notes,  the  payment of
      related  transaction  fees and  expenses  (including  $2.0 million paid to
      related parties pursuant to employment agreements),  and the charge-off of
      the unamortized  debt discount and deferred  financing fees.  There was no
      tax benefit recognized for the extraordinary item as a valuation allowance
      was recorded to fully reserve the net operating losses created.

      The  Company  also  recorded  a $19.0  million  charge for the cost of the
      Rainbow Royalty Buyout. Additionally, the Company recorded a $16.6 million
      charge to equity and a  corresponding  increase in the net loss applicable
      to common  shares for the  difference  between the carrying  value and the
      liquidation value of the Series B Special Stock, all of which was redeemed
      on  September  8, 1997 at the  liquidation  price of $100 per share,  plus
      accrued dividends.

      In connection  with the  acquisition  of BGII,  the Company  issued $154.0
      million  aggregate  principal  amount of 12 7/8% Senior  Secured Notes due
      2003 (the "12 7/8% Notes") and 15% Non Voting Senior  Pay-in-Kind  Special
      Stock  Series  B  (the  "Series  B  Preferred  Stock")  with  an  original
      liquidation  value of $68.5 million.  As part of the  Refinancing,  the 12
      7/8% Notes were repaid and the Series B Preferred Stock was redeemed.
            
      During 1995, HFS and its  affiliate,  NGM,  together  agreed to loan up to
      $12.0  million to the Company's  majority  controlled  subsidiary  Rainbow
      Casino Vicksburg  Partnership,  L.P. ("RCVP").  Of these loan commitments,
      RCVP  ultimately  borrowed $10.0 million and $1.3 million from HFS and NGM
      respectively.  
<PAGE>

      The notes  were  purchased  by the  Company  as part of the Refinancing.  
      Prior to the  Refinancing,  HFS was  entitled  to  receive a monthly  
      royalty fee based on the Rainbow  Casino's gaming revenues of 12% on the  
      first  $40.0  million,  11% on the  next  $10.0  million,  and 10%
      thereafter.

      Prior to the  refinancing,  the Bally Wulff entities held three bank lines
      of credit which provided for borrowings of DM16,300,000,  DM16,000,000 and
      DM750,000.  These lines of credit were repaid with  proceeds  from the new
      Revolving Credit Facility.

      Maturities  of  long-term  debt,  for each of the five fiscal years ending
      subsequent to June 30, 1998 are as follows:

                                Years ending June 30,
                                    (In 000's)
        1999     2000     2001     2002     2003   Thereafter    Total
       $1,996   $1,954   $1,954   $2,142  $14,304   $303,603   $325,953
       ================================================================  

5.    STOCKHOLDERS' EQUITY, OPTIONS,  WARRANTS AND RIGHTS

      Special Stock

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

      The Board had designated an initial series of Special Stock as "Non-voting
      Junior Convertible Special Stock" which consisted of 1,333,333 shares (the
      "Initial  Series")  which  were sold to  Kirkland - Ft.  Worth  Investment
      Partners, L.P. ("Kirkland"), pursuant to a Letter Agreement dated June 25,
      1993, for $5.0 million. The Initial Series had certain conditions relating
      to regulatory licensing,  which, when met allowed the holder to convert on
      a one-for-one  basis into shares of common stock. The licensing  condition
      was met and during fiscal year 1996 Kirkland elected to convert its shares
      to common stock.

      In June 1996,  the Company  completed an offering of 200,000 shares of its
      15% Non-Voting Senior Pay-in-Kind  Special Stock,  Series B (the "Series B
      Special Stock"). The Series B Special Stock was also issued as part of the
      consideration in the BGII acquisition. During fiscal year 1997 the Company
      repurchased  a total of  18,000  shares  of  Series B  Special  Stock at a
      premium to their carrying  value of $0.7 million.  As discussed in Note 4,
      on September 8, 1997 the Company redeemed all of the outstanding shares of
      Series B Special Stock at their  liquidation price of $100 per share, plus
      accrued dividends.  The Company recorded non-cash dividends in the form of
      additional  shares of Series B Special  Stock  totaling  $10.2 million and
      $2.0 million for years ended June 30, 1997 and 1998, respectively.

      In June 1996,  the Company issued 113,160 shares of Series E Special Stock
      to  certain  holders  of  the  Company's  71/2%  Convertible  Subordinated
      Debentures  who elected to receive such stock in lieu of receiving  common
      stock. Each share of Series E Special Stock accrues  cumulative  dividends
      until June 18, 1999 at an annual rate of 111/2%, payable quarterly in cash
      or, at the  Company's  option,  in  additional  shares of Series E Special
      Stock. The Series E Special Stock is convertible  after June 18, 1998 into
      common stock at a  conversion  price of $5.88 per share  (equivalent  to a
      conversion rate of  approximately  17.007 shares of common stock per share
      of  Series  E  Special  Stock),   subject  to  adjustment   under  certain
<PAGE>
      
      circumstances,  and  has a $100  liquidation  preference  per  share.  The
      holders of shares of Series E Special  Stock have no voting  rights except
      as required by law.

      Stock Option Plans

      In 1984,  the  Company  created an Employee  Stock  Option Plan (the "1984
      Plan") that provides for the issuance of up to 2,000,000  shares of common
      stock to Company employees and directors.  Generally,  options are granted
      at the fair market value of the Company's  Common Stock at the date of the
      grant and are exercisable over ten years.

      In 1992, the Company  created the 1991 Long Term Incentive Plan (the "1991
      Plan")  that,  as amended,  provides  for the  issuance of up to 3,000,000
      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
      3,000,000  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.

      Pursuant to the BGII  acquisition  agreement,  the Company  assumed BGII's
      obligations  with respect to each of its  outstanding  stock options,  and
      such options became exercisable  pursuant to employee election (except for
      certain  identified former executive officers and directors of BGII) for a
      number of shares of  common  stock  equal to the  number of shares of BGII
      common stock subject thereto. Such options expire on June 18, 1999.

      On August 29, 1996, the Board of Directors  repriced the exercise price of
      previously  issued,  unexercised  options  for  substantially  all current
      employees  and  directors to $3.4375 per share which was the closing price
      of the Company's common stock on the closing date of the BGII acquisition,
      June 18, 1996.  The closing price of the Company's  common stock on August
      29, 1996 was $2.50. Transactions involving stock options are summarized as
      follows:


<PAGE>


                             Options Outstanding
                                                        Weighted-Average       
                                              Shares     Exercise Price
        Balance, June 30, 1995              2,617,834        $6.00
              Granted                         689,000         3.39
              Exercised                            --           --
              Canceled                       (621,000)        5.97
                                             --------         ----
        Balance, June 30, 1996              2,685,834         5.53
              Granted                       3,726,319         3.50
              Exercised                       (91,836)        1.65
              Canceled                     (1,704,000)        5.97
                                            ---------         ----
        Balance, June 30, 1997              4,616,317         3.84
              Granted                       1,466,904         4.37
              Exercised                      (250,084)        3.80
              Canceled                       (399,334)        6.95
                                            ---------         ----
        Balance, June 30, 1998              5,433,803        $3.77
        ----------------------              =========        =====

        Exercisable at June 30, 1998        3,286,086        $3.73
                                            =========        =====

      The following options were outstanding as of June 30, 1998:

            Options Outstanding                        Options Exercisable
                    Weighted-Avg.                Weighted-Avg.
  Range of            Remaining    Outstanding     Remaining      Outstanding
  Exercise  Prices  Contractual Life  Shares     Contractual Life    Shares 
     $2.25 - $3.00       2.47         89,500             2.47       89,500
     $3.01 - $4.00       4.16      3,808,399             3.77    2,948,298
     $4.01 - $5.00       4.40      1,392,904             4.33      198,288
        over $5.01       3.17        143,000             1.30       50,000
                                    --------                       -------
                                   5,433,803                     3,286,086
                                   =========                     =========

      At June 30,  1998,  the  range of  exercise  prices  and  weighted-average
      remaining  contractual life of outstanding  options was $2.25 - $8.375 and
      4.16 years, respectively.

