**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended June 30, 2005**

**OR**

**o**                                 TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from               to               **

**CommissionFile Number 0-4281**

**ALLIANCE GAMING CORPORATION**

(Exact name of registrantas 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 ofprincipal executive offices)

Registrant’s telephonenumber, including area code: **(702) 270-7600**

Securities registered pursuant to Section 12(b) ofthe Act:

**None**

Securities registered pursuant to Section 12(g) ofthe Act:

**CommonStock, $0.10 par value per share**

**(Titleof Class)**

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. o Yes  x  No

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’s knowledge,in definitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). x Yes   o  No

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). o Yes   x  No

The aggregate market valueof the common stock, $0.10 par value, held by non-affiliates of the registrant,computed based on the closing sale price as of December 31, 2004 of $13.81per share as reported by the New York Stock Exchange, was approximately$674,557,000.

According to the recordsof the registrant’s registrar and transfer agent, the number of shares of theregistrant’s common stock outstanding as of December 26, 2005 was52,137,166, which does not include 526,000 shares held in treasury.

 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**EXPLANATORY NOTE**

In this Annual Report on Form 10-K we arerestating the consolidated financial statements as of June 30, 2004 andfor the years ended June 30, 2004 and 2003 and the unaudited financialinformation for the fiscal quarters ended June 30, 2004, September 30,2004 and 2003, December 31, 2004 and 2003, March 31, 2005 and 2004,to reflect adjustments to our previously reported financial information forthose periods (the “restatement”).

We have not amended, anddo not intend to amend, any of our periodic reports previously filed with theSecurities and Exchange Commission (the “SEC”). Therefore, the consolidatedfinancial statements and other financial information in our previously filedperiodic reports for the dates and periods referred to above should not berelied upon.

**PART I**

**ITEM 1.**                BUSINESS

**General**

Operating under the name *Bally Gaming and Systems*, we are a worldwide leader indesigning, manufacturing and distributing traditional and nontraditional gamingmachines, having marketed over 100,000 gaming machines during the past fiveyears. We define traditional gaming machines as being Class III,casino-style games, and nontraditional gaming machines such as games that arecentrally determined or video lottery terminals (“VLTs”). We also design,integrate and sell highly specialized computerized monitoring systems thatprovide casinos with networked accounting and security services for theirgaming machines. In our systems business, we have over 276,000 game monitoringunits installed in casinos worldwide. We also own and operate a dockside casinoin Vicksburg, Mississippi, which has approximately 12 table games and 890gaming devices (“Casino Operations”). You can find further informationregarding our individual business units in the notes to our consolidatedfinancial statements included in this Annual Report on Form 10-K.

We were incorporated inNevada on September 30, 1968, under the name Advanced Patent Technology. In1983, we changed our name to Gaming and Technology, Inc., and to UnitedGaming, Inc., in 1988. We became Alliance Gaming Corporation on December 19,1994. We conduct our gaming operations through directly and indirectly ownedsubsidiaries. Unless the context requires otherwise, the terms “Alliance,” “theCompany,” “we” and “our” as used herein refer to Alliance Gaming Corporationand subsidiaries. Our principal executive offices are located at 6601 SouthBermuda Road, Las Vegas, Nevada 89119; telephone (702) 270-7600. Ourinternet address is *www.alliancegaming.com*.Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and all amendments to those reports areavailable on our website, free of charge, as soon as reasonably practicableafter such material is electronically filed with or furnished to the SEC. Copiesof our Corporate Governance Guidelines, Code of Ethics and Business Conductapplicable to our officers, directors and employees and the charters for theAudit, Nominating and Corporate Governance and Compensation Committees of ourBoard of Directors are available on our website by following the links to “InvestorRelations” and “Corporate Governance” or upon written request to our CorporateSecretary at the address set forth above.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

*Acquisitions*

On March 2, 2004, we purchased Sierra DesignGroup (“SDG”), a leading supplier of Class II and Class III gamingdevices, systems and technology, for aggregate initial consideration ofapproximately $126.4 million. The initial purchase price consisted of $108.6million of cash, 662,000 shares of our common stock valued at $11.9 million,the assumption of approximately $8 million of debt and certain transaction feesand expenses. In addition, an earn out provision provided for the payment of upto $95.6 million in additional consideration upon certain financial targetsbeing achieved in the subsequent three-year period. In December 2004,the Company and the selling shareholders settled the earn out for a fixedamount of $40.0 million, consisting of a one-time cash payment of $12.0 millionand the issuance of a subordinated note of $28.0 million. In June 2005,the Company extinguished $14.0 million of the note and accrued interest thereon, by issuing approximately 1.0 million shares of common stock to the noteholders. The acquisition of SDG in March 2004 provides us with significanttechnology-based assets including the Alpha Game Engine, as well as positionedus to take advantage of significant opportunities in both the domestic andinternational markets, from the technology advances in traditional casino stylegaming to the Class II environments with central determination features.

On February 19, 2004, we acquired substantiallyall of the assets and liabilities of MindPlay LLC (“MindPlay”), a leadingdeveloper of advanced table game technologies, for aggregate initialconsideration of approximately $16.8 million. The initial purchase priceincluded $9 million cash, a $4 million note payable, the assumption ofapproximately $2 million of debt and the issuance of warrants to purchase100,000 shares of our common stock which were valued at approximately $0.9million. In addition, an earn out provision provided for the payment of 10% ofgross margin from the sale of MindPlay products in the first seven yearssubsequent to the acquisition, and 4.25% of gross margin for the next sixyears, subject to adjustments pursuant to the conditions contained in the saleagreement. The MindPlay technologies are designed to provide data andinformation to casino operators to improve customer service, to provideenhanced security and to increase profitability by lowering the cost ofoperation and enhancing the casino patron experience. Under the protection of anumber of patents acquired, we envision a series of new table game productsthat can potentially redefine the market with the advances of automation andnew gaming features to attract and retain table game players. 

On December 31, 2003, we acquired all of the assets of U.K.based Crown Gaming from Crown Leisure Limited for aggregate consideration of$3.9 million. The acquisition of Crown Gaming, which included Crown’sdistributorship agreements for a wide variety of automated table games andvideo bingo machines, strategically built on the Company’s focus towards futuregrowth in the U.K. and Europe.

On April 9, 2003, we acquired all of the assets ofMicro Clever Consulting (“MCC”) for $11.3 million, and on May 28, 2003, weacquired the assets of HoneyFrame Systems Company (“HSC”) for $4.9 million. Bothof these companies provide systems products, primarily to our internationalcustomers.

*Dispositions*

During fiscal year 2005 and 2004, we completed thedisposition of certain of our “non-core” assets. The dispositions were asfollows:

·       on October 14, 2004 wecompleted the sale of our interest in our Louisiana route operations foraggregate consideration of $2 million;

·       on June 30, 2004 wecompleted the sale of our Nevada route operations for aggregate considerationof $105 million;

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

·       on May 3, 2004 wecompleted the sale of our Rail City Casino for aggregate consideration of $37.9million; and

·       on July 18, 2003 we completed the sale of our BallyWulff wall machine and amusement games business for aggregate consideration of$16.5 million.

*FinancialInformation*

The financial information required with respect to each ofour business segments and with respect to geographical areas can be found inthe consolidated financial statements included in this Annual Report on Form 10-Kand the related notes.

**BallyGaming and Systems**

*Overview*

The Bally Gaming and Systemsbusiness unit consists of three divisions: Gaming Equipment, Systems and GamingOperations. The following table sets forth the percentages of revenues of BallyGaming and Systems provided by each division for the periods indicated:

| ** **                        | ** ** | **Percentage of Revenues**    | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **Years ended June 30,** | ** ** |
| **Revenue by Division** | ** ** | ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gaming Equipment                  |       |                                    | 47         | % |   |   | 53 | % |   |   | 56 | % |   |
| Systems                           |       |                                    | 23         | % |   |   | 29 | % |   |   | 26 | % |   |
| Gaming Operations                 |       |                                    | 30         | % |   |   | 18 | % |   |   | 18 | % |   |
|                              |       |                                    | 100        | % |   |   | 100 | % |   |   | 100 | % |   |
|                                   |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Gaming Equipment*

We design,manufacture and sell a variety of electronic slot and video gaming machines. Slotmachines are normally produced to specific order, configured to a customer’sparticular requirements. Customers may also change the game theme of a slotmachine by purchasing a “conversion kit” that consists of artwork, reel strips(if applicable) and a computer chip. Gaming machines are differentiated fromone another by a number of factors including graphic design and theme, cabinetstyle and size, pay table, reel-type design, betting denomination and minimum/maximumbetting amount. Our video gaming machines are designed to offer the player thechance to play a multitude of different games by simulating various card games,video reel-spinning games and keno through a video display. We periodicallyintroduce new games and themes to satisfy customer demand and to compete withour competitors’ product designs. The gaming products created are the result ofa comprehensive product development effort which includes extensive testingin-house and on casino floors for reliability and player appeal.

Native American gaming differs from the traditional casinomarket in that it is regulated under the Indian Gaming Regulatory Act of 1988,which permits specific types of gaming as follows:

·       Class I Gaming—TraditionalNative American social and ceremonial games; regulated exclusively at thetribal level;

·       Class II Gaming—Pulltabs, instant bingo and other games similar to bingo; regulated by individualtribes, with the National Indian Gaming Commission having oversight of theregulatory process; and

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

·       Class III Gaming—Allforms of casino-style gaming not included under Class I and Class II,including traditional slot machines and table games; governed by compactsnegotiated between individual tribes and states.

Each gamingmachine contains an operating system, also referred to as a game platform. Themachine’s operating system manages the software needed to run the machine. Gameplatforms are constantly under development or revision to keep pace with theever increasing complexity of game software.****Infiscal year 2005, the Company completed the successful migration from the EVOTMplatform to the Linux based Alpha platform and operating system (“Alpha GameEngine”). The Alpha Game Engine is the result of a significant investment inhardware and software engineering since development efforts first began at SDGin 1999. The platform underwent the most extensive pre-launch testing in theCompany’s history and now forms the foundation for our new video and mechanicalreel-spinning products.

The Alpha Game Engine is approved in all majorjurisdictions including Nevada, Mississippi, New Jersey, Missouri,Washington, New York, Rhode Island and various Native American jurisdictions.The flexibility of the platform allows it to operate in both Class III andClass II markets, including random number generated, central determinationand bingo-based jurisdictions.

The Alpha Game Engine’s layered architecture andmodular design allow for adaptability and simplified requirement changes. TheLinux based operating system is compatible with the major slot accounting andticket systems and supports 20-plus lines, bonusing, multi-denom andmulti-percentage game configurations. The Alpha Game Engine also supportsmulti-level local and wide-area progressives gaming venues.

The Alpha Game Engine is designed for robust gamedevelopment and incorporates free spin, scatter, bonusing and other advancedgame features. The platform is architected for separation of the gamingoperating system from the game layer to allow for rapid game development. Astandardized game interface allows internal and third-party developers with asecure, easy-to-use programming environment that incorporates an advanced setof development tools.

We have launched proven game themes including Blazing7s® and Blues BrothersTM on the Alpha Game Engine. In all, we now offer anextensive library of game titles on Alpha in Class III and Class IImarkets. Pursuant to license agreements, we also offer certain game titlesdeveloped by WMS Industries, Inc. (“WMS”), Aristocrat Leisure Limited (“Aristocrat”),Konami Co. Ltd. (“Konami”), which we place in certain jurisdictions pursuant tothose license agreements.

Technologicaladvances, development of new entertaining games, new sound and visual featuresand changing preferences of casino patrons are the main factors that lead tothe replacement of gaming machines, which typically have a useful life of 5 to7 years.

Wegenerally offer a 90-day parts and labor warranty for new gaming machinessold. We also remain actively involved in customer service after the originalinstallation of the machine. We provide several after-sale, value-addedservices to our customers including customer education programs, a 24-hourcustomer service telephone hot-line, an Internet web site for technicalsupport, field service support programs and spare parts programs. Ourhistorical warranty expense as a percentage of revenues has been less than 1%.

We alsosell used gaming machines, as well as parts for existing machines. Generally weacquire the used machines we sell as trade-ins toward the purchase of newgaming equipment. While a small secondary 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

market exists in the United States, used machines aretypically resold into the international market. Some used equipment isreconditioned for direct sale, but much is sold in container lots on an “as is”basis through independent brokers. Used game sales totaled $17.3 million, $19.6million and $7.2 million for the years ended June 30, 2005, 2004 and 2003,respectively.

Total revenuefrom the Gaming Equipment division totaled $203.7 million, $226.4 million and$175.9 million for the years ended June 30, 2005, 2004 and 2003,respectively.

In fiscal year 2004 we completed two strategic acquisitionsin the Gaming Equipment area, Crown Gaming and SDG. See “—General—Acquisitions”above.

*Systems*

We design and sell casino enterprise systems. These systemsprovide casino operators integrated modules across multiple platforms. Ourprimary products include slot monitoring, casino management and cashlesssystems, all of which are designed to streamline casino business processesthrough the use of technology. Bally products operate on Windows, AS/400(iSeries), and UNIX platforms, allowing our customers to choose a technologysolution that meets their existing or future infrastructure requirements.

·       Slot Monitoring:   Ourslot monitoring products are comprised of hardware consisting of microcontroller based printed circuit boards installed within the slot machines aswell as card readers, displays and keypads which provide casinos the ability totrack player gaming activity through our casino management systems and monitoremployee access to slot machines, internally developed firmware that providesaccess to the slot machines’ and players’ activity data gathered by the microcontroller hardware; and internally developed slot monitoring businessapplications that manage certain slot machine activity, including securityevents, revenue, expenses and other financial reporting metrics.

·       Casino Management:   Ourcasino management systems are composed of various hardware and softwareproducts that provide casino operators patron loyalty solutions comparable tofrequent guest programs offered in other leisure industries; table gamesaccounting including the calculation of all revenue and expense related items;and cage and credit accountability for all extensions of credit and cage cashbalancing functions. 

·       Cashless Systems:   Ourcashless systems provide a suite of products for casino operators to providebonusing and cashless gaming activity to casino patrons. 

We marketour system product solutions through Bally Gaming and Systems under the broadcategories of Bally CMS® (Casino Management Systems), Bally SMS® (SlotManagement Systems) and Bally TMS® (Table Management Systems). These categoriesinclude the product lines consisting of SDS, ACSC, CMP, CMS, MCC and MindPlay.

Our Systemsdivision generated revenues of approximately $97.0 million, $122.6 million and$80.7 million for the years ended June 30, 2005, 2004 and 2003,respectively.

During fiscal year 2004, we completed the acquisition ofMindPlay. During fiscal year 2003, we completed the acquisitions of MCC and HSC.See “—General—Acquisitions” above.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

*Gaming Operations*

Our GamingOperations division offers three general types of games that are placed incasinos or other permissible gaming locations. The three general types of gamesare: those that are linked on a proprietary wide-area progressive system, thosethat operate on a proprietary near-area progressive system and those that arenon-linked niche games, which are games that generally offer more complexfeatures than traditional slot machines such as bonus rounds. These gamingmachines earn recurring revenues and cash flows for us rather than being soldon a one-time basis. Rather than being sold, such games are often moreprofitable for us as a result of the recurring nature of the revenue, but theydo require us to invest capital in the cost of manufacturing the gamingmachines, purchasing signs and seating, and at times acquiring certainintellectual property rights.

Wide-AreaProgressive Systems:   We received regulatory approval from the NevadaGaming Control Board of our wide-area progressive jackpot system named “ThrillionsTM”in November 1998. The ThrillionsTM system was designed to allow patronsplaying nickel, quarter and dollar machines to compete for the same progressivejackpot, with the odds of winning the jackpot being proportional to the amountwagered. We also operate separate wide-area progressives in Nevada, Mississippiand Native American lands, as well as through a separate third-party trustarrangement in Atlantic City, New Jersey. We utilize certain web-basedtechnologies, such as virtual private networks to monitor wide-area progressivesoperating in non-domestic markets. We have a total of 1,660 units deployed onour wide-area progressive networks as of June 30, 2005.

Weconsolidate the revenues and expenses from certain wide-area progressive trustsin New Jersey due to the accounting rules for variable interest entities (“VIE’s”).

Near-AreaProgressive Systems:   As an alternative to wide-area games, we also offercustomers the option of purchasing gaming devices and provide the customer withnear-area progressive technology. This approach permits customers to createtheir own branded progressive links for which we also collect a daily fee. Currently,certain Harrah’s Entertainment properties (formerly operated by Caesar’sEntertainment) utilize the ThrillionsTM system as a platform for their near-areaprogressive networks of linked games in the Nevada and Mississippi markets, asdoes Isle of Capri in Mississippi.

Non-LinkedGames:   We also offer a variety of non-linked daily fee games. These gameshave been marketed under such titles as Playboy (Playboy and Rabbit Head Designare marks of Playboy and used under license by Bally Gaming, Inc.), MonteCarloTM, Saturday Night LiveTM and others, all of which are approved in mostmajor gaming markets. We also earn recurring revenues from 798 devices deployedat horseracing facilities under agreements with the Delaware State LotteryCommission. As of June 30, 2005, we had a total installed base of dailyfee games totaling 8,804 units.

BallyGaming and Systems is also a provider of video lottery type terminal devices atrace tracks in the state of New York. Through the competitive bidding process,Bally Gaming and SDG were each awarded approximately 25% of the initialterminals installed. The financial model for this market requires themanufacturer to build, deploy and maintain the terminals in return for a shareof the net win generated by the terminals. The first games were installed atthe Saratoga race track in January 2004, and have since been followed byinstallations at four additional tracks, totaling 2,953 games for the Company. Additionalinstallations at Aqueduct and Yonkers may occur in the late spring or summer of2006.

Additionally,we have a base of centrally determined games operating primarily in Washington,Florida, Alabama, and Oklahoma. With the exception of Oklahoma, these gamesgenerally have been sold to the customer, and we retain a daily fee for thecentral determination software license. Participation 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

lease arrangements are still most prevalent in Oklahoma. Asof June 30, 2005, the installed base for the centrally determined gamestotaled 18,885 units and full participation fee units for these markets total3,100 units.

Gaming Operations generated revenues of approximately$131.3 million, $79.1 million and $55.6 million for the years ended June 30,2005, 2004 and 2003, respectively.

*Product Development*

We believethat providing games and systems with high entertainment value and that arepreferred by the casino patron is key to meeting the demands of casinos. Webelieve that the use of technology is accelerating, and this trend could givenewer gaming machines and systems that incorporate such technology acompetitive advantage over older gaming machines and systems. Total spending onresearch and development by the Bally Gaming and Systems business unit wasapproximately $43.4 million, $36.6 million and $20.0 million during the yearsended June 30, 2005, 2004 and 2003, respectively. The increase in researchand development spending for these years is a reflection of the competitive landscapeand the need to continue to develop next generations of gaming product andsystems.

We developour products for both the domestic and international market. Our productdevelopment process for games includes both hardware and software. Major areasof hardware development include cabinet style, electronic capability, printercapability, and coin and currency handling. Hardware development efforts arefocused on player appeal, product reliability and ease of maintenance.Development cycles for hardware can range from a few days for simpleenhancements to more than a year for new electronics or new mechanicalpackages.

Thesoftware development process for new games, which includes graphicsdevelopment, is continuous and requires significant allocations of humanresources. Creativity in software development is an important element inproduct differentiation. Ideas for new models are generated internally and fromcustomers and other third parties, many of whom have entered into strategicrelationships with us.

All new ormodified hardware and software are designed to satisfy all applicable testingstandards. Typically, new products require regulatory approval for most NorthAmerican jurisdictions. However, many jurisdictions outside North America donot require approval. For Nevada, new gaming machine platforms must be filedwith the state gaming laboratory which tests the products for at least two tothree months before a mandatory 30 to 60 day field test is conducted in acasino. The Nevada State Gaming Control Board and the Nevada Gaming Commissionmust each approve new product platforms at their monthly, public meetings. Theprocess in Nevada for modifications of existing products or casino associatedequipment is similar to that for new platforms, except a field test is usuallynot required and the Nevada State Gaming Control Board staff can approve theproduct administratively. Each jurisdiction that requires regulatory approvalof new products has its own filing requirement and process. Once products areapproved by the gaming regulators, customers may require a 30-90-dayfield trial of the product in their casinos with the right to return theproduct at any time during the field trial period. We do not recognize revenueuntil the customer ends the field trial and accepts the gaming machines.

Productdevelopment for casino enterprise systems also includes hardware and software.The major areas of hardware development include micro controller circuit boarddesign and programming, as well as user interface devices such as card readers,keypads and displays. We have developed a modular and extendible hardware andsoftware architecture, which focuses development on achieving greaterfunctionality, product reliability, and ease of maintenance for the casino operator,and greater ease of use 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

for the player. In addition, the architecture allowscustomers to upgrade existing components or add new components with minimalimpact. Development cycles for hardware can vary between a few months for minorrevisions to more than a year for major design changes or changes made byvarious slot machine manufacturers with which our products must be physicallyintegrated. Software development results in periodic product releases thatinclude new features that extend or enhance the casino enterprise systems;periodic maintenance releases that enable casino operators to correct problemsor improve the usability of the system; and documentation needed to install anduse the system.

We havedeveloped a series of cashless and bonusing products marketed under the Bally PowerSeries name. The Bally Power products represent an integrated set of cashless andbonusing features to enhance the gaming experience of casino patrons. Theseproducts allow the transfer of funds using bar coded coupons and/or encryptedPIN numbers to download either restricted or unrestricted credits to the gamingdevice. These products allow casino operators to reduce cash and coin handlingexpenses and minimize overall operating expenditures and provide creativemarketing incentives to their casino patrons. Our cashless products are in usein Nevada, Michigan, New Jersey, Mississippi, Louisiana, Iowa, Colorado,Missouri, Indiana and various Native American and international jurisdictionsencompassing many states and countries.

The software development process for our systems includesthe design and development of features to meet various regulatory standards. Theregulatory standards vary by jurisdiction forcing us to develop multiplesoftware settings based on the individual state and tribal gaming standards,and each jurisdiction can require the approval of any software modifications ornew products prior to deploying at casino locations. The approval processes canvary significantly by jurisdiction, based on the software changes developed,technology enhancements, and regulator resources.

*Product Markets*

We believethat the domestic installed base of traditional Class III gaming devicesnow exceeds 725,000 units. Nevada has the largest installed base, totalingapproximately 200,000 units as of June 30, 2005.

The gamingindustry continues to expand in international markets. Our primaryinternational markets are Europe, Canada, Latin America and, to a lesserextent, the Far East and the Caribbean. We conduct our business in Canadathrough our staff based in the United States. We also distribute gamingmachines, manufactured by Bally Gaming, through direct and indirectsubsidiaries: Bally Gaming UK, from our sales office in Wigan, Englandprincipally to customers in Europe and Russia; Bally Gaming de Puerto Rico, Inc.,principally to customers in Puerto Rico; and Bally Gaming and Systems, SA, inMontevideo, Uruguay and its branches in Peru and Argentina, principally tocustomers in South America.

Presently, Class IIgaming devices are marketed to certain Native American gaming markets. Webelieve the domestic installed base of Class II gaming devices isapproximately 31,000 units.

The primary markets for casino enterprise systems are theUnited States and, to a lesser extent, Canada, Latin America, Europe and theCaribbean. Markets for systems within the United States include traditionalland-based casinos concentrated in Nevada, Atlantic City, New Jersey,Native American casinos and riverboats and dockside casinos. Our domesticmarket for casino enterprise systems is new casinos and existing or newcustomers who either acquire casinos with a competitor’s system which wereplace with our system, or expand their casino floors or upgrade theirhardware or software to a new product release. Unlike the United States market,where most jurisdictions require the implementation of systems, few 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

international markets have done so.Management believes, however, that the international market for such systems isincreasing, and if that expansion occurs, our Systems’ sales to such marketsare likely to increase accordingly.

*Sales andMarketing*

Bally Gaming and Systems uses a direct sales force and, toa lesser extent, an independent distributor network to distribute our products.Bally Gaming and Systems’ North America sales staff consists of approximately54 people in offices in Nevada, New Jersey, Mississippi, Illinois, Californiaand Florida.

Bally Gaming and Systems’ direct sales force generatedapproximately, 80%, 80% and 98% of new unit sales for the years ended June 30,2005, 2004 and 2003, respectively. Bally Gaming and Systems uses distributorsfor sales to certain jurisdictions. The agreements with distributors generallyspecify minimum purchases and generally provide that we may terminate theagreement if certain performance standards are not met. These independentdistributors generated approximately, 20%, 20% and 2% of new gaming machineunit sales for the years ended June 30, 2005, 2004, and 2003,respectively.

As of June 30, 2005, we had approximately 276,000 gamemonitoring units installed in 225 locations, of which approximately 92% are inthe United States. Substantially all of System’s revenues are generated by ourdirect sales force.

We sell gaming machinesand our computerized monitoring systems either through normal credit terms of120 days or less, or may grant credit terms that may extend up to five years.International sales are either consummated on a cash basis or financed over nomore than two years, depending on credit quality.

For casino enterprise system sales we generally offerlimited financing terms, normally less than one-year, for sales of newinstallations. Most sales, however, are invoiced on a net 30-day basis.

For casino enterprise system sales, we offer our customersthe option of signing separate hardware and software maintenance agreements atthe time of sale. These agreements are for one-year terms and automaticallyrenew unless otherwise canceled in writing by either party. After an initialwarranty period, typically 90 days, the customer is invoiced a monthly hardwareand software maintenance fee that provides for, among other things, repair orreplacement of malfunctioning hardware and software, software version upgrades,and on-call support for software.

*Customers*

The demand for slot machines and video gaming machinesvaries depending on the level of new construction and renovation of casinos andother facilities, the corresponding need for new and replacement equipment andproduct innovation. These machines generally have an average replacement cycleof three to seven years. For the year ended June 30, 2005, our ten largestcustomers, including corporate customers with multiple casino properties,accounted for approximately 35% of the Bally Gaming and Systems’ new unitsales, with the largest single customer accounting for 10% of new unit sales.