      The Company accounts for its stock-based  employee  compensation awards in
      accordance with Accounting  Principles  Board Opinion No. 25,  "Accounting
      for Stock  Issued to  Employees"  ("APB  25").  Under APB 25,  because the
      exercise  price of the Company's  employee stock options equals or exceeds
      the market price on date of grant, no compensation  expense is recognized.
      Had the Company  determined  compensation  cost based on the fair value at
      the grant date for its stock options under SFAS No. 123, " Accounting  for
      Stock Based  Compensation,"  the Company's  net loss  applicable to common
      shares would have  increased  from $60.3 million (or $(4.64) per share) to
      $61.2  million  (or  $(4.71)  per share) on a pro forma basis for the year
      ended June 30, 1996, from a loss of $6.2 million (or $(0.19) per share) to
      $8.3  million  (or  $(0.26)  per share) on a pro forma  basis for the year
      ended  June 30,  1997 and from a loss of $77.4  million  (or  ($2.42)  per
      share) to $79.3  million (or $2.48 per share) on a pro forma basis for the
      year ended June 30,  1998.  The pro forma net loss  reflects  only options
      granted in 1996, 1997 and 1998. Therefore,  the full impact of calculating
      compensation cost for stock options under SFAS No. 123 is not reflected in
      the pro forma net income amounts presented above because compensation cost
      is reflected over the options' vesting period,  generally three years, and
      compensation  cost  for  options  granted  prior  to July  1,  1995 is not
      considered.

      The per share  weighted-average fair value of stock options granted during
      1996, 1997 and 1998 was $5.80, $1.43 and $1.71  respectively,  on the date
      of grant using the Black-Scholes  option-pricing  model with the following
      weighted-average  assumptions for 1996, 1997 and 1998:  expected  dividend
      yield of 0%,  risk  free  interest  rates  ranging  from  5.0% to 6.5%,  a
<PAGE>
      
      volatility   factor  of  .79,  .51  and  .69  for  1996,  1997  and  1998,
      respectively, and expected lives varying from 3 to 10 years.

      Warrants

      Upon closing of the private  placement of the Company's 7 1/2% Convertible
      Subordinated  Debentures  and the $5.0 million  equity  investment  in the
      Initial  Series  by   Kirkland-Ft.   Worth   Investment   Partners,   L.P.
      ("Kirkland")  on  September  21,  1993,  the  Company  issued  warrants to
      purchase  up to  2,750,000  shares of  Common  Stock at $1.50 per share to
      Kirkland  which  expire  September  21,  1999.  Under the same terms,  the
      Company issued warrants to purchase  1,250,000 and 30,000 shares of Common
      Stock to Gaming Systems Advisors, L.P. ("GSA") and L.H. Friend, Weinress &
      Frankson, Inc. ("Friend"),  respectively.  Under certain circumstances the
      expiration  date on a  portion  of the  above  warrants  may be  extended.
      Pursuant to employment agreements,  the holders of approximately 1,400,000
      of the warrants can extend the  expiration  date of their  warrants  until
      June 30, 2002 by paying an aggregate of approximately $1.1 million in cash
      or foregoing  cash bonuses of an equal amount prior to September 21, 1999.
      All of these warrants  became  exercisable  one year after the grant dates
      and vest in three  equal  increments  only after the  market  price of the
      Common Stock reaches $11, $13 and $15. The Company also issued warrants to
      purchase  500,000 and 250,000 shares of Common Stock at $8.25 per share to
      the initial  purchasers of the 7 1/2% Convertible  Debentures;  Donaldson,
      Lufkin & Jenrette  Securities  Corporation  ("DLJ") and Oppenheimer & Co.,
      Inc. ("Oppenheimer"),  respectively, each of which expire on September 21,
      1999.  During  the  year  ended  June 30,  1996,  in  connection  with the
      commencement of employment  with the Company,  the then Board Chairman and
      then  Vice-Chairman  each were each granted  warrants to purchase  250,000
      shares  of  common  stock  on the  same  terms  as the  Kirkland  warrants
      described above except that such warrants expire on September 21, 2000. At
      the  completion  of the BGII  acquisition,  GSA was  issued an  additional
      2,500,000  warrants on the same terms as the original  warrants  issued to
      Kirkland described above, except with an expiration date of June 18, 2002.
      During the financing stage of the BGII acquisition, Cerberus Partners L.P.
      and certain  affiliates of Canyon  Partners,  Inc. were issued warrants to
      purchase 250,000 shares of Common Stock at $5.00 per share which expire on
      August 31, 2002. None of the warrants  granted to Kirkland,  GSA,  Friend,
      and the now former Board members were exercisable at June 30, 1998.

      Prior to the merger, BGII had issued warrants to purchase 1,200,000 shares
      of BGII common stock at a purchase price of $12.50 per share.  Pursuant to
      the merger  agreement,  the Company assumed BGII's obligation with respect
      to each warrant,  which are exercisable for the merger  consideration  per
      share of BGII common stock subject to such warrants. During July 1998, the
      holders  exercised these warrants  resulting in the Company issuing 94,680
      shares of common stock and $0.3 million in cash.

      At June 30, 1998,  shares of the Company's  Common Stock were reserved for
      future issuance as follows:

         Shares underlying stock options issued or
            issuable under the 1984 Plan                  107,000
         Shares underlying stock options issued or
            issuable under the 1991 Plan                2,934,000
         Shares underlying stock options issued or
            issuable under the 1996 Plan                3,000,000
         Shares underlying all warrants issued         10,125,000
         Shares for former BGII option holders            202,500
                                                        ---------
               Total  (see below)                      16,368,500
                                                       ==========

      Included in the warrants  above are warrants  held by Mr.  Alfred Wilms to
      purchase  2,000,000 shares of Common Stock at $2.50 per share,  subject to
      adjustment,  that were to expire  September 1, 1998.  These  warrants were
      issued  in  connection  with  the  funding  of a $6.5  million  five  year
      subordinated loan for VSI which has since been repaid. On August 25, 1998,
      (after  the  date of the  auditors'  report)  Mr.  Wilms  exercised  these
      warrants.
<PAGE>

      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 $25
      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 $0.001 at any time  before a buyer  acquires  10% (or 15% in the
      case of an institutional investor) of the Company's Common Stock.