In addition we sell game cabinets to original equipmentmanufactures (“OEMs”) that in turn provide games primarily to the Class IInon-traditional gaming markets. Typically, the OEM also purchases the rights tocertain Bally themes, which entitles it to certain Bally proprietary gamethemes and redesigns these game themes to be compatible with its operatingsystem configurations. Sales of such cabinets to OEMs totaled approximately$16.7 million, $8.6 million, and $6.3 million for years ended June 30,2005, 2004 and 2003, respectively, and sales of game themes to the OEMs totaledapproximately $2.3 million, $3.4 million and $3.2 million for the years endedJune 30, 2005, 2004 and 2003, respectively.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

Duringfiscal year 2005, the Company also licensed certain technologies for “redemption”markets to Spectre Gaming. The Company expects to receive fees for thelicensing of certain technologies, as well as recurring fees from ongoingroyalty fees beginning in fiscal year 2006.

The demandfor casino enterprise systems is driven by regulatory requirements in eachapplicable jurisdiction and by casino operators’ competitive need to properlytrack machine and player activity and, to establish and compile individualmachine and player profitability and other demographic information. Thesefeatures enable casinos to develop or enhance marketing strategies. Revenuesfor casino enterprise systems are derived from selling products to new orexisting customers. For the year ended June 30, 2005, the ten largestcasino enterprise system customers, which include certain multi-sitecasino operators that have corporate agreements, accounted for approximately55.2% of game monitoring unit sales revenues, with the largest single customeraccounting for 10.2% of game monitoring unit sales revenues.

Future growth of Bally Gaming and Systems will be based oncontinued penetration in the international markets, further expansion in theestablished and emerging markets, as well as continued development efforts toprovide customers with new and innovative hardware and software productofferings.

*Assembly Operations*

BallyGaming and Systems’ primary facility, located in Las Vegas, was completed in1990. The facility, which we own, was constructed specifically for the design,assembly and distribution of gaming equipment. The 150,000-square footfacility was designed to meet fluctuating product design demands and volumerequirements. Management believes the facility enables Bally Gaming and Systemsto increase production without significant capital expenditures.

Management believes our assembly operations allow for rapidgeneration of different models to fill orders quickly and efficiently. Anothermajor advantage of the existing plant operation is that a number of machinefeatures can be altered to produce a “customized” product for each customer,including the size, type and color of glass, sound and payoff patterns. BallyGaming and Systems keeps an inventory of parts that allow machines to bealtered quickly to conform to a particular customer’s design and/or featurerequest. Bally Gaming and Systems typically manufactures products forindividual customer orders. Bally Gaming and Systems designs all of the majorassemblies that are incorporated into the final machine configuration.

*Competition*

There are a number of domestic and internationalbusinesses who compete in the various geographic markets where we sell ourproducts. Our ability to compete effectively is based on a number of factorsincluding, but not limited to, our product quality, product depth, pricing,financing terms, regulatory approvals, the successful development andprotection of intellectual property as well as the success of our distribution,sales and service levels.

The North American market is dominated by a singlecompetitor, International Game Technology (“IGT”). IGT has substantially morefinancial resources, products and intellectual property than nearly all of itscompetitors and many of our customers derive a significant portion of theirgaming revenues using IGT products. Some of our other competitors currentlyinclude GTech, Aristocrat, WMS, Atronic and Konami.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

These competitors also compete in the internationalmarkets we serve, along with well established foreign companies such asRecreativos Franco, Cirsa/Unidesa, Ainsworth, Aruze and Novomatic.

We believe the future success of our operations dependon our ability to bring more innovative and higher quality products to themarket in a more cost effective and timely manner than our competitors.

The competition in themarket for management systems is also significant. Product feature andfunctionality, accuracy, reliability, and pricing are all key factors indetermining a provider’s success in selling its system. The main competition incasino management systems currently consists of IGT, Aristocrat, MIS Grips andto a lesser extent, Konami and Progressive Gaming. Competition is keen in thismarket due to the number of providers and the limited number of casinos andjurisdictions in which they operate. Management believes the future success ofour operations will be determined by our ability to bring new and innovativeproducts to the market while maintaining our base of loyal existing customers.

**CasinoOperation**

*Rainbow Casino*

Our RainbowHotel Casino, located in Vicksburg, Mississippi, began operations in July 1994.The facility includes a 33,000-square foot casino, with 890 gamingdevices and 12****table games as wellas a 310-seat buffet-style restaurant and 20,000-square footconference center. The facility also includes the 89-room Rainbow Hotel,which is owned and operated by a third party. Rainbow Casino is marketed as a “locals”casino and draws customers principally from within a 75-mile radius ofVicksburg. The Vicksburg casino market generated approximately $252 million ingaming revenue in the twelve months ended June 30, 2005, representing agrowth rate of approximately 4%.

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

The Rainbow Casino was not damaged by Hurricane Katrina,and the property reopened after power was restored on the fourth day after thehurricane. Play levels have subsequently returned to levels at or above thoseof the pre-hurricane period.

*Sales and Marketing*

The Rainbow Casino targets the mid-level gaming customersin the Vicksburg market. We promote the casino primarily through direct mailand special promotional events.

*Competition*

The operation of casinos is a highly competitive businessand gaming of all types is available throughout Mississippi in numerouslocations. The principal competitive factors in the industry include thequality and location of the facility, the nature and quality of the amenitiesand customer services offered, and the implementation and success of marketingprograms. The Rainbow Casino faces substantial direct competition for gamingcustomers from the three other gaming facilities in Vicksburg, as well as othergaming operations throughout Mississippi. One additional gaming site inVicksburg is currently being 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

pursued by Lakes Gaming, howeverthe timing of opening and potential impact on the market is not yet known.

**DiscontinuedOperations**

*Route Operations*

NevadaOperations:   In June 2004, we sold our Nevada route operations toCentury Gaming, Inc., a privately held route operator based in Montana. Wereceived approximately $100 million in cash and the assumption by CenturyGaming of approximately $5 million in debt. We reported a gain on the sale beforeincome taxes of $15.3 million, or $9.1 million after tax. During fiscal year2005, we incurred a litigation charge and we settled certain indemnity claimsraised by Century Gaming, and recorded a reduction in the gain on sale of $9.8million, or $6.3 million net of tax.

Louisiana Operations:   In October 2004 we soldour interest in our Louisiana route operations to Churchill Downs Incorporatedand received proceeds of approximately $2 million and realized a gain of $1.3million or $0.8 million, net of tax.

*Rail City Casino*

In May 2004, the Company sold its Rail City Casino, a20,000 square-foot facility located between the cities of Reno and Sparksin northern Nevada, to the Sands Regent. We received aggregate consideration of$37.9 million. We reported a gain on the sale before income taxes of $23.1million, or $14.3 million after tax.

*Wall Machines and Amusement Games*

In July 2003, we sold our Bally Wulff wall machine andamusement game business unit to a third party equity investor for $16.5 millionin cash, and recorded a loss on sale totaling $25.4 million. During fiscal year2004 and 2005 the Company negotiated with the German tax authorities to resolveseveral tax related matters. See Note 5 to our consolidated financialstatements, Discontinued Operations, included in this Annual Report on Form 10-K.

**Patents, Copyrights and TradeSecrets**

We rely ona combination of patents, copyrights, trade secrets, trademarks and proprietaryinformation to maintain and enhance our competitive position. We have been along standing participant in the development of intellectual property in ourindustry. We have been granted patents have patent applications pending inUnited States as well as many foreign countries. The expiration dates of thesepatents vary and are based on their filing and issuances dates. We intend tocontinue to actively file for patent protection, where reasonable, within andoutside the United States. We also seek protection for a large number of ourproducts by filing for copyrights and trademarks in the United States andvarious foreign countries. Under permission or contract with third parties, wealso sell products covered by independently filed copyrights and trademarks.Typically, these contracts require us to pay royalties to the licensing party.Royalty expense is included in cost of gaming and systems in our consolidatedfinancial statements in this report.

We cannotprovide assurance that other parties will not infringe our patents or useproducts that violate our copyright and trademark protections. We also cannotprovide assurance that other parties will not claim that we violate theirintellectual property rights. The research, legal, and administrative costs 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

associated with creating, securing, enforcing and defendingour intellectual property rights can be material. Moreover, the likelihood ofsuccess in such matters is generally not predictable and is subject tolitigation risks.

**Employeesand Labor Relations**

As of June 30, 2005, we and our subsidiaries employedapproximately 1,640 individuals worldwide. These employees are not covered bycollective bargaining agreements. We believe we have satisfactory relationshipswith our employees.

**Gaming Regulations and Licensing**

*General.**  *The manufacturing and distribution of gaming machinesand the operation of gaming facilities are subject to extensive federal, state,local, and foreign regulations. Although the laws and regulations of thevarious jurisdictions in which we operate and may expand our gaming operationsvary in their technical requirements and are subject to amendment from time totime, virtually all of these jurisdictions require licenses, permits,documentation of qualification, including evidence of financial stability, andother forms of approval for companies engaged in the manufacture anddistribution of gaming machines and the operation of gaming facilities, as wellas the individual licensing of officers, directors, major stockholders and keypersonnel of such companies.

Any person who acquires a controlling interest in theCompany would have to meet the requirements of all governmental bodies thatregulate our gaming businesses. A change in the make-up of our Board ofDirectors and management may require the various gaming authorities to examinethe qualifications of the new board and management.

*Nevada.**  *The ownership and operation of casino gamingfacilities in Nevada are subject to (i) the Nevada Gaming Control Act andthe regulations promulgated thereunder (the “Nevada Act”); and (ii) variouslocal ordinances and regulations. Our gaming, manufacturing, and distributingoperations (collectively referred to as “gaming machine operations”) aresubject to the licensing and regulatory control of the Nevada State GamingControl Board (the “Nevada Board”), the Nevada Gaming Commission (the “NevadaCommission”), the Clark County Liquor and Gaming Licensing Board (the “ClarkCounty Board”), and various other county and city regulatory agencies, all ofwhich are collectively referred to as the “Nevada Gaming Authorities.”

The laws, regulations, and supervisory procedures ofthe Nevada Gaming Authorities are based on declarations of public policyconcerned with, among other things: (i) the prevention of unsavory andunsuitable persons from having any involvement with gaming; (ii) thestrict regulation of all persons, locations, practices, associations andactivities related to the operation of licensed gaming establishments and themanufacture and distribution of gaming machines, cashless wagering systems andassociated equipment; (iii) the establishment and maintenance ofresponsible accounting practices and procedures; (iv) the maintenance ofeffective control over the financial practices of licensees, including theestablishment of minimum procedures for internal fiscal affairs and thesafeguarding of assets and revenues, providing reliable record-keeping andrequiring the filing of periodic reports with the Nevada Gaming Authorities; (v) theprevention of cheating and fraudulent practices; and (vi) providing asource of state and local revenues through taxation and licensing fees. Achange in such laws, regulations and procedures, or non-compliance with some,could have an adverse effect on our gaming-related operations.

Alliance is registered with the Nevada Commission as apublicly traded corporation (a “Registered Corporation”). Our direct andindirect subsidiaries that manufacture or distribute gaming devices or 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

conduct gaming operationsat various locations (collectively, the “Nevada Subsidiaries”) are required tobe licensed by the Nevada Gaming Authorities. The licenses held by the NevadaSubsidiaries require periodic payments of fees and taxes and are nottransferable. We, through our registered intermediary companies (individuallyan “Intermediary Company” and collectively the “Intermediary Companies”), have beenfound suitable to own the stock of the Nevada Subsidiaries, each of which is acorporate licensee (individually a “Corporate Licensee” and collectively the “CorporateLicensees”) under the terms of the Nevada Act. As a Registered Corporation, weare required to periodically submit detailed financial and operating reports tothe Nevada Gaming Authorities and furnish any other information the NevadaGaming Authorities may require. No person may become a stockholder of orreceive any percentage of the profits from the Corporate Licensees withoutfirst obtaining licenses and approvals from the Nevada Gaming Authorities. TheCompany, the Intermediary Companies, and the Corporate Licensees have obtainedfrom the Nevada Gaming Authorities the various registrations, findings ofsuitability, approvals, permits, and licenses required to engage in gamingactivities, gaming machine operations, and in the manufacture and distributionof gaming devices for use or play in Nevada or for distribution outside ofNevada.

All gaming machines and cashless wagering systemsmanufactured, sold, or otherwise distributed for use or play in Nevada or fordistribution outside of Nevada must be manufactured by licensed manufacturersand distributed or sold by licensed distributors. All gaming machinesmanufactured for use or play in Nevada must be approved by the NevadaCommission before they are distributed or exposed for play. The approvalprocess for gaming machines and cashless wagering systems includes rigoroustesting by the Nevada Board, a field trial, and a determination as to whetherthe gaming machines or cashless wagering systems meet strict technicalstandards set forth in the regulations of the Nevada Commission. Associatedequipment (as defined in the Nevada Act) must be administratively approved bythe chairman of the Nevada Board before it is distributed in Nevada.

The Nevada Gaming Authorities may investigate anyindividual who has a material relationship or material involvement with us, theIntermediary Companies or the Corporate Licensees to determine whether thatindividual is suitable or should be licensed as a business associate of agaming licensee. Officers, directors, and key employees of the Company and theIntermediary Companies who are actively and directly involved in the licensedactivities of the Corporate Licensees are or may be required to be licensed orfound suitable by the Nevada Gaming Authorities. A finding of suitability iscomparable to licensing, and both require submission of detailed personal andfinancial information followed by a thorough investigation. The applicant forlicensing or a finding of suitability must pay all the costs of theinvestigation. Changes in licensed positions must be reported to the NevadaGaming Authorities, and in addition to their authority to deny an applicationfor a finding of suitability or licensing, the Nevada Gaming Authorities havejurisdiction to disapprove a change in a corporate position. The Nevada GamingAuthorities may deny an application for licensing or finding of unsuitabilityfor any cause they deem reasonable.

If the Nevada Gaming Authorities were to find anofficer, director, or key employee unsuitable for licensing or unsuitable tocontinue having a relationship with the Intermediary Companies, the CorporateLicensees, or us, the companies involved would have to sever all relationshipswith that person. In addition, the Nevada Commission may require theIntermediary Companies, the Corporate Licensees or us to terminate theemployment of any person who refuses to file appropriate applications. Licensingand suitability determinations are not subject to judicial review in Nevada.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

We and the Corporate Licensees are required to submitdetailed financial and operating reports to the Nevada Commission. Substantiallyall material loans, leases, sales of securities, and similar financingtransactions by the Corporate Licensees must be reported to or approved by theNevada Commission.

If it were determined that a Corporate Licensee hadviolated the Nevada Act, the licenses it holds could be limited, conditioned,suspended, or revoked, subject to compliance with certain statutory andregulatory procedures. In addition, the Company, the Intermediary Companies,the Corporate Licensees, and the persons involved could be subject tosubstantial fines for each separate violation of the Nevada Act at thediscretion of the Nevada Commission. Limitation, conditioning, or suspension ofthe gaming licenses of the Corporate Licensees could, and revocation of anygaming license would, materially adversely affect the gaming-relatedoperations of the Company.

The Gaming Authorities may, at their discretion,require the holder of any of our securities to file applications, beinvestigated, and be found suitable to own our securities if the NevadaCommission has reason to believe that the holder’s ownership would beinconsistent with the declared policies of Nevada. The applicant must pay allcosts of investigation incurred by the Nevada Gaming Authorities in conductingany such investigation.

The Nevada Act requires any person who acquires morethan 5% of any class of a Registered Corporation’s voting securities to reportthe acquisition to the Nevada Commission. The Nevada Act requires thatbeneficial owners of more than 10% of any class of a Registered Corporation’svoting securities apply to the Nevada Commission for a finding of suitabilitywithin thirty days after the chairman of the Nevada Board mails writtennotice requiring such filing. Under certain circumstances, an “institutionalinvestor,” as defined in the Nevada Act, that acquires more than 10%, but notmore than 15% (19% if such additional ownership results from a stock repurchaseprogram conducted by the Registered Corporation, subject to certainconditions), of a class of a Registered Corporation’s voting securities mayapply to the Nevada Commission for a waiver of finding of suitability if theinstitutional investor holds the securities for investment purposes only. Aninstitutional investor shall not be deemed to hold voting securities forinvestment purposes unless the voting securities were acquired and are held inthe ordinary course of business as an institutional investor and not for thepurpose of causing, directly or indirectly, the election of a majority of themembers of the Board of Directors of the Registered Corporation, any change inthe corporate charter, bylaws, management, policies, or operations of theRegistered Corporation or any of its gaming affiliates, or any other action theNevada Commission finds to be inconsistent with holding the RegisteredCorporation’s voting securities for investment purposes only. Activities thatare not deemed to be inconsistent with holding voting securities for investmentpurposes include: (i) voting on all matters voted on by stockholders; (ii) makingfinancial and other inquiries of management of the type normally made bysecurities analysts for informational purposes and not to cause a change in theRegistered Corporation’s management, policies, or operations; and (iii) suchother activities as the Nevada Commission may determine to be consistent withinvestment-only intent. If the beneficial holder of voting securities who mustbe found suitable is a corporation, partnership, or trust, it must submitdetailed business and financial information including a list of beneficialowners. The applicant is required to pay all costs of investigation.

Any person who fails or refuses to apply for a findingof suitability or a license within thirty days after being ordered to doso by the Nevada Commission or the chairman of the Nevada Board may be foundunsuitable. The same restrictions apply to a record owner if the record owner,after request, fails to identify the beneficial owner. Any stockholder foundunsuitable and who holds, directly or indirectly, any beneficial ownership ofthe common stock beyond such period of time as may be prescribed by the Nevada 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

Commission may be guiltyof a criminal offense. We are subject to disciplinary action if, after wereceive notice that a person is unsuitable to be a stockholder or to have anyother relationship with the Company, the Intermediary Companies, or theCorporate Licensees, we (i) pay that person any dividend or interest uponvoting securities of the Company; (ii) allow that person to exercise,directly or indirectly, any voting right conferred through securities held bythat person; (iii) pay remuneration in any form to that person forservices rendered or otherwise; or (iv) fail to pursue all lawful effortsto require such unsuitable person to relinquish his or her voting securities,including, if necessary, the immediate purchase of said voting securities forcash at fair market value. Additionally, the Clark County Board has taken theposition that it has the authority to approve all persons owning or controllingthe stock of any corporation controlling a gaming license.

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

We are required to maintain in Nevada a current stockledger, which may be examined by the Nevada Gaming Authorities at any time. Ifany securities are held in trust by an agent or by a nominee, the record holdermay be required to disclose the identity of the beneficial owner to the NevadaGaming Authorities. A failure to make such disclosure may be grounds forfinding the record holder unsuitable. We are also required to render maximumassistance in determining the identity of the beneficial owner. The NevadaCommission has the power to impose a requirement that a Registered Corporation’sstock certificates bear a legend indicating that the securities are subject tothe Nevada Act. The Nevada Commission previously imposed this requirement onthe Company but removed it in June 2004.

We may not make a public offering of our securitieswithout the prior approval of the Nevada Commission if the securities orproceeds there from are intended to be used to construct, acquire, or financegaming facilities in Nevada or to retire or extend obligations incurred forsuch purposes. In addition, (i) a Corporate Licensee may not guarantee asecurity issued by a Registered Corporation pursuant to a public offeringwithout the prior approval of the Nevada Commission; and (ii) restrictionson the transfer of an equity security issued by a Corporate Licensee orIntermediary Company and agreements not to encumber such securities areineffective without the prior approval of the Nevada Commission.

Changes in control of the Company through merger,consolidation, stock or asset acquisitions, management or consultingagreements, or any act or conduct whereby a person or entity acquires controlmay not occur without the prior approval of the Nevada Commission. Entitiesseeking to acquire control of a Registered Corporation must satisfy the NevadaBoard and Nevada Commission on a variety of stringent standards before assumingcontrol of the Registered Corporation. The Nevada Commission may also requirecontrolling stockholders, officers, directors, and other persons having amaterial relationship or involvement with the entity proposing to acquirecontrol to be investigated and licensed as a part of the approval processrelating to the transaction.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

The Nevada Legislature has declared that somecorporate acquisitions opposed by management, repurchases of voting securities,and corporate defense tactics affecting Nevada corporate gaming licensees andRegistered Corporations that are affiliated with those operations may beinjurious to stable and productive corporate gaming. The Nevada Commission hasestablished a regulatory scheme to ameliorate the potentially adverse affectsof these business practices on Nevada’s gaming industry and to promote Nevada’spolicy to: (i) assure the financial stability of corporate gaminglicensees and their affiliates; (ii) preserve the beneficial aspects ofconducting business in the corporate form; and (iii) promote a neutralenvironment for orderly governance of corporate affairs. Approvals are, incertain circumstances, required from the Nevada Commission before a RegisteredCorporation can make exceptional repurchases of voting securities above thecurrent market price (commonly called “greenmail”) and before a corporateacquisition opposed by management can be consummated. The Nevada Act alsorequires prior approval of a plan of recapitalization proposed by theRegistered Corporation’s board of directors in response to a tender offer madedirectly to the Registered Corporation’s stockholders for the purpose ofacquiring control of the Registered Corporation.

License fees and taxes, computed in various waysdepending on the type of gaming or activity involved, are payable to the Stateof Nevada and to the counties and cities in which the licensees conduct theiroperations. Depending upon the particular fee or tax involved, these fees andtaxes are payable, either monthly, quarterly, or annually and are based oneither (i) a percentage of the gross revenues received; (ii) thenumber of gaming devices operated; or (iii) the number of games operated.An excise tax is also paid by the Corporate Licensees engaged in casinooperations on charges for admission to any facility where certain forms of liveentertainment are provided. The Corporate Licensees that hold gaming deviceroute operator licenses or manufacturer or distributor licenses also paycertain fees to Nevada.

Any person who is licensed, required to be licensed,registered, required to be registered, or who is under common control with suchpersons (collectively, “Licensees”), and who proposes to become involved in agaming venture outside of Nevada, is required to deposit with the Nevada Boardand thereafter maintain a $25,000 revolving fund to pay the expenses of investigationby the Nevada Board of the Licensee’s participation in such foreign gaming. Therevolving fund is subject to increase or decrease in the discretion of theNevada Commission. Thereafter, Licensees are required to comply with certainreporting requirements imposed by the Nevada Act. Licensees are also subject todisciplinary action by the Nevada Commission if they knowingly violate any lawsof the foreign jurisdiction pertaining to the foreign gaming operation, fail toconduct the foreign gaming operation in accordance with the standards ofhonesty and integrity required of Nevada gaming operations, engage inactivities that are harmful to the State of Nevada or its ability to collectgaming taxes and fees, or employ a person in the foreign operations who hasbeen denied a license or finding of suitability in Nevada on the ground ofpersonal unsuitability.

*Mississippi.**  *The manufacturing and distribution of gaming andassociated equipment and the ownership and operation of casino facilities inMississippi are subject to extensive state and local regulation, but primarilythe licensing and regulatory control of the Mississippi Gaming Commission (the “MississippiCommission”).

The Mississippi Gaming Control Act (the “MississippiAct”), which legalized dockside casino gaming in Mississippi, is similar to theNevada Gaming Control Act. The Mississippi Commission has adopted regulationsthat are also similar in many respects to the Nevada gaming regulations.

The laws, regulations and supervisory procedures ofMississippi and the Mississippi Commission are based on declarations of publicpolicy that are concerned with, among other things: (i) the prevention ofunsavory or unsuitable persons from having direct or indirect involvement withgaming at any time or in 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

any capacity; (ii) theestablishment and maintenance of responsible accounting practices andprocedures; (iii) the maintenance of effective controls over the financialpractices of licensees, including the establishment of minimum procedures forinternal fiscal affairs and safeguarding of assets and revenues, providing forreliable record keeping and requiring the filing of periodic reports with theMississippi Commission; (iv) the prevention of cheating and fraudulentpractices; (v) providing a source of state and local revenues throughtaxation and licensing fees; and (vi) ensuring that gaming licensees, tothe extent practicable, employ Mississippi residents. The regulations aresubject to amendment and interpretation by the Mississippi Commission. Webelieve our compliance with the licensing procedures and regulatoryrequirements of the Mississippi Commission will not affect the marketability ofour securities. Changes in Mississippi law or regulations may limit orotherwise materially affect the types of gaming that may be conducted, and suchchanges, if enacted, could have an adverse effect on us and our Mississippi gamingoperations.

The Mississippi Act provides for legalized docksidegaming in each of the fourteen counties that border the Gulf Coast or theMississippi River, but only if the voters in the county have not voted toprohibit gaming in that county. Currently, dockside gaming is permissible innine of the fourteen eligible counties in the state, and gaming operations havecommenced in seven counties. Under Mississippi law, gaming vessels must belocated on the Mississippi River or on navigable waters in eligible countiesalong the Mississippi River, or in the waters of the State of Mississippi lyingsouth of the state in eligible counties along the Mississippi Gulf Coast. TheMississippi Act permits unlimited stakes gaming on permanently moored vesselson a 24-hour basis and does not restrict the percentage of space that maybe utilized for gaming.