6.    INCOME TAXES

      The  components  of the  Company's  income tax expense for the years ended
      June 30, 1996, 1997 and 1998 are as follows:

                                                 1996        1997          1998 
                                                             (In 000s)
           Current tax expense:
                   U. S. Federal                $ 533      $   225   $        -
                   Foreign                        172        7,701        2,743
                   State                           50          750          568
                                                  755        8,676        3,311
          Deferred tax expense
                   U. S. Federal                    -            -           -
                   Foreign                          -         (683)        (126)
                   State                            -            -           -
                                                -----        ----         -----
          Total provision for income taxes      $ 755       $7,993       $3,185
                                                =====        =====        =====
      A reconciliation  of the Company's income tax provision as compared to the
      tax provision  calculated by applying the statutory federal tax rate (35%)
      to the income  (loss)  before  income  taxes for the years  ended June 30,
      1996, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>                                                                                               
                                                           1996          1997          1998
                                                                      (In 000's)
      <S>                                                <C>            <C>         <C>            
      Computed expected income tax expense (benefit) 
         at 35%                                          $(20,700)      $4,826      $(18,942)
      Change in valuation allowance                        (6,453)         169        17,613
      Change in estimates, principally due to changes
         in estimated tax depreciation and NOL's            1,166          686             -
      State income taxes, net of federal benefit               33          488           369
      Tax gain on conversion of debt to equity,  net       18,265            -             -
      Acquisition costs not currently deductible            7,102            -             -
      Foreign taxes, net of federal benefit                     -        1,940           754
      Foreign tax credits                                       -            -         1,770       
      Other, net                                            1,342         (116)        1,621
                                                            -----        -----         -----
                                                           $  755       $7,993        $3,185
                                                            =====        =====         =====
</TABLE>

<PAGE>

      The major components of the deferred tax assets and liabilities as of June
      30, 1997 and 1998 are presented below.

                                                        1997               1998
                                                              (In 000's)
      Deferred Tax Assets:
       Net operating loss carry forwards              $ 6,049           $15,254
       Foreign tax credit carry forwards               11,843            12,816
       Inventory obsolescence reserves                  4,008             3,582
       Bad debt reserves                                6,359             2,056
       Accruals not currently deductible for tax 
         purposes                                       3,585             4,108
       Refinancing costs being amortized for tax 
         purposes                                           -            13,125
       Other                                            9,404             7,611
      Total gross deferred tax assets                  41,248            58,552
      Less:  Valuation allowance                       29,472            47,085
                                                       ------            ------
      Deferred tax assets                             $11,776           $11,467
                                                      =======           =======

      Deferred Tax Liabilities:
       Property and equipment, principally due to
         depreciation  differences                    $ 3,703           $ 4,762
       Other                                            6,662             5,168
      Total gross deferred tax liabilities (a)         10,365             9,930
                                                       ------             -----
      Net deferred tax assets                         $ 1,411           $ 1,537
                                                      =======           =======

      (a)  Included in the other  non-current  liabilities  in the  accompanying
      consolidated balance sheets.
                  
      Management has considered certain tax planning  strategies as permitted by
      Statement of Financial Accounting Standards No. 109 "Accounting for Income
      Taxes".  Management  has  determined  that tax  benefits  associated  with
      recorded deferred tax assets, net of valuation allowance,  are more likely
      than not realizable  through future taxable income and future reversals of
      existing taxable temporary differences.

      At June 30, 1998,  the Company had net operating  loss carry  forwards for
      federal  income tax  purposes of  approximately  $44.2  million  which are
      available to offset future federal taxable income, if any, expiring in the
      years 2007 through 2013. In addition,  approximately  $21.3 million of the
      Company's  net  operating  loss   carryforwards   are  limited  to  annual
      utilization  of  $4.7  million  per  year  subject  to  certain  carryover
      provisions  pursuant to Section 382 of the Internal  Revenue Code. At June
      30,  1998  the  Company   has  foreign  tax  credit   carry   forwards  of
      approximately $12.8 million and alternative minimum tax credit (AMT) carry
      forwards of approximately $1.7 million.  Foreign tax credits are available
      to offset future taxes due in the U.S. on future  foreign  taxable  income
      and expire  between 1999 and 2003 unless  utilized prior to such time. AMT
      credits  are  available  to be  carried  forward  indefinitely  and may be
      utilized  against  regular  U.S.  Corporate  tax to the extent it does not
      exceed computed AM calculations.




<PAGE>


7.    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, 1996, 1997 and 1998:

                                                            1996    1997    1998
                                                         
                                                                (In 000's)

       Reclassify inventory to property, plant and 
        equipment and leased gaming equipment           $   -    $9,642   $4,132
       Dividends for Series E and  Series  B Special   
        Stock                                               -    11,264    3,551
       Translation  rate adjustment                         -    11,204    2,105
       Reclassify other assets to property,  plant 
        and equipment                                       -     1,818        -
       Reclassify  receivables to other assets              -     1,837      540
       Reclassify  excess costs over net assets of 
        acquired business to  property,  plant and           
        equipment                                           -     1,436        -
       Convertible debentures converted to equity  
        securities                                     83,358         -        -
       Common and Series B Special Stock issued in 
        the BGII  Acquisition                          42,738         -        -
       BGII common stock purchased in fiscal year 
        1995 and canceled upon consummation of the 
        BGII Acquisition                               10,481         -        -
       Accrual of contingent payment to RCC             1,000         -        -

      Payments  for interest  expense in fiscal  years 1996,  1997 and 1998 were
      approximately $8.0 million, $22.5 million and $19.9 million, respectively.
      Payments  for  income  taxes in  fiscal  years  1996,  1997 and 1998  were
      approximately $0.3 million, $3.5 million and $7.3 million, respectively.

8.    COMMITMENTS AND CONTINGENCIES

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

      The Company is obligated under several patent  agreements to pay royalties
      ranging  from  approximately  $50  to  $200  per  game  depending  on  the
      components in the gaming machines.  Additionally, based on an amendment to
      the trademark  licensing  agreement  between BGII and Bally  Entertainment
      Corporation  dated May 10, 1996, the Company is obligated to pay a royalty
      on new machines sold or leased after June 18, 1996 of $35 per machine with
      a minimum annual royalty payment of $1.0 million for the initial five-year
      term of the  amended  agreement,  which  is  subject  to  annual  renewals
      thereafter  at the  option of the  Company.  Royalty  expense  under  this
      agreement for the years ended June 30, 1997 and 1998 was $1.0 million.

      The  Company  leases  office  space,   equipment,   warehouse  and  repair
      facilities,  Route Operation  locations,  casino and other locations under
      non-cancelable  operating leases.  Certain Route Operation location leases
      provide only for  contingent  rentals  based upon a  percentage  of gaming
      revenue and are  cancelable  at any time by either party.  Future  minimum
      rentals under non-cancelable operating leases at June 30, 1998 are:

                                         Years ended June 30,                  
                                             (In 000's)
                          1999    2000   2001    2002   2003  Thereafter  Total
      Minimum rentals  $13,039  $9,106  $7,099  $4,984 $3,490  $38,297  $76,015
      Total sublease 
       income           (1,314)  (915)    (566)   (535)  (462)  (1,959)  (5,751)
                        -------------------------------------------------------
      Net minimum 
       rentals         $11,725 $8,191   $6,533  $4,449 $3,028  $36,338  $70,264
                       ========================================================
<PAGE>

      Operating lease rental expense,  including  contingent lease rentals,  for
      years ended June 30, 1996, 1997 and 1998 was as follows:

                                              1996         1997         1998
                                                        (In 000's)
          Minimum rentals                   $10,194      $15,126      $15,534
          Contingent rentals                 60,525       70,744       85,915
                                             ------       ------       ------
                                             70,719       85,870      101,449
          Sublease rental income             (1,487)      (1,606)      (2,136)
                                             ------       ------       ------
                                            $69,232      $84,264      $99,313
                                            =======      =======      =======

      Pursuant to the  transactions  consummated  in March 1995,  Rainbow Casino
      Corporation  (RCC), the former owner of 55% of the Rainbow Casino,  is now
      entitled to receive 10% of the net available  cash flow after debt service
      and other items, as defined (which amount  increases to 20% of such amount
      when revenues exceed $35.0 million but only on such  incremental  amount),
      for a period of 15 years.  In addition,  the  agreement  with RCC required
      that, if under defined  circumstances  the casino achieved  earnings of at
      least $10.5 million before deducting depreciation,  amortization,  royalty
      and income  taxes,  then the Company would be obligated to make a one time
      payment to certain principals of the original  partnership of $1.0 million
      which  payment was earned in the year ended June 30, 1996 and paid in cash
      in September 1996.

      During  fiscal 1996,  Bally Wulff  increased the amount of tax reserves by
      $1.0  million  (to a  total  reserve  of  $1.4  million)  as a  result  of
      developments  in an ongoing  quadrennial  audit of Wulff's tax returns for
      the years 1988 through  1991.  The German tax  authorities  have  proposed
      preliminary  adjustments  which  range from $1.4  million  (which has been
      accrued) to $5.0 million.  The German tax authorities  have not yet issued
      the final assessment from their quadrennial audit.

      Litigation

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

      In an  action  filed on  December  2,  1996,  the  Company  was named as a
      defendant in an action brought by Canpartners  Investments IV and Cerberus
      Partners,   relating  to  loan   commitment   letters  from  August  1995,
      contemplating that the plaintiffs would lend  approximately  $30.0 million
      to partially  fund the  Company's  then pending  hostile  tender offer for
      BGII. In August 1998 the Company and the plaintiffs settled the litigation
      for approximately $2.0 million which has been accrued for at June 30, 1998

      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.


<PAGE>



9.    CONCENTRATION OF CREDIT RISK

      The  financial   instruments  that  potentially  subject  the  Company  to
      concentrations  of credit risk consist  principally  of accounts and notes
      receivable.  Each of the Company's business units conducts business in and
      the resulting  receivables are  concentrated in specific  legalized gaming
      regions.  The ComAt June 30, 1998 net  accounts  and notes  receivable  by
      region as a percentage of total net receivables are as follows:

<TABLE>
<CAPTION>

                             Gaming    Wall Machines
                            Equipment  and Amusement    Route       Casino
                           and Systems    Games       Operations  Operations  Total
      <S>                     <C>         <C>           <C>          <C>       <C>  
      Germany                 0.3         45.6%          --%          --%      45.9%
      Other international
       jurisdictions         25.7          0.5           --           --       26.2
      Nevada                  9.1           --          5.7           --       14.7
      Michigan                5.7           --           --           --        5.7
      Mississippi             1.1                        --          0.1        1.2
      Atlantic City           1.0           --           --           --        1.0
      Others individually
       less than 5%           5.3           --           --           --        5.3
                             ----         ----         ----         ----       ----
                             48.2%        46.1%         5.7%         0.1%     100.0%
                             ====         ====         ====         ====      =====
</TABLE>

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

10.   SEGMENT INFORMATION

     The  Company  has  operations  based  primarily  in Germany  and the United
     States. The German  operation's  customers are a diverse group of operators
     of wall machines and amusement  games at arcades,  hotels,  restaurants and
     taverns,  primarily in Germany. Gaming Equipment and Systems' customers are
     primarily casinos and gaming machine  distributors in the United States and
     abroad.  Receivables  of the German  operations  and Gaming  Equipment  and
     Systems  are  generally   collateralized  by  the  related  equipment.  See
     "Concentration of Credit Risk".

     The table  below  presents  information  as to the  Company's  identifiable
     assets  and  revenues,   operating   income,   capital   expenditures   and
     depreciation and amortization by geographic region for the years ended June
     30, 1997 and 1998.

                                                  At June 30,
                                              1997           1998
                                                   (In 000's)
             Identifiable assets:
                Germany                    $110,371        $106,886
                United States               242,450         265,922
                Eliminations                   (805)         (5,971)
                                            -------         -------
                Consolidated               $352,016        $366,837
                                           ========        ========
    
                                         Year ended June 30, 1997
                                                 (In 000's)
                                     Operating      Capital     Depreciation and
                         Revenues      Income      Expenditures   Amortization
         Germany         $142,961      $23,356        $ 2,091       $ 6,579
         United States    311,334       19,346         11,166        16,027
         Eliminations      (9,149)      (1,243)             -             -
                           ------       ------         ------        ------
         Consolidated    $445,146      $41,459        $13,257       $22,606
                         ========      =======        =======       =======   
                 
<PAGE>

                                    Year ended June 30, 1998
                                             (In 000's)
                                      Operating       Capital   Depreciation and
                         Revenues       Income     Expenditures   Amortization
         Germany         $111,505      $13,978        $ 1,372       $ 5,747
         United States    314,100       22,311         14,169        17,091
         Eliminations      (8,233)         (26)             -             -
                          -------       ------         ------        ------
         Consolidated    $417,372      $36,263        $15,541       $22,838
                         ========      =======        =======       =======

11.   INTERIM FINANCIAL INFORMATION (Unaudited)

      Following is the unaudited  quarterly results of the Company for the years
      ended  June 30,  1997 and 1998.  This  information  is not  covered by the
      Independent Auditors' Report.