The Mississippi Act permits substantially alltraditional casino games and gaming devices. The Company, RCVP, Bally Gaming, Inc.(“BGI”), and their affiliates are subject to the licensing and regulatorycontrol of the Mississippi Commission. We are registered under the MississippiAct as a publicly traded corporation (a “Registered Corporation”) and holdingcompany of RCVP and BGI. As a Registered Corporation, we are requiredperiodically to submit detailed financial and operating reports to theMississippi Commission and furnish any other information the MississippiCommission may require. If we are unable to continue to satisfy theregistration requirements of the Mississippi Act, we and our affiliates cannotown or operate gaming facilities or continue to act as a manufacturer anddistributor in Mississippi. No person may become a stockholder of, or receiveany percentage of profits from, a licensed subsidiary of a RegisteredCorporation or a holding company without first obtaining licenses and approvalsfrom the Mississippi Commission. We and our affiliates have obtained thenecessary licenses and approvals from the Mississippi Commission. RCVP mustmaintain a gaming license from the Mississippi Commission to operate a casinoin Mississippi and BGI must maintain a manufacturer and distributor licensefrom the Mississippi Commission to manufacture and distribute gaming productsand a wide-area progressive operator license to operate its progressive slotsystem. Such licenses are issued by the Mississippi Commission subject tocertain conditions, including continued compliance with all applicable statelaws and regulations.

There are no limitations on the number of licensesthat may be issued in Mississippi. Gaming and manufacturer and distributorlicenses are not transferable, are issued for a three-year period (andmay be renewed for two additional three-year periods) and must be renewed orcontinued thereafter. In June 2003, RCVP was granted a three-year renewalof its gaming license by the Mississippi Commission, and BGI was grantedthree-year renewals of its manufacturer and distributor license and itswide-area progressive operator license.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

Certain of our officers and employees and theofficers, directors, and certain key employees of our licensed subsidiariesmust be found suitable or be licensed by the Mississippi Commission. We believewe have obtained, applied for, or are in the process of applying for all necessaryfindings of suitability with respect to such persons affiliated with us, RCVPor BGI, although the Mississippi Commission, in its discretion, may requireadditional persons to file applications for findings of suitability. Inaddition, any person having a material relationship or involvement with us maybe required to be found suitable, in which case those persons must pay thecosts and fees associated with such investigation. The Mississippi Commissionmay deny an application for a finding of suitability for any cause it deemsreasonable. Changes in certain licensed positions must be reported to theMississippi Commission. In addition to its authority to deny an application forfindings of suitability, the Mississippi Commission can disapprove a change ina licensed position. The Mississippi Commission has the power to require theCompany and its registered or licensed subsidiaries to suspend or dismissofficers, directors and other key employees or sever relationships with otherpersons who refuse to file appropriate applications or whom the authoritiesfind unsuitable to act in such capacities.

Determinations of suitability or questions pertainingto licensing are not subject to judicial review in Mississippi. At any time,the Mississippi Commission has the power to investigate and require the findingof suitability of any record or beneficial stockholder of the Company. TheMississippi Act requires any person who acquires more than 5% of any class ofvoting securities of a Registered Corporation, as reported to the SEC, toreport the acquisition to the Mississippi Commission, and such person may berequired to be found suitable. Also, any person who becomes a beneficial ownerof more than 10% of any class of voting securities of a Registered Corporation,as reported to the SEC, must apply for a finding of suitability by theMississippi Commission. The Mississippi Commission generally has exercised itsdiscretion to require a finding of suitability of any beneficial owner of morethan 5% of any class of voting securities of a Registered Corporation. If astockholder who must be found suitable is a corporation, partnership, or trust,it must submit detailed business and financial information including a list ofbeneficial owners. Any record or beneficial stockholder required to apply for afinding of suitability must pay all investigative fees and costs of theMississippi Commission in connection with the investigation.

The Mississippi Commission has adopted a regulationwhich provides that under certain circumstances, an “institutional investor,”as defined in the regulation, which acquires more than 10%, but not more than15%, of a Registered Corporation’s voting securities may apply to theMississippi Commission for a waiver of such finding of suitability if suchinstitutional investor holds the voting securities for investment purposes only.An institutional investor shall not be deemed to hold voting securities forinvestment purposes only unless the voting securities were acquired and areheld in the ordinary course of business as an institutional investor and notfor the purpose of causing, directly or indirectly, the election of a majorityof the members of the board of directors of the Registered Corporation, anychange in the Registered Corporation’s corporate charter, bylaws, management,policies or operations of the Registered Corporation or any of its gamingaffiliates, or any other action which the Mississippi Commission finds to beinconsistent with holding the Registered Corporation’s voting securities forinvestment purposes only. Activities which are not deemed to be inconsistentwith holding voting securities for investment purposes include: (i) votingon all matters voted on by the stockholders; (ii) making financial andother inquiries of management of the type normally made by securities analystsfor informational purposes and not to cause a change in management, policies oroperations; and (iii) such other activities as the Mississippi Commissionmay determine to be consistent with such investment intent.

Any person who fails or refuses to apply for a findingof suitability or a license within 30 days after being ordered to do so by theMississippi Commission may be found unsuitable. The same restrictions 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

apply to a record owner ifthe record owner, after request, fails to identify the beneficial owner. Anyperson found unsuitable and who holds, directly or indirectly, any beneficialownership of such securities beyond such time as the Mississippi Commissionprescribes may be guilty of a misdemeanor. We may be subject to disciplinaryaction if, after receiving notice that a person is unsuitable to be astockholder or to have any other relationship with us or our Mississippi gamingsubsidiaries, the company involved: (i) pays the unsuitable person anydividend or other distribution on that person’s voting securities; (ii) recognizesthe exercise, directly or indirectly, of any voting rights conferred bysecurities held by the unsuitable person; (iii) pays the unsuitable personany remuneration in any form for services rendered or otherwise, except incertain limited and specific circumstances; or (iv) fails to pursue alllawful efforts to require the unsuitable person to divest himself of thesecurities, including, if necessary, the immediate purchase of the securitiesfor cash at a fair market value.

We may be required to disclose to the MississippiCommission on request the identities of the holders of any of our debt or othersecurities. In addition, under the Mississippi Act, the Mississippi Commissionmay in its discretion require the holders of any debt security of a RegisteredCorporation to file an application, be investigated, and be found suitableto own the debt security if the Mississippi Commission has reason to believethat the ownership would be inconsistent with the declared policies of thestate of Mississippi. Although the Mississippi Commission generally does notrequire the individual holders of obligations such as notes to be investigatedand found suitable, the Mississippi Commission retains the discretion to do sofor any reason, including but not limited to a default or where the holder ofthe debt instrument exercises a material influence over the gaming operationsof the entity in question. Any holder of debt securities required to apply fora finding of suitability must pay all investigative fees and costs of theMississippi Commission in connection with the investigation. If the MississippiCommission determines that a person is unsuitable to own a debt security, thenthe Registered Corporation may be sanctioned, including the loss of itsapprovals, if without the prior approval of the Mississippi Commission it: (i) paysto the unsuitable person any dividend, interest, or any distributionwhatsoever; (ii) recognizes any voting right by the unsuitable person inconnection with those securities; (iii) pays the unsuitable personremuneration in any form; or (iv) makes any payment to the unsuitableperson by way of principal, redemption, conversion, exchange, liquidation, orsimilar transaction.

RCVP and BGI must maintain in Mississippi a currentledger with respect to the ownership of their equity securities, and we mustmaintain a current list of stockholders in the principal office of RCVP, whichlist must reflect the record ownership of each outstanding share of any classof our equity securities. The ledger and stockholder lists must be availablefor inspection by the Mississippi Commission at any time. If any securities areheld in trust by an agent or by a nominee, the record holder may be required todisclose the identity of the beneficial owner to the Mississippi Commission. Afailure to make such disclosure may be grounds for finding the record holderunsuitable. We must also render maximum assistance in determining the identityof the beneficial owner.

The Mississippi Act requires that the certificatesrepresenting securities of a Registered Corporation bear a legend indicatingthat the securities are subject to the Mississippi Act and the regulations ofthe Mississippi Commission. We have received from the Mississippi Commission awaiver of this legend requirement. The Mississippi Commission has the power toimpose additional restrictions on the holders of our securities at any time.

Substantially all material loans, leases, sales ofsecurities and similar financing transactions by a Registered Corporation or alicensed gaming subsidiary must be reported to or approved by the MississippiCommission. A licensed gaming subsidiary may not make a public offering of itssecurities, but may pledge 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

or mortgage casinofacilities. A Registered Corporation may not make a public offering of itssecurities without the prior approval of the Mississippi Commission if any partof the proceeds of the offering is to be used to finance the construction,acquisition or operation of gaming facilities in Mississippi or to retire orextend obligations incurred for one or more such purposes. Such approval, ifgiven, does not constitute a recommendation or approval of the investmentmerits of the securities subject to the offering.

Under the regulations of the Mississippi Commission, aMississippi gaming subsidiary may not guarantee a security issued by anaffiliated company pursuant to a public offering, or pledge its assets tosecure payment or performance of the obligations evidenced by the securityissued by the affiliated company, without the prior approval of the MississippiCommission. A pledge of the stock of a Mississippi gaming subsidiary and theforeclosure of such a pledge are ineffective without the prior approval of theMississippi Commission. Moreover, restrictions on the transfer of an equitysecurity issued by a Mississippi gaming subsidiary and agreements not toencumber such securities are ineffective without the prior approval of the MississippiCommission.

Changes in control of the Company through merger,consolidation, acquisition of assets, management or consulting agreements, oract or conduct by a person by which he or she obtains control, may not occurwithout the prior approval of the Mississippi Commission. Entities seeking toacquire control of a Registered Corporation must satisfy the MississippiCommission in a variety of stringent standards prior to assuming control of theRegistered Corporation. The Mississippi Commission may also require controllingstockholders, officers, directors, and other persons having a materialrelationship or involvement with the entity proposing to acquire control to beinvestigated and licensed as part of the approval process relating to the transaction.

The Mississippi legislature has declared that somecorporate acquisitions opposed by management, repurchases of voting securitiesand other corporate defense tactics that affect corporate gaming licensees inMississippi and Registered Corporations may be injurious to stable andproductive corporate gaming. The Mississippi Commission has established aregulatory scheme to ameliorate the potentially adverse effects of thesebusiness practices upon Mississippi’s gaming industry and to promote Mississippi’spolicy to: (i) assure the financial stability of corporate gamingoperators and their affiliates; (ii) preserve the beneficial aspects ofconducting business in the corporate form; and (iii) promote a neutralenvironment for the orderly governance of corporate affairs.

Approvals are, in certain circumstances, required fromthe Mississippi Commission before a Registered Corporation may make exceptionalrepurchases of voting securities (such as repurchases that treat holdersdifferently) in excess of the current market price and before a corporateacquisition opposed by management may be consummated. Mississippi’s gamingregulations also require prior approval by the Mississippi Commission of a planof recapitalization proposed by a Registered Corporation’s board of directorsin response to a tender offer made directly to the stockholders for the purposeof acquiring control of the Registered Corporation.

Neither we nor any of our subsidiaries may engage ingaming activities in Mississippi while also conducting gaming operationsoutside of Mississippi without approval of the Mississippi Commission. TheMississippi Commission may require determinations that, among other things,there are means for the Mississippi Commission to have access to information concerningthe out-of-state gaming operations of the Company and itsaffiliates. We have previously obtained a waiver of foreign gaming approvalfrom the Mississippi Commission for operations in other states and will berequired to obtain the approval or a waiver of such approval from theMississippi Commission prior to engaging in any additional future gamingoperations outside of Mississippi.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

If the Mississippi Commission determined that we or alicensed gaming subsidiary violated a gaming law or regulation, the MississippiCommission could limit, condition, suspend, or revoke our approvals and thelicense of the subsidiary. In addition, we, the licensed subsidiary, and thepersons involved could be subject to substantial fines for each separateviolation. Because of such violations, the Mississippi Commission could seek toappoint a supervisor to operate our casino facilities. Limitation, conditioningor suspension of any gaming license or approval or the appointment of asupervisor could (and revocation of any gaming license or approval would)materially adversely affect us and RCVP’s gaming operations or BGI’smanufacturer, distributor, and wide-area progressive operations, as the casemay be.

License fees and taxes, computed in various waysdepending on the type of gaming involved, are payable to the State ofMississippi and to the counties and cities in which a licensed gamingsubsidiary’s operations are conducted. Depending on the particular fee or taxinvolved, these fees and taxes are payable either monthly, quarterly, orannually and are based on (i) a percentage of the gross gaming revenuesreceived by the casino operation; (ii) the number of gaming devicesoperated by the casino; or (iii) the number of table games operated by thecasino. The license fee payable to the State of Mississippi is based upon “gamingrevenues” (generally defined as gross revenues less payouts to customers aswinnings), and equals 4% of gaming revenues of $50,000 or less per month, 6% ofgaming revenues that exceed $50,000 but do not exceed $134,000 per month, and8% of gaming revenues that exceed $134,000 per month. The foregoing licensefees we pay are allowed as a credit against our Mississippi income taxliability paid for the year. The gross revenue fee imposed by the City ofVicksburg, Mississippi, where RCVP’s casino operations are located, equalsapproximately 4% of gaming revenues.

The Mississippi Commission’s regulations require as acondition of licensing or license renewal that an existing licensed gamingestablishment’s plan include a 500-car parking facility in closeproximity to the casino complex and infrastructure facilities that amount to atleast 25% of the casino cost. We believe the Rainbow Casino is in compliancewith this requirement. The Mississippi Commission adopted a change to thisregulation increasing the infrastructure requirement to 100%; however, theregulation grandfathers existing licensees and applies only to new casinoprojects and casinos that are not operating at the time of acquisition or purchaseby new owners.