<TABLE>
<CAPTION>
                                                                Quarter
                                         First           Second         Third         Fourth
                                                   (In 000's, except per share data)
                           1997
         <S>                           <C>             <C>            <C>            <C>     
         Revenues                      $102,912        $128,703       $101,691       $111,840
         Operating income                 8,956          13,909          8,882          9,712
         Net income                         635           4,145            561            444
         Net income (loss) applicable 
          to common shares               (2,261)          1,051         (2,420)        (2,559)
         Income (loss) per share         $(0.07)          $0.03         $(0.08)        $(0.08)
</TABLE>

<TABLE>
<CAPTION> 
                                                                Quarter
                                         First          Second          Third          Fourth
                                                   (In 000's, except per share data)
                           1998
         <S>                            <C>            <C>            <C>            <C>     
         Revenues                       $97,971        $106,714       $102,226       $110,461
         Operating income                 7,444          11,442          7,988          9,389
         Net income (loss)              (60,909)          3,346           (731)           988
         Net income (loss) applicable 
          to common shares              (79,862)          2,973         (1,115)           594
         Income (loss) per share         $(2.51)          $0.09         $(0.03)         $0.02
</TABLE>


      12.   CONSOLIDATING FINANCIAL STATEMENTS

      The following  consolidating financial statements are presented to provide
      certain financial information regarding  guaranteeing and non-guaranteeing
      subsidiaries in relation to the Company's Senior  Subordinated Notes which
      were issued in the Refinancing  transaction  completed in August 1997 (see
      note 4). The financial  information  presented  includes  Alliance  Gaming
      Corporation (the "Parent") and its wholly-owned  guaranteeing subsidiaries
      (together   the  "Parent   and   Guaranteeing   Subsidiaries"),   and  the
      non-guaranteeing subsidiaries Video Services, Inc., United Gaming Rainbow,
      BGI  Australia  Pty.  Limited,  Bally  Gaming de Puerto  Rico,  Inc.,  and
      Alliance  Automaten GmbH & Co. KG (the subsidiary that holds the Company's
      German  interests)  (together the  "Non-Guaranteeing  Subsidiaries").  The
      notes to consolidating  financial statements should be read in conjunction
      with these consolidating financial statements.




<PAGE>

                         CONSOLIDATING BALANCE SHEETS
                                June 30, 1997
                                  (In 000's)
                                    ASSETS
<TABLE>
<CAPTION>

                                                                            Alliance
                                                                             Gaming
                                        Parent and     Non-                Corporation
                                      Guaranteeing  Guaranteeing  Elimina-      and
                                      Subsidiaries  Subsidiaries    tions  Subsidiaries
<S>                                       <C>         <C>        <C>        <C>   
Current assets:  
  Cash and cash equivalents               $ 16,462    $ 12,462   $    -     $  28,924
  Accounts and notes receivable, net        31,799      57,207      (1,305)    87,701
  Inventories, net                          19,231      18,778        (680)    37,329
  Other current assets                       6,695       2,932        -         9,627
                                            ------      ------     -------     ------
     Total current assets                   74,187      91,379      (1,985)   163,581
Long-term notes receivable, net             96,271       1,501     (88,791)     8,981
Leased equipment, net                            -       7,902        -         7,902
Property, plant and equipment, net          41,836      32,811        -        74,647
Excess of costs over net assets of acquired
  businesses, net                           41,185      21,031        (118)    62,098
Intangible assets, net                      17,979         252        -        18,231
Investments in subsidiaries                100,605        -       (100,605)      -
Deferred tax assets                          6,265       5,511        -        11,776
Other assets, net                           16,045     (11,269)         24      4,800
                                           -------     -------     -------    -------
                                          $394,373    $149,118   $(191,475)  $352,016
                                          ========    ========   =========   ========

              LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
  Accounts payable                        $  9,936     $ 4,262    $     72   $ 14,270
  Accrued liabilities                       21,129      16,727        (464)    37,392
  Current maturities of long-term debt         585       1,348        (809)     1,124
                                             -----      ------       -----     ------
     Total current liabilities              31,650      22,337      (1,201)    52,786
Senior Secured Notes, net                  151,224        -           -       151,224
Other long-term debt, less current 
  maturities                                87,924      22,676     (89,109)    21,491
Other liabilities                            9,366       3,500        (433)    12,433
     Total liabilities                     280,164      48,513     (90,743)   237,934
                                           -------      ------     -------    -------
Minority interest                            1,546        -           -         1,546
Series B Special Stock                      58,981        -           -        58,981
Commitments and contingencies
Stockholders' equity (deficiency):
   Series E Special Stock                   12,368        -          -         12,368
   Common Stock                              3,185      17,832    (17,832)      3,185
   Additional paid-in capital              138,590      68,699    (68,699)    138,590
   Cumulative translation adjustment       (11,719)    (11,880)    11,880     (11,719)
   Retained earnings (accumulated 
     deficit)                              (88,742)     25,954    (26,081)    (88,869)
     Total stockholders' equity 
      (deficiency)                          53,682     100,605   (100,732)     53,555
                                            ------     -------    -------      ------
                                          $394,373    $149,118  $(191,475)   $352,016
                                          ========    ========   ========    ========
</TABLE>


                           See accompanying notes.




<PAGE>


                         CONSOLIDATING BALANCE SHEETS
                                June 30, 1998
                                  (In 000's)
                                    ASSETS
<TABLE>
<CAPTION>
                                      
                                                                             Alliance
                                                                              Gaming
                                        Parent and     Non-                Corporation
                                      Guaranteeing  Guaranteeing  Elimina-      and
                                      Subsidiaries  Subsidiaries    tions  Subsidiaries
<S>                                        <C>        <C>        <C>        <C> 
Current assets:
  Cash and cash equivalents                $ 8,609    $ 14,878   $    -     $  23,487
  Accounts and notes receivable, net        44,757      52,380      (3,678)    93,459
  Inventories, net                          27,957      14,990        (529)    42,418
  Other current assets                       7,998       3,713        -        11,711
                                            ------      ------    --------    -------
     Total current assets                   89,321      85,961      (4,207)   171,075
Long-term notes receivable, net             95,036       1,926     (89,031)     7,931
Leased equipment, net                            2       7,323        -         7,325
Property, plant and equipment, net          45,052      32,853        -        77,905
Excess of costs over net assets of acquired
  businesses, net                           39,963      19,989        -        59,952
Intangible assets, net                      26,248         484        -        26,732
Investments in subsidiaries                104,219        -       (104,219)      -
Deferred tax assets                          7,123       4,344        -        11,467
Other assets, net                           15,330      (5,468)     (5,412)     4,450
                                           -------      ------    ---------   -------
                                          $422,294    $147,412   $(202,869)  $366,837
                                          ========    ========   ==========  ========

              LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
  Accounts payable                         $ 7,373     $ 3,104   $    -      $ 10,477
  Accrued liabilities                       26,415      13,705        (998)    39,122
  Current maturities of long-term debt       6,912       3,176      (8,092)     1,996
                                            ------      ------      -------    ------
     Total current liabilities              40,700      19,985     (9,090)    51,595
Term loan facilities                       137,800        -           -       137,800
Senior Subordinated Notes due 2007, net    149,245        -           -       149,245
Other long-term debt, less current 
  maturities                               105,279      20,878     (89,245)    36,912
Other liabilities                           10,729       2,330        (341)    12,718
     Total liabilities                     443,753      43,193     (98,676)   388,270
                                           -------      ------     --------   -------
Minority interest                            2,315        -           -         2,315
Commitments and contingencies
Stockholders' equity ( deficiency):
   Series E Special Stock                   13,732        -          -         13,732
   Common Stock                              3,212      17,832    (17,832)      3,212
   Additional paid-in capital              122,980      68,700    (68,700)    122,980
   Cumulative translation adjustment       (13,946)    (14,140)    14,140     (13,946)
   Retained earnings (accumulated deficit)(149,752)     31,827    (31,801)   (149,726)
     Total stockholders' equity 
      (deficiency)                         (23,774)    104,219   (104,193)    (23,748)
                                            ------     -------    -------      ------
                                          $422,294    $147,412  $(202,869)   $366,837
                                          ========    ========   ========    ========
</TABLE>

                           See accompanying notes.




<PAGE>

                    CONSOLIDATING STATEMENTS OF OPERATIONS

                           Year ended June 30, 1996
                                  (In 000's)
<TABLE>
<CAPTION>

                                                                       Alliance
                                                                        Gaming
                                  Parent and      Non-                Corporation
                                 Guaranteeing Guaranteeing Elimina-       and
                                 Subsidiaries Subsidiaries   tions   Subsidiaries
<S>                                  <C>           <C>       <C>        <C>  
Revenues:
  Gaming equipment and systems       $ 11,700      $1,223    $(2,348)   $ 10,575
  Wall machines and amusement games      -          3,356        -         3,356
  Route operations                     93,037      16,901        -       109,938
  Casino operations                    14,747      33,862       (100)     48,509
                                      -------      ------     -------     ------
                                      119,484      55,342     (2,448)    172,378
                                      -------      ------     -------    -------
Costs and expenses:
  Cost of gaming equipment and systems  8,531       1,030     (2,348)      7,213
  Cost of wall machines and amusement 
    games                                -          2,022        -         2,022
  Cost of route operations             73,436      10,776        -        84,212
  Cost of casino operations             9,722      12,324        -        22,046
  Selling, general and administrative  19,652      11,710        (92)     31,270
  Research and development                236         134        -           370
  Depreciation and amortization         8,746       2,242        -        10,988
  Direct acquisition costs             55,843         -          -        55,843
  Unusual items                         5,498         -          -         5,498
                                        -----      ------     ------      ------
                                      181,664      40,238     (2,440)    219,462
                                      -------      ------     ------     -------

Operating income (loss)               (62,180)     15,104         (8)    (47,084)

Earnings in consolidated subsidiaries   8,378         -       (8,378)        -

Other income (expense):
  Interest income                       1,654         391       (474)      1,571
  Interest expense                     (7,407)     (1,964)       474      (8,897)
  Rainbow royalty                        -         (4,070)       -        (4,070)
  Minority interest                      (963)        -          -          (963)
  Other, net                              987         209       (895)        301
                                        -----       -----       -----      -----

Income (loss) before income taxes    (59,531)      9,670      (9,281)    (59,142)

Income tax provision                    (366)     (1,292)        903        (755)
                                       ------     -------      -----      ------

Net income (loss)                    (59,897)      8,378      (8,378)    (59,897)
Special Stock dividends                 (362)       -            -          (362
                                      ------       -----       -----      ------    
Net income (loss) applicable to 
  common shares                     $(60,259)    $ 8,378    $ (8,378)   $(60,259)
                                    ========     =======     =======    ======== 
</TABLE>

                           See accompanying notes.




<PAGE>

                     CONSOLIDATING STATEMENTS OF OPERATIONS

                           Year ended June 30, 1997
                                  (In 000's)
<TABLE>
<CAPTION>

                                                                         Alliance
                                                                          Gaming
                                   Parent and       Non-                 Corporation
                                  Guaranteeing  Guaranteeing  Elimina-       and
                                  Subsidiaries  Subsidiaries    tions   Subsidiaries
<S>                                   <C>         <C>        <C>         <C>     
Revenues:
  Gaming equipment and systems        $130,764    $ 11,070   $ (7,100)   $134,734
  Wall machines and amusement games        -       131,954        (20)    131,934
  Route operations                     108,148      18,880        -       127,028
  Casino operations                     11,738      39,712        -        51,450
                                       -------     -------     ------    --------
                                       250,650     201,616     (7,120)    445,146
                                       -------     -------     -------    -------
Costs and expenses:
  Cost of gaming equipment and systems  82,673       8,796     (6,973)     84,496
  Cost of wall machines and amusement 
    games                                    -      68,437        (11)     68,426
  Cost of route operations              83,592      12,124        -        95,716
  Cost of casino operations              7,528      14,741        -        22,269
  Selling, general and administrative   53,913      45,616         (9)     99,520
  Research and development               6,701       3,253        -         9,954
  Depreciation and amortization         13,390       9,216        -        22,606
  Unusual items                            700           -        -           700
                                        ------     -------     ------     -------
                                       248,497     162,183     (6,993)    403,687
                                       -------     -------     ------     -------

Operating income (loss)                  2,153      39,433       (127)     41,459

Earnings in consolidated subsidiaries   23,624           -    (23,624)        -

Other income (expense):
  Interest income                        1,635         369       (384)      1,620
  Interest expense                     (21,042)     (2,968)       384     (23,626)
  Rainbow royalty                            -      (4,722)       -        (4,722)
  Minority interest                     (1,092)        -          -        (1,092)
  Other, net                               135           4        -           139
                                         -----       -----     ------      ------

Income before income taxes               5,413      32,116    (23,751)     13,778

Income tax benefit (provision)             499      (8,492)       -        (7,993)
                                         -----      -------    ------      ------

Net income                               5,912      23,624    (23,751)      5,785
Special Stock dividends                (11,974)          -          -     (11,974)
                                       -------      ------     ------     -------  
Net income (loss) applicable to 
  common shares                        $(6,062)    $23,624   $(23,751)    $(6,189)
                                       =======     =======    =======     =======  
</TABLE>


                           See accompanying notes.




<PAGE>

                    CONSOLIDATING STATEMENTS OF OPERATIONS
                           Year ended June 30, 1998
                                  (In 000's)
<TABLE>
<CAPTION>

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

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

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

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

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

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

Special Stock dividends                 (3,551)        -           -        (3,551)
Premium on repurchase of Series B 
  Special Stock                        (16,553)        -           -       (16,553)
                                       -------      ------     -------     -------
Net income (loss) applicable to 
  common shares                       $(77,436)    $22,844    $(22,818)   $(77,410)
                                      ========     =======    ========    ========

</TABLE>

                              See accompanying unaudited note.





<PAGE>


                    CONSOLIDATING STATEMENTS OF CASH FLOWS
                           Year ended June 30, 1996
                                  (In 000's)
<TABLE>
<CAPTION>

                                                                               Alliance
                                                                                Gaming
                                           Parent and     Non-                Corporation
                                         Guaranteeing  Guaranteeing  Elimina-     and
                                         Subsidiaries  Subsidiaries   tions   Subsidiaries
<S>                                          <C>         <C>        <C>        <C>    
Cash flows from operating activities: 
    Net income (loss)                        $(59,897)   $ 8,378    $(8,378)   $(59,897)
    Adjustments to reconcile net income (loss)
      to net cash provided by (used in) 
      operating activities:
    Depreciation and amortization               8,746      2,242          -      10,988
    Amortization of debt discounts                  9        236          -         245
    Loss on debenture conversion               30,079         -           -      30,079
    Write down of other assets                  6,117        (22)         -       6,095
    (Gain) loss on sale of assets                 (13)       118          -         105
    Provision for doubtful receivables            973         47          -       1,020
    Other                                       2,839     (1,295)         -       1,544
  Change in  operating  assets and  liabilities,  
     net of  effects of  businesses acquired:
    Accounts and notes receivable              (3,642)    (2,389)         97     (5,934)
    Inventories                                 5,754         90          -       5,844
    Other current assets                       (1,508)     1,413          -         (95)
    Intercompany accoumts                      (7,038)    (1,340)      8,378         -
    Accounts payable                           (3,195)     1,403         (97)    (1,889)
    Accrued liabilities                        12,930       (174)         24     12,780
                                               ------      ------      -----     ------
     Net cash provided by (used in) operating 
       activities                              (7,846)     8,707          24        885
                                                        