In recent years, certain anti-gaming groups proposedthe adoption, through the initiative and referendum process, of certainamendments to the Mississippi Constitution that would prohibit gaming in thestate. The proposals were declared illegal by the Mississippi courts onconstitutional and procedural grounds. The latest ruling was appealed to theMississippi Supreme Court, which affirmed the decision of the lower court. Ifanother such proposal were to be offered and if a sufficient number ofsignatures were to be gathered to place a legal initiative on the ballot, it ispossible for the voters of Mississippi to consider such a proposal in November 2006.While we are unable to predict whether such an initiative will appear on aballot or the likelihood of such an initiative being approved by the voters, ifsuch an initiative were passed and gaming were prohibited in Mississippi, itwould have a significant adverse effect on us and our Mississippi gamingoperations.

The sale of alcoholic beverages by the Rainbow Casinoowned and operated by RCVP is subject to the licensing, control and regulationby both the City of Vicksburg and the Alcoholic Beverage Control Division (the “ABC”)of the Mississippi State Tax Commission. The Rainbow Casino area has beendesignated as a special resort area, which allows the Rainbow Casino to servealcoholic beverages on a 24-hour basis. The ABC has the full power tolimit, condition, suspend or revoke any license for the serving of alcoholicbeverages or to place such a licensee on probation with or without conditions.Any such disciplinary action could (and revocation would) have a materialadverse effect on RCVP’s operations. 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

Certain officers andmanagers of RCVP must be investigated by the ABC in connection with its liquorpermits, and changes in certain positions must be approved by the ABC.

*NewJersey.**  *BGI islicensed by the New Jersey Casino Control Commission (the “New JerseyCommission”) as a gaming-related casino service industry (“CSI”) inaccordance with the New Jersey Casino Control Act (the “Casino Control Act”).We are a holding company, as that term is defined by the Casino Control Act, ofBGI and thus are a qualifier in connection with BGI’s CSI license and have beenapproved as such by the New Jersey Commission. BGI has an application pendingto renew its CSI license under the Casino Control Act.

The New Jersey Commission requires the officers,directors, key personnel, financial sources, and stockholders (in particularthose with holdings in excess of 5%) of a CSI license holder and its holdingand intermediary companies to qualify in accordance with the Casino ControlAct. BGI is required to notify the New Jersey Commission of any appointment,nomination, election, resignation, termination, incapacitation, or death of anyperson or entity otherwise required to qualify pursuant to the Casino ControlAct. Such persons and entities may be investigated and may be required to makecertain regulatory filings and to disclose and/or to provide consents todisclose personal and financial data. The costs associated with suchinvestigation are typically borne by the applicant.

*Louisiana.**  *The manufacturing, distribution, servicing, andoperation of gaming devices (“Devices”) in Louisiana are subject to the LouisianaGaming Control Law and the rules and regulations promulgated thereunder(the “Louisiana Act”). Licensing and regulatory control is maintained by asingle gaming control board for the regulation of gaming in Louisiana. ThisBoard, created on May 1, 1996, is called the Louisiana Gaming ControlBoard (the “Louisiana Board”) and oversees all licensing for all forms oflegalized gaming in Louisiana (including all regulatory enforcement, andsupervisory authority that exists in the state as to gaming on Native Americanlands). The Louisiana State Police within the Department of Public Safety andCorrections (the “Division”) performs the investigative functions for theLouisiana Board. The laws and regulations of Louisiana are based on policies ofmaintaining the health, welfare, and safety of the general public andprotecting the gaming industry from elements of organized crime, illegalgambling activities, and other harmful elements, as well as protecting thepublic from illegal and unscrupulous gaming to ensure the fair play of devices.

BGI, doing business as Bally Gaming and Systems, holdsthe following permits (licenses): (i) Gaming Supplier Permit; (ii) Manufacturerof Slot Machines and Video Draw Poker Devices Permit; and (iii) Manufacturerof Gaming Equipment other than Slot Machines and Video Draw Poker DevicesPermit.

The Louisiana Board may deny, impose a condition on,or suspend or revoke a permit, renewal, or application for a permit forviolations of any rules and regulations of the Louisiana Board or anyviolations of the Louisiana Act. In addition, fines for violations of gaminglaws or regulations may be levied against the Louisiana Permitee and thepersons involved for each violation of the gaming laws. The permit is deemed apure and absolute privilege and issuance, condition, denial, suspension orrevocation of a permit is at the discretion of the Louisiana Board under theprovisions of the Louisiana Act. A permit is not property or a protectedinterest under the Louisiana constitution.

The Division has the authority to conduct overt andcovert investigations of any person involved directly or indirectly in thegaming industry in Louisiana. These investigations have extended to informationregarding a prospective permitee’s and his or her spouse’s immediate family andrelatives and their affiliations with certain organizations or other businessentities. The investigation may also extend to 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

any person who has orcontrols more than a 5% ownership of, or interest in income or profits in, anapplicant for or holder of a license or who is a key employee or who has theability to exercise significant influence over the permitee. All persons orentities investigated must meet all suitability requirements and qualificationsfor a permitee. The Louisiana Board may deny an application for permitting forany cause it may deem reasonable. The applicant for permitting must pay afiling fee, which applies to the cost of the investigation.

*FederalRegistration.**  *Theoperating subsidiaries of the Company that are involved in the manufacture,sale, distribution, or operation of gaming machines are required to registerannually with the Attorney General of the United States. All currently requiredfilings have been made.

From time to time, certain legislators have proposedthe imposition of a federal tax on gross gaming revenues. No specific proposalsfor the imposition of such a federal tax are currently pending. However, noassurance can be given that such a tax will not be imposed in the future. Anysuch tax could have a material adverse effect on our businesses, financialconditions, or results of operations.

*AdditionalJurisdictions.**  *We, inthe ordinary course of our business, routinely consider business opportunitiesto expand our gaming operations into additional jurisdictions. Although thelaws and regulations of the various jurisdictions in which we operate or intowhich we may expand our gaming operations vary in their technical requirementsand are subject to amendment from time to time, virtually all of thosejurisdictions require licenses, permits, documentation of qualification,including evidence of financial stability, and other forms of approval forcompanies engaged in the manufacture, distribution and operation of gamingmachines as well as for the officers, directors, major stockholders, and keypersonnel of such companies.

We and our key personnel have obtained, or appliedfor, all government licenses, registrations, findings of suitability, permits,and approvals necessary for the manufacture, distribution and, where permitted,operation of gaming machines in the jurisdictions in which we do business. Weand the holders of our securities may be subject to the provisions of thegaming laws of each jurisdiction where we or our subsidiaries are licensed orare applying for licensing or conduct business, including, without limitation,Arizona, California, Colorado, Connecticut, Delaware, Florida, Illinois,Indiana, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana,Nevada, New Jersey, New Mexico, New York, Oklahoma, Pennsylvania, Puerto Rico,South Dakota, Washington, West Virginia, Wisconsin, and the local regulatoryauthorities within each such state, as well as Australian, Canadian, and otherforeign gaming jurisdictions in which BGI and its subsidiaries are licensed orconduct business.

Holders of common stock of an entity licensed tomanufacture and sell gaming machines, and in particular those with holdings inexcess of 5%, should note that local laws and regulations may affect theirrights regarding the purchase of such common stock and may require such personsor entities to make certain regulatory filings or seek licensing, findings ofqualification, or other approvals. In some cases this process may require theholder or prospective holder to disclose or provide consents to disclosepersonal and financial data in connection with necessary investigations, thecosts of which are typically borne by the applicant. The investigative andapproval process can take three to six months to complete under normalcircumstances.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**ITEM 2.**                PROPERTIES

Thefollowing table sets forth information regarding our leased properties as of June 30,2005, all of which are fully utilized unless otherwise noted (dollars in 000s):

| **Location**                                  | ** ** | ** **                                     | ** ** | **Use** | ** ** | **Building  Square  Feet** | ** ** | **Annual  Rental  Payments** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------|------------|---------|------------|----------------------------|------------|------------------------------|------------|
| Bally Gaming and  Systems business unit: |       |                                           |       |    |       |                       |       |                         |       |   |   |
| Absecon, NJ                                   |       | Direct  mail office                            |       |    | 5,300      |                       |       |                         | $          | 63 |   |   |
| Atlantic City, NJ                             |       | Sales  offices and warehousing                 |       |    | 15,800     |                       |       |                         | 136        |   |   |
| Bellevue, WA                                  |       | Administrative  offices                        |       |    | 7,581      |                       |       |                         | 140        |   |   |
| Biloxi, MS                                    |       | Sales  offices                                 |       |    | 5,000      |                       |       |                         | 50         |   |   |
| Campbell Hall, NY                             |       | Offices                                        |       |    | 6,900      |                       |       |                         | 128        |   |   |
| Cheekotowage, NY                              |       | Offices                                        |       |    | 1,143      |                       |       |                         | 8          |   |   |
| Chester, NY                                   |       | Office/warehouse                               |       |    | 5,000      |                       |       |                         | 37         |   |   |
| Clifton Park, NY                              |       | Offices                                        |       |    | 504        |                       |       |                         | 9          |   |   |
| Dover, DE                                     |       | Offices                                        |       |    | 468        |                       |       |                         | 6          |   |   |
| Egg Harbor  Township, NJ                      |       | General,  research and development offices     |       |    | 24,750     |                       |       |                         | 461        |   |   |
| Fife, WA                                      |       | Office/warehouse                               |       |    | 6,550      |                       |       |                         | 81         |   |   |
| Gulfport, MS                                  |       | Offices                                        |       |    | 1,500      |                       |       |                         | 5          |   |   |
| Hollywood, FL                                 |       | Sales  offices                                 |       |    | 3,400      |                       |       |                         | 8          |   |   |
| Huntington Beach,  CA                         |       | Offices                                        |       |    | 3,340      |                       |       |                         | 59         |   |   |
| Las Vegas, NV                                 |       | Offices/warehouse                              |       |    | 101,650    |                       |       |                         | 704        |   |   |
| Las Vegas, NV                                 |       | Warehousing                                    |       |    | 20,640     |                       |       |                         | 160        |   |   |
| Las Vegas, NV                                 |       | Offices                                        |       |    | 2,939      |                       |       |                         | 32         |   |   |
| Las Vegas, NV                                 |       | Office/warehouse                               |       |    | 90,000     |                       |       |                         | 283        |   |   |
| Livermore, CA                                 |       | Office/warehouse                               |       |    | 43,337     |                       |       |                         | 551        |   |   |
| Marysville, WA                                |       | Warehousing                                    |       |    | 4,400      |                       |       |                         | 32         |   |   |
| Oklahoma City, OK                             |       | Warehouse/storage                              |       |    | 16,730     |                       |       |                         | 66         |   |   |
| Pleasanton, CA                                |       | Office  and storage                            |       |    | 3,176      |                       |       |                         | 52         |   |   |
| Reno, NV                                      |       | Office/warehouse                               |       |    | 30,500     |                       |       |                         | 412        |   |   |
| Reno, NV                                      |       | Offices                                        |       |    | 20,284     |                       |       |                         | 258        |   |   |
| Reno, NV                                      |       | Warehousing                                    |       |    | 9,626      |                       |       |                         | 97         |   |   |
| Reno, NV                                      |       | Warehousing                                    |       |    | 3,511      |                       |       |                         | 36         |   |   |
| San Juan, PR                                  |       | Sales  offices                                 |       |    | 2,135      |                       |       |                         | 31         |   |   |
| Slidell, LA                                   |       | Offices                                        |       |    | 1,250      |                       |       |                         | 15         |   |   |
| Sommerville, NJ                               |       | Warehousing                                    |       |    | 10,000     |                       |       |                         | 33         |   |   |
| Sparks, NV                                    |       | Administrative  /sales offices and warehousing |       |    | 33,384     |                       |       |                         | 441        |   |   |
| Temecula, CA                                  |       | Sales  offices                                 |       |    | 1,920      |                       |       |                         | 21         |   |   |
| Westchester, IL                               |       | Sales  offices                                 |       |    | 2,132      |                       |       |                         | 48         |   |   |
| Hannover, Germany                             |       | Administrative  offices and warehousing        |       |    | 13,292     |                       |       |                         | 91         |   |   |
| Hannover, Germany                             |       | Administrative  offices                        |       |    | 248        |                       |       |                         | 10         |   |   |
| Montevideo,  Uruguay                          |       | Administrative  offices                        |       |    | 1,367      |                       |       |                         | 28         |   |   |
| Nice, France                                  |       | Administrative  offices                        |       |    | 5,844      |                       |       |                         | 137        |   |   |
| Province of  Cordoba, Argentina               |       | Administrative  offices                        |       |    | 969        |                       |       |                         | 4          |   |   |
| Shropshire,  England                          |       | Administrative  offices                        |       |    | 1,550      |                       |       |                         | 17         |   |   |
| Wigan, England                                |       | Office/warehouse                               |       |    | 10,985     |                       |       |                         | 71         |   |   |
| Casino Operations  business unit:             |       |                                           |       |    |       |                       |       |                         |       |   |   |
| Vicksburg, MS                                 |       | Storage                                        |       |    | 3,000      |                       |       |                         | 27         |   |   |
| Vicksburg, MS                                 |       | Administrative offices                         |       |    | 1,500      |                       |       |                         | 10         |   |   |
|                                               |            |                                                |            |         |            |                            |            |                              |            |  |  |  |  |  |

 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

See Note 19 to the consolidated financial statements,Commitments and Contingencies, for information as to our lease commitments withrespect to the foregoing rental properties.