Cash flows from investing activities:
  Acquisitions of businesses, net of cash 
    acquired                                  (79,209)        -           -     (79,209)
  Additions to property, plant and equipment   (6,290)    (1,811)         -      (8,101)
  Proceeds from disposal of property and 
    equipment                                   2,106        176          -       2,282
  Proceeds from sales of securities available 
    for sale                                   13,516         -           -      13,516
  Other                                        (7,156)     2,065          -      (5,091)
                                               ------      -----       -----     ------
     Net cash provided by (used in) investing 
       activities                             (77,033)       430          -     (76,603)
                                            
Cash flows from financing activities:
  Proceeds from long-term debt                155,236      1,301        (645)   155,892
  Capitalized debt issuance costs             (10,472)       -            -     (10,472)
  Reduction of long-term debt                 (47,233)    (4,834)        621    (51,446)
  Issuance of Series B Special Stock, net of 
    discount                                   15,000        -            -      15,000
  Issuance of common stock                      4,400        -            -       4,400
  Convertible debentures conversion fees       (3,333)       -            -      (3,333)
                                               ------      -----      -----     -------
     Net  cash   provided  by  (used  in)   
      financing   activities                  113,598     (3,533)        (24)   110,041 
Cash and cash equivalents:
     Increase for year                         28,719      5,604          -      34,323
     Balance, beginning of year                 8,235      5,499          -      13,734
                                               ------     ------      ------     ------
     Balance, end of year                     $36,954    $11,103     $    -     $48,057
                                              =======    =======     =======    =======

</TABLE>


                           See accompanying notes.





<PAGE>

                    CONSOLIDATING STATEMENTS OF CASH FLOWS
                           Year ended June 30, 1997
                                  (In 000's)
<TABLE>
<CAPTION>

                                                                                Alliance
                                                                                 Gaming
                                          Parent and      Non-                 Corporation
                                         Guaranteeing  Guaranteeing  Elimina-     and
                                         Subsidiaries  Subsidiaries   tions    Subsidiaries
<S>                                          <C>         <C>        <C>        <C>    
Cash flows from operating activities:
    Net income                               $  5,912    $23,624    $(23,751)  $  5,785
  Adjustments to reconcile net income to 
      net cash provided by (used in) 
      operating activities:
     Depreciation and amortization             13,390      9,216          -      22,606
     Amortization of debt discounts               295        512          -         807
     Write down of other assets                   803        272          -       1,075
     Loss on sale of assets                       503        730          -       1,233
     Provision for doubtful receivables         5,049      4,010          -       9,059
     Other                                         32       (683)         -        (651)
   Net change in operating assets and liabilities:
     Accounts and notes receivable              1,912    (10,495)      3,982     (4,601)
     Inventories                                4,587    (12,165)        680     (6,898)
     Other current assets                        (287)    (1,262)         -      (1,549)
     Intercompany accounts                    (20,472)     5,673      14,799          -
     Accounts payable                          (4,425)      (177)      2,632     (1,970)
     Accrued liabilities                       (8,943)     7,269         914       (760)
                                               ------     ------       -----     ------
      Net cash provided by (used in) operating  
        activities                             (1,644)    26,524        (744)    24,136 

Cash flows from investing activities:
   Additions to property, plant and equipment  (9,198)    (4,059)         -     (13,257)
   Proceeds from disposal of property, plant  
     and equipment                                 78        176          -         254
   Other additions to long-term assets         (8,375)      (199)         -      (8,574)
                                               ------     ------       -----     ------
     Net cash used in investing activities    (17,495)    (4,082)         -     (21,577)                                            

Cash flows from financing activities:
   Reduction of long-term debt                   (767)    (6,751)        744     (6,774)
   Net change in credit lines                  (7,525)    (4,053)         -     (11,578)
   Repurchase of Series B Special Stock        (3,879)        -           -      (3,879)
   Proceeds from exercise of stock options        767         -           -         767
   Dividends received (paid)                   10,051    (10,051)         -          -
                                              -------    -------        ----    -------
     Net cash used in financing activities     (1,353)   (20,855)        744    (21,464)
                        
  Effect of exchange rate changes on cash           -       (228)         -        (228)
  Cash and cash equivalents:
   Increase (decrease) for period             (20,492)     1,359          -     (19,133)
   Balance, beginning of period                36,954     11,103          -      48,057
                                              -------    -------        ----    -------
   Balance, end of period                     $16,462    $12,462      $   -     $28,924
                                              =======    =======      ======    =======

</TABLE>

                              See accompanying unaudited note.




<PAGE>


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

                                                                                Alliance
                                                                                 Gaming
                                         Parent and       Non-                Corporation
                                         Guaranteeing  Guaranteeing  Elimina-     and
                                         Subsidiaries  Subsidiaries   tions   Subsidiaries
<S>                                          <C>         <C>        <C>         <C> 
Cash flows from operating activities:  
    Net income (loss)                        $(57,332)   $22,844    $(22,818)   $(57,306)
  Adjustments to reconcile net income 
      (loss)to net cash provided by 
      (used in) operating activities:
     Depreciation and amortization             14,181      8,657          -       22,838
     Amortization of debt discounts                44         -           -           44
     Extraordinary item                        42,033         -           -       42,033
     Write down of other assets                 2,447         -         (118)      2,329
     (Gain) loss on sale of assets                185        (52)         -          133
     Provision for losses on (recovery of) 
       receivables                             (8,278)     1,084          -       (7,194)
     Other                                       (140)        (3)         92         (51)
   Net change in operating assets and liabilities:
     Accounts and notes receivable             (4,795)     3,318       3,423       1,946
     Inventories                               (8,870)      (200)       (151)     (9,221)
     Other current assets                      (1,100)    (1,912)         -       (3,012)
     Intercompany accounts                    (17,688)      (430)     18,118          -
     Accounts payable                          (2,563)    (1,158)        (72)     (3,793)
     Accrued liabilities                        6,150     (3,022)       (534)      2,594
                                              -------     ------       -----       -----
      Net cash provided by (used in operating
        activities                            (35,726)    29,126      (2,060)     (8,660) 

Cash flows from investing activities:
   Additions to property, plant and equipment (11,534)    (4,007)        -       (15,541)
   Proceeds from disposal of property, plant 
     and equipment                                (88)       143         -            55
   Additions to long-term assets               (9,263)    (5,873)      5,503      (9,633)
      Net cash used in investing activities   (20,885)    (9,737)      5,503     (25,119)
                                              -------     ------       -----     -------
  Cash flows from financing activities:
  Refinancing fees and expenses               (32,752)        -           -      (32,752)
  Capitalized debt issuance costs             (11,456)        -           -      (11,456)
  Proceeds from long-term debt                309,318         -       (5,584)    303,734
   Reduction of long-term debt               (179,348)    (2,540)      2,141    (179,747)
   Net change in credit lines                  22,738      2,660          -       25,398
   Redemption of Series B Special Stock       (77,568)        -           -      (77,568)
   Proceeds from exercise of stock options        855         -           -          855
   Dividends received (paid)                   16,971    (16,971)         -           -                 
                                              -------    -------      ------     -------
      Net cash provided by (used in) 
        financing activities                   48,758    (16,851)     (3,443)     28,464
                                                                

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

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

                              See accompanying unaudited note.