Thefollowing table sets forth information regarding properties owned by us as of June 30,2005, all of which are fully utilized unless otherwise noted. Except for theLas Vegas, NV property, each of the properties listed below is utilized in ourCasino Operation business unit:

| **Location**  | ** ** | ** **                                         | ** ** | **Use** | ** ** | **Building Square Feet** | ** ** |
|---------------|------------|----------------------------------------------------|------------|---------|------------|------------------------------------|------------|
| Las Vegas, NV |       | Administrative  offices and manufacturing facility |       |    | 150,000    |                               |       |
| Vicksburg, MS |       | Casino                                             |       |    | 33,000     |                               |       |
| Vicksburg, MS |       | Entertainment  facility                            |       |    | 20,000     |                               |       |
| Vicksburg, MS |       | Administrative  offices                            |       |    | 3,200      |                               |       |
| Vicksburg, MS |       | Vacant-land                                        |       |    | —     |                               |       |

 

We believe our facilitiesare suitable for our needs and we have no future expansion plans that wouldmake these properties inadequate.

**ITEM 3.**                LEGALPROCEEDINGS

***Litigation***

On September 25, 1995, BGI, a wholly-ownedsubsidiary of the Company, was named as a defendant in a class action lawsuitfiled in the United States District Court for the District of Nevada. Theplaintiffs filed suit against BGI and approximately 45 other defendants, eachof which is involved in the gaming business as a gaming machine manufacturer,distributor, or casino operator. The lawsuit arises out of alleged fraudulentmarketing and operation of casino video poker machines and electronic slotmachines. The plaintiffs alleged that the defendants have engaged in a courseof fraudulent and misleading conduct intended to induce people into playingtheir gaming machines based on a false belief concerning how those machinesactually operate, as well as the extent to which there is actually anopportunity to win on any given play. The plaintiffs allege that the defendants’actions constitute violations of the Racketeer Influenced and CorruptOrganizations Act (RICO) and give rise to claims of common law fraud and unjustenrichment. The plaintiffs are seeking monetary damages in excess of$1.0 billion. In July 2002, the federal district court denied theplaintiffs’ request for class action certification. In August 2004, theUnited States Court of Appeals for the Ninth Circuit affirmed the districtcourt’s denial of class action certification, and the plaintiffs did notappeal. Subsequently, two of the four named plaintiffs elected to continuetheir cases as individual, non-class actions. However, in September 2005,the court granted the defendants’ motions for summary judgment, resolving allclaims in defendants’ favor without a trial. In October 2005, theplaintiffs’ appealed the District Court’s granting of summary judgment in favorof the defendants to the Ninth Circuit. Management believes the plaintiffslawsuit to be without merit. The Company will continue to pursue all availablelegal defenses.

In June 2004, putative class actions were filedagainst Alliance and its officers, Robert Miodunski, Robert Saxton, MarkLerner, and Steven Des Champs, in the United States District Court for theDistrict of Nevada. The nearly identical complaints alleged violations of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”) stemming fromrevised earnings guidance, declines in the stock price, and sales of stock byinsiders. The complaints sought damages in unspecified amounts. The federaldistrict court granted the plaintiffs’ unopposed motions to consolidate thecases and to appoint a lead counsel and a lead plaintiff, and the plaintiffsfiled a consolidated complaint, all as is customary in such cases. Alliance 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

and the other defendantshave moved for summary judgment, and the motion is being briefed. Alliancebelieves the lawsuits are without merit and intends to vigorously defend itselfand its officers. In addition, in July 2004 two derivative lawsuits werefiled in Nevada state court against the members of the board of directors andthe officers listed above. The Company is named as a nominal defendant in thederivative lawsuits as the claims are purportedly asserted for the benefit ofAlliance. These lawsuits assert claims for breach of fiduciary duty and wasteof corporate assets arising out of the same events as those giving rise to theclass actions described above, and seek injunctive relief and damages inunspecified amounts. These two cases were consolidated, and Alliance and theother defendants moved to dismiss the case. In February 2005, the state districtcourt granted the defendants’ motion and dismissed the case, and the plaintiffshave appealed the case the Nevada Supreme Court, where the matter is pending.Management believes the plaintiffs’’ lawsuit to be without merit. The Companywill continue to pursue all available legal defenses.

In August 2004, Shuffle Master, Inc., suedthe Company in the United States District Court for the District of Nevada,alleging infringement of various patents in connection with the Company’sMindPlay product line and seeking injunctive relief and damages in anunspecified amounts. In June 2005, it was announced that IGT had acquiredan interest in the patents at issue in the case, and thereafter IGT joined thecase as a plaintiff. The Company is vigorously defending against the lawsuit,which is in the discovery phase. Management believes the plaintiffs’’ lawsuitto be without merit. The Company will continue to pursue all available legaldefenses.

In September 2004, a United States District Courtjury in the District of Nevada entered a $7.4 million verdict against theCompany in a suit filed by Action Gaming, Inc., and IGT. The suit allegedthat the multi-hand video poker game deployed by the Company’s formersubsidiary, United Coin Machine Co. (“United Coin”), infringed the plaintiffs’patents. The district court ruled on summary judgment that the game does notinfringe the patents. However, the court left to the jury the question whetherthe use of “autohold,” a specific, optional feature of the game, caused it toinfringe under the “doctrine of equivalents,” a doctrine of patent law. After atwo-week trial, the jury determined that the game with the autohold optionenabled did infringe under the doctrine of equivalents and awarded damagesaccordingly. The feature has been disabled on all affected games in the field,and the decision permits continued deployment of the game as long as theautohold feature is not included. The Company is pursuing various remedies andhas posted a cash bond totaling $7.7 million to stay payment of the judgmentand accrued interest pending appeal. The cash bond is included in othernon-current assets and the accrued liability is included in accrued liabilitiesin the accompanying balance sheet. This amount has been accrued and the expensefor this charge is included in discontinued operations in the accompanyingstatement of operations.

On December 7, 2004, IGT filed a patentinfringement lawsuit against Alliance in the United States District Court forthe District of Nevada. The complaint asserts that Alliance’s wheel-basedgames, such as Monte Carlo and Cash For Life, and its iView products infringeon patents held by IGT, and seeks injunctive relief and damages in unspecifiedamounts. Alliance believes IGT’s claims are without merit and is vigorouslydefending itself against the lawsuit. As part of its defense, Alliance hasasserted counterclaims against IGT, including claims that IGT’s patents areinvalid as well as several claims that IGT has engaged in anti-competitiveconduct in violation of state and federal antitrust laws. By its counterclaims,Alliance is seeking damages and other relief from IGT. The litigation is in thediscovery phase and no trial date has been set.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

In February 2005, theSEC initiated an informal inquiry and requested documents and informationregarding matters related to the allegations in the class actions and similarmatters. In August 2005, the SEC notified the Company that itsinvestigation had entered a formal phase, and has requested additionalinformation from the Company covering the same general areas that wereaddressed in the informal inquiry. Management is cooperating fully with the SECin this matter.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Ourcommon stock is listed on the New York Stock Exchange (the “NYSE”) under thesymbol “AGI”. The following table sets forth the high and low closing bid priceof the common stock as reported by the NYSE for the periods indicated. 

| ** **                              | ** ** | **Price Range of** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **Common Stock**        | ** ** |
| ** **                              | ** ** | **High**                     | ** ** | **Low** | ** ** |
| *Fiscal Year Ended June 30,  2006* |       |                         |       |   |   |
| 1st Quarter                        |       | $                            | 15.53      |   | $ | 10.43 |   |
| *Fiscal Year Ended June 30,  2005* |       |                         |       |   |   |
| 1st Quarter                        |       | $                            | 16.82      |   | $ | 12.09 |   |
| 2nd Quarter                        |       | 14.07                        |       | 9.12 |   |
| 3rd Quarter                        |       | 13.21                        |       | 9.40 |   |
| 4th Quarter                        |       | 15.42                        |       | 9.48 |   |
| *Fiscal Year Ended June 30,  2004* |       |                         |       |   |   |
| 1st Quarter                        |       | $                            | 23.78      |   | $ | 19.01 |   |
| 2nd Quarter                        |       | 27.37                        |       | 20.72 |   |
| 3rd Quarter                        |       | 33.45                        |       | 23.27 |   |
| 4th Quarter                        |       | 34.00                        |       | 15.63 |   |

 

As of****December 26,2005, we had approximately 1,000 holders of record of our common stock.

We have never declared orpaid cash dividends on our common stock. Our bank loan agreement materiallylimits our ability pay dividends on our common stock. We intend to follow apolicy of retaining earnings to finance growth of our business and do notanticipate paying any cash dividends in the foreseeable future. The declarationand payment of future dividends on our common stock will be at the solediscretion of our Board of Directors and will depend on our profitability, ourability to pay dividends under the terms of our bank credit agreement, asdiscussed in Item 7, Management’s Discussion and Analysis of FinancialConditions and Results of Operations—Risk Factors, and our financial condition,capital requirements, statutory and contractual restrictions, future prospectsand other factors the Board of Directors deems relevant.

29

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**Equity Compensation Plans**

Thefollowing table sets forth information as of June 30, 2005 with respect toour equity compensation plans that provide for the issuance of options topurchase our common stock:

| ** **                                                  | ** ** | **Number of Securities  to be issued upon exercise   of outstanding options,  warrants and rights(1)** | ** ** | **Weighted average  exercise  price of outstanding  options,warrants and rights(1)** | ** ** | **Number of Securities  remaining available for  future issuance  under equity compensation  plans (excluding securities  reflected in the first column)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| *Plan Category*                                             |       |                                                                                                                                                          |       |                                                                                                          |       |                                                                                                                                                                                                                        |       |   |   |   |   |   |   |
| Equity compensation  plans approved by security holders     |       |                                                                                                                                                          | 8,716,736  |                                                                                                          |       |                                                                                                                                                                                                                        | $          | 13.79 |   |   |   | 2,009,220 |   |   |
| Equity compensation plans not approved by security  holders |       |                                                                                                                                                          | —     |                                                                                                          |       |                                                                                                                                                                                                                        | —     |   |   |   | — |   |   |
| Total                                                       |       |                                                                                                                                                          | 8,716,736  |                                                                                                          |       |                                                                                                                                                                                                                        | $          | 13.79 |   |   |   | 2,009,220 |   |   |

 

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(1)          Rightsinclude grants for Restricted Stock and Restricted Stock Units.

**ITEM 6.**                SELECTEDFINANCIAL DATA

The followingselected financial data for the fiscal years ended June 30, 2005, 2004 and2003 has been derived from the Consolidated Financial Statement which appearselsewhere in this Annual Report on Form 10-K. The consolidatedfinancial statements for the years ended June 30, 2004 and 2003 have beenrestated in this Annual Report on Form 10-K, and the financialinformation presented below for the years ended June 30, 2004, 2003 and2002 reflects the restatement. The Selected Financial Data should be read inconjunction with:

·       Item7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations

·       Item8, Financial Statements and Supplementary Data;

·       Note2 to consolidated financial statements, Restatement of Previously IssuedFinancial Statements; and

·       Note 22 to consolidatedfinancial statements, Selected Quarterly Financial Data (unaudited).