<PAGE>


Basis of Presentation

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

Debt and Lines of Credit

Long-term debt and lines of credit at June 30, 1998 consist of the following :
                                                                     Alliance
                                                                      Gaming
                              Parent and     Non-                   Corporation
                             Guaranteeing  Guaranteeing  Elimina-       and
                             Subsidiaries  Subsidiaries    tions   Subsidiaries
                                                            (in 000's)
10% Senior Subordinated Notes due
    2007, net of unamortized 
     discount                 $149,245     $   -     $   -       $149,245
Term loan facilities:
  Tranche B Term Loan           74,438         -         -         74,438
  Tranche C Term Loan           39,700         -         -         39,700
  Delayed Draw Term Facility    25,000         -         -         25,000
Revolving Credit Facility       22,700      12,271       -         34,971
Intercompany notes payable      88,096       9,241   (97,337)         -
Other                               57       2,542        -         2,599
                               -------      ------   -------      -------
                               399,236      24,054   (97,337)     325,953
Less current maturities          6,912       3,176    (8,092)       1,996
                               -------      ------   -------      -------
Long-term debt, less current
  maturities                  $392,324     $20,878  $(89,245)    $323,957
                              ========     =======  ========     ========

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, 1997 are as follows (in 000's):

<TABLE>
<CAPTION>

                                                                            Alliance
                                                                             Gaming
                                      Parent and     Non-                 Corporation
                                    Guaranteeing  Guaranteeing  Elimina-      and
                                    Subsidiaries  Subsidiaries   tions    Subsidiaries
<S>                                     <C>           <C>       <C>         <C>        
Deferred Tax Assets: 
 Net operating loss carry forwards      $ 6,049       $         $           $ 6,049
 Foreign tax credit carry forwards       11,843                              11,843
 Inventory obsolescence reserves          3,360         648                   4,008
 Bad debt reserves                        6,359                               6,359
 Accruals not currently deductible
  for tax purposes                        3,585                               3,585
 Other                                    4,541       4,863                   9,404
                                          -----      ------      -----        -----
Total gross deferred tax assets          35,737       5,511                  41,248
Less:  Valuation allowance               29,472                              29,472
                                         ------      ------      -----       ------
Deferred tax assets                      $6,265     $ 5,511     $  -       $ 11,776
                                         ------     -------     ------     --------

</TABLE>

<TABLE>
<CAPTION>

                                                                          Alliance
                                                                           Gaming
                                     Parent and      Non-                 Corporation
                                    Guaranteeing  Guaranteeing  Elimina-      and
                                    Subsidiaries  Subsidiaries   tions    Subsidiaries
<S>                                      <C>       <C>          <C>        <C>          
Deferred Tax Liabilities:
  Property and equipment, principally
    due to depreciation differences      $3,703    $            $          $ 3,703
  Other                                   3,162     3,500                    6,662
                                          -----     -----       ----         -----
Total gross deferred tax liabilities      6,865     3,500                   10,365
                                          -----     -----       ----        ------
Net deferred tax assets (liabilities)    $ (600)   $2,011       $  -       $ 1,411
                                         ======    ======       ====        ======

</TABLE>


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, 1998 are as follows (in 000's):

<TABLE>
<CAPTION>

                                                                          Alliance
                                                                           Gaming
                                    Parent and     Non-                  Corporation
                                   Guaranteeing  Guaranteeing  Elimina-      and
                                   Subsidiaries  Subsidiaries   tions    Subsidiaries
<S>                                    <C>         <C>          <C>        <C>          
Deferred Tax Assets: 
  Net operating loss carry forwards    $15,254     $            $          $15,254
  Foreign tax credit carry forwards     12,816                              12,816
  Inventory obsolescence reserves        2,729        853                    3,582
  Bad debt reserves                      2,045         11                    2,056
  Accruals not currently deductible
      for tax purposes                   3,809        299                    4,108
  Refinancing costs being amortized
    for tax purposes                    13,125                              13,125
  Other                                  4,430      3,181                    7,611
                                        ------      -----       -----        -----
Total gross deferred tax assets         54,208      4,344                   58,552
Less:  Valuation allowance             (47,085)                            (47,085)
                                        ------      -----       -----       ------
Deferred tax assets                    $ 7,123    $ 4,344       $   -      $11,467
                                       -------    -------       -----      -------

Deferred Tax Liabilities:
  Property and equipment, principally
    due to depreciation differences    $ 3,268    $ 1,494       $          $ 4,762
  Other                                  4,332        836                    5,168
                                         -----      -----       -----        -----
Total gross deferred tax liabilities     7,600      2,330                    9,930
                                         -----      -----       -----        -----
Net deferred tax assets (liabilities)  $  (477)   $ 2,014       $   -      $ 1,537
                                       =======    =======       ======     =======

</TABLE>



<PAGE>




13.      RESERVES AND ALLOWANCES

     The  following  tables  represent the activity for each of the fiscal years
     ended June 30, 1996,  1997 and 1998 for each of the  valuation  reserve and
     allowance accounts (in 000,s):

<TABLE>
<CAPTION>

                                             Balance at                                  Balance at
                                            Beginning of                                   End of
                                                Year        Additions     Deductions        Year
 <S>                                            <C>           <C>            <C>            <C>    
         Allowance for doubtful accounts:
           Year ended June 30, 1998            $23,901       $ 2,722        $13,582 (b)    $13,041
           Year ended June 30, 1997             19,497         9,179          4,775         23,901
           Year ended June 30, 1996              1,659        18,995 (a)      1,157         19,497
 
         Inventory valuation allowance:
           Year ended June 30, 1998             $8,856       $   355         $2,414         $6,797
           Year ended June 30, 1997              9,484         1,719          2,347          8,856
           Year ended June 30, 1996                -          11,315 (a)      1,831          9,484

         Other assets valuation reserve:
           Year ended June 30, 1998             $3,502       $    18         $   32         $3,488
           Year ended June 30, 1997              3,679           162            339          3,502
           Year ended June 30, 1996                631         4,629          1,581          3,679

</TABLE>
_______________

(a)  Includes  reserves  assigned to BGII receivables  and inventory in purchase
     accounting of $17.6 million and $9.8 million, respectively.
(b)  Includes the $6.0 million net reversal of bad debt reserves  related to the
     resolution of certain  receivables  sold with recourse to General  Electric
     Capital  Corporation.  Such  amount was  included  in unusual  items in the
     accompanying consolidated statement of operations.