30

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

 

| ** **                                                                          | ** ** | **Fiscal Year Ended June 30,**              | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                                                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                          | ** ** | ** **                                                      | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** | ** ** | ** ** |
| ** **                                                                          | ** ** | **(In 000s except per share amounts)** | ** ** |
| Statement of Operations  Data:                                                      | ** ** | ** **                                                      | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Total revenues  from continuing operations                                          |       | $                                                               | 484,030    |   |   | $ | 480,408 |   |   |   | $ | 363,212 |   |   |   | $ | 273,415 |   |   | $ | 214,098 |   |
| Operating income  (loss)(2)                                                         |       | (5,722                                                          | )          |   | 92,137 |   |   |   | 71,664 |   |   |   | 50,017 |   |   | 29,449 |   |
| Income (loss)  from continuing operations before income taxes and minority interest |       | (22,582                                                         | )          |   | 63,569 |   |   |   | 46,637 |   |   |   | 23,403 |   |   | (5,462 | ) |
| Income tax  expense (benefit)                                                       |       | (6,510                                                          | )          |   | 21,513 |   |   |   | 16,516 |   |   |   | (39,256 | ) |   | (1,313 | ) |
| Minority interest                                                                   |       | (4,245                                                          | )          |   | (2,309 | ) |   |   | (2,009 | ) |   |   | (1,935 | ) |   | (2,165 | ) |
| Income (loss)  from continuing operations                                           |       | (20,317                                                         | )          |   | 39,747 |   |   |   | 28,112 |   |   |   | 60,724 |   |   | (6,314 | ) |
| Income (loss)  from discontinued operations(3)                                      |       | (4,654                                                          | )          |   | 40,889 |   |   |   | (17,638 | ) |   |   | 1,612 |   |   | 20,796 |   |
| Net income (loss)                                                                   |       | $                                                               | (24,971    | ) |   | $ | 80,636 |   |   |   | $ | 10,474 |   |   |   | $ | 62,336 |   |   | $ | 14,482 |   |
| Basic earning (loss) per  share:                                                    |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                               |       | $                                                               | (0.40      | ) |   | $ | 0.79 |   |   |   | $ | 0.57 |   |   |   | $ | 1.31 |   |   | $ | (0.14 | ) |
| Discontinued operations                                                             |       | (0.09                                                           | )          |   | 0.82 |   |   |   | (0.36 | ) |   |   | 0.04 |   |   | 0.49 |   |
| Total                                                                               |       | $                                                               | (0.49      | ) |   | $ | 1.61 |   |   |   | $ | 0.21 |   |   |   | $ | 1.35 |   |   | $ | 0.35 |   |
| Diluted earning (loss)  per share:                                                  |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                               |       | $                                                               | (0.40      | ) |   | $ | 0.78 |   |   |   | $ | 0.56 |   |   |   | $ | 1.28 |   |   | $ | (0.14 | ) |
| Discontinued operations                                                             |       | (0.09                                                           | )          |   | 0.80 |   |   |   | (0.36 | ) |   |   | 0.04 |   |   | 0.48 |   |
| Total                                                                               |       | $                                                               | (0.49      | ) |   | $ | 1.58 |   |   |   | $ | 0.20 |   |   |   | $ | 1.32 |   |   | $ | 0.34 |   |

 

| ** **                                          | ** ** | **As of June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                          | ** ** | ** **                        | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** | **As restated(1)** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **(In 000s)**                | ** ** |
| Balance Sheet Data:                                 | ** ** | ** **                        | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Cash and cash  equivalents                          |       | $                                 | 33,170     |   |   | $ | 154,258 |   |   |   | $ | 24,406 |   |   |   | $ | 24,700 |   |   | $ | 27,029 |   |
| Restricted cash                                     |       | 13,421                            |       |   | 15,590 |   |   |   | 14,478 |   |   |   | 7,100 |   |   | 2,100 |   |
| Working capital                                     |       | 129,293                           |       |   | 262,883 |   |   |   | 139,938 |   |   |   | 99,459 |   |   | 53,297 |   |
| Total assets                                        |       | 648,094                           |       |   | 768,431 |   |   |   | 538,456 |   |   |   | 461,424 |   |   | 371,017 |   |
| Total long term debt,  including current maturities |       | 335,117                           |       |   | 428,955 |   |   |   | 345,215 |   |   |   | 341,793 |   |   | 339,540 |   |
| Total stockholders’  equity (deficiency)       |       | 178,937                           |       |   | 186,363 |   |   |   | 81,068 |   |   |   | 44,473 |   |   | (39,205 | ) |
|                                                     |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          See Note 2 to theConsolidated Financial Statements, Restatement of Previously Issued FinancialStatements.

(2)          TheCompany has recorded the following significant items effecting comparability ofoperating income (loss):

·       Duringthe fiscal year ended June 30, 2005, we recorded severance chargestotaling $3.7 million (see Note 16 to the consolidated financial statements,Severance Charges), certain impairment charges 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

of $3.6 million (see Note17 to the consolidated financial statements, Impairment Charges), inventoryimpairment charges of $26.4 million (see Note 18 to the consolidated financialstatements, Inventory Impairment Charges), and a charge of $0.6 million relatedto an amendment to our bank loan agreement (see Note 11 to the consolidatedfinancial statements, Long-Term Debt).

·       Duringthe fiscal year ended June 30, 2004, we recorded a loss on extinguishmentof debt of $12.3 million (see Note 11 to the consolidated financial statements,Long-Term Debt).

·       During the fiscal yearended June 30, 2001, the Company incurred costs and expenses related tothe contemplated sale of the Nevada route operations totaling $6.5 million.

(3)          We sold our Nevada route operations, the RailCity Casino and Bally Wulff during fiscal year 2004. The Nevada route operationdisposition was completed on June 30, 2004, the Rail City disposition wascompleted on May 3, 2004 and the Bally Wulff disposition was completed on July 18,2003. On October 14, 2004, we sold our interest in our Louisiana routeoperations.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**ITEM7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Forward-Looking Statements**

Certain matters in this Annual Report on Form 10-Kand our other filings with the SEC, including, without limitation, certainmatters discussed in this Item 7, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and in Item 7A, Quantitative andQualitative Disclosures about Market Risk, constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the ExchangeAct, and are subject to the safe harbor created thereby. Those statementsreflect the intent, belief or current expectations of the Company, its directorsor its officers with respect to, among other things, future events andfinancial trends affecting the Company.

Forward-looking statementsare typically identified by the words “believes,” “expects,” “anticipates” andsimilar expressions. In addition, any statements that refer to expectations orother characterizations of future events or circumstances are forward-lookingstatements. Readers are cautioned that any such forward-looking statements arenot guarantees of future performance and that matters referred to in suchforward-looking statements involve known and unknown risks, uncertainties andother factors which may cause actual results, performance or achievements ofthe Company to be materially different from any future results, performance orachievements expressed or implied by such forward-looking statements. Suchfactors include, among other things, the impact of competition anduncertainties concerning such matters as the Company’s ability to service debt,product development, customer financing, sales to non-traditional gamingmarkets, foreign operations, dependence on key personnel, the ability tointegrate future acquisitions, strict regulation by gaming authorities, theoutcome of pending litigation matters including the pending securities classactions, gaming taxes, currency fluctuations and market risk. Certain of thesefactors are discussed in the “Risk Factors” section below. The Companyundertakes no obligation to publicly update or revise these forward-lookingstatements because of new information, future events or otherwise.

**Restatement**

In connection with our year-end closing process for2005, we identified certain possible errors in our accounting and previouslyreported financial information. As a result, in September 2005, we announcedthat we would delay filing our Annual Report on Form 10-K for thefiscal year ended June 30, 2005. Based on our extensive internal reviewdescribed below, our Board of Directors concluded on November 2, 2005 thatthere were material errors in our previously reported financial information andconsequently, that a restatement of our previously reported financialstatements as of June 30, 2004 and for the fiscal years ended June 30,2004 and 2003 and our previously reported unaudited financial information forthe fiscal quarters ended June 30, 2004, September 30, 2004 and 2003,December 31, 2004 and 2003, and March 31, 2005 and 2004 was required.

Our review process included an extensive assessment ofour accounting methods and practices as well as our previously reportedfinancial information. This process, conducted by third party consultants andinternal accountants under the direction of our senior management and with theoversight of the Audit Committee of the Board of Directors, consisted of anextensive review of our sales contracts, account reconciliations, financialinformation, and certain transactions. Our review determined that theaccounting errors in our previously reported financial information and thefailure to prevent or detect them in our financial reporting process were, inpart, attributable to material weaknesses in our internal control over 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

financial reporting. Thematerial weaknesses are described in “—Internal Control Over FinancialReporting” in Item 9A, Controls and Procedures.

The restatementdecreased:

(i)            gaming and systemsrevenues by $8.5 million and $23.2 million in fiscal years 2004 and 2003,respectively;

(ii)        cost of sales and otherexpenses by $1.9 million and $9.9 million in fiscal years 2004 and 2003,respectively; and

(iii)    income from continuingoperations by $3.9 million and $9.0 million in fiscal years 2004 and 2003,respectively.

We also recorded an adjustment to change theclassification of certain certificates of deposit with maturities beyond 90days when purchased from cash and cash equivalents to other current assets,totaling $3.1 million as of June 30, 2004, and an adjustment to change theclassification of certain jackpot reserve cash accounts from cash and cashequivalents to restricted cash totaling $15.6 million as of June 30, 2004.

The Company also determined that it should havepresented the cash flows from discontinued operations within the respectiveoperating, investing and financing activities in its statements of cash flows,rather than as one separate line item. The cash flow statements were alsoadjusted for the change in the classification of the jackpot reserve cashaccounts to restricted cash.

Thefollowing is a reconciliation of income from continuing operations aspreviously reported, to the restated amounts, by the categories discussed above(in 000s):

| ** **                                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Income from  continuing operations, as previously reported |       | $        | 43,625     |     | $          | 37,162 |   |
| Revenue recognition adjustments, net                       |       | (3,405   | )          | (8,624   | )          |
| Inventory adjustments, net                                 |       | (441     | )          | (420     | )          |
| Other miscellaneous adjustments, net                       |       | (32      | )          | (6       | )          |
| Income from continuing  operations, as restated            |       | $        | 39,747     |     | $          | 28,112 |   |

 

The restatement also resulted in a reduction ofretained earnings as of June 30, 2002 of $1.5 million. 

In connection with therestatement of our financial statements, deferred revenues and related deferredcost of sales as of June 30, 2005 were adjusted and total $31.3 millionand $12.5 million, respectively. The Company expects a majority of such amountsto be recognized as revenue and cost of sales in fiscal year 2006.

**InternalControl Over Financial Reporting**

We have identified material weaknesses in our internalcontrol over financial reporting which are described in Item 9A, Controls andProcedures. Each of these material weaknesses results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. As a result, we have assessedthat our internal control over financial reporting was not effective as of June 30,2005.

We are in the process ofdeveloping and implementing measures to address these material weaknesses. Thekey issues identified by management during its assessment were the high levelof turnover of certain of 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

our key finance andaccounting personnel during fiscal 2005, our inability to timely replacedeparted key personnel and the misinterpretation by management of certaincomplex accounting and tax issues. We aremaking progress in the implementation of these measures however at presentthere can be no assurance as to when the implementation of these measures willbe completed. Until such measures are implemented, we will continue to incurthe expenses and management burdens associated with the additional resources requiredto prepare our consolidated financial statements.

We discuss the risksassociated with the material weaknesses identified below under “—Risk Factors”.

**Our Business**

We are a worldwide leader in designing, manufacturingand distributing gaming machines, having marketed over 100,000 gaming machinesduring the past five years, and computerized monitoring systems for gamingfacilities. We also own and operate the Rainbow Casino, a dockside casino inVicksburg, Mississippi, which has approximately 12 table games andapproximately 890 gaming devices.

We derive our revenues from the following foursources:

*Gaming Equipment**—*Sale of gaming machines

*Systems—**Sales*of computerizedmonitoring systems and related recurring hardware and software maintenancerevenue

*GamingOperations**—*Operationof wide-area progressive systems and lease of gaming machines

*Casino Operations**—*Operation of the Rainbow Casino

**CriticalAccounting Policies and Estimates**

We prepare ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America. Some of our accountingpolicies require us to make difficult and subjective judgments, often as aresult of the need to make estimates of matters that are inherently uncertain. Ourmost critical accounting estimates include valuations utilized in assetimpairment tests, acquisition accounting, revenue recognition, allowance fordoubtful accounts, capitalized costs, inventory valuation and deferred taxreserves. These judgments are subject to an inherent degree of uncertainty. Therecan be no assurance that the actual results will not differ from our estimates.Additional information regarding our significant accounting policies ispresented below.

*Revenue recognition*

Our GamingEquipment and Systems revenue are recognized in accordance with the provisionsof Statement of Position (“SOP”) No. 97-2 and are generallyrecognized when:

·       Persuasiveevidence of an arrangement exists

·       Deliveryhas occurred

·       Thevendors’ fee is fixed or determinable

·       Collectibilityis probable

We sell gaming machines and our computerizedmonitoring systems either through normal credit terms of a 120 days or less, ormay grant extended credit terms of up to five years. Revenue is recorded in 

35

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

accordance with the termsof sale for contracts with payment terms of 24 months or less, or as cash isreceived for contracts with payment terms in excess of 24 months. Games placedwith customers on a trial basis are not recognized as revenue until the trialperiod ends, the customer accepts the games and collectibility is probable.

We also sell gaming devices under arrangements inwhich there are multiple elements, as that term is defined in SOP No. 97-2.Contracts may contain multiple elements such as a combination of gaming devices,central site monitoring equipment, systems software, license fees and training.We allocate revenue to each element based upon its fair value as determined by “vendorspecific objective evidence.” Vendor specific objective evidence of fair valuefor all elements of an arrangement is based upon the normal pricing anddiscounting practices for those products and services when sold separately. Inaddition, software license updates and product support services are measured bythe renewal rate offered to the customer.

We recognize revenue when the product is delivered, orover the period in which the service is performed and we defer revenue for anyundelivered elements. If we cannot objectively determine the fair value of anyundelivered elements included in the arrangement, the revenues are deferreduntil all elements are delivered and services have been performed, or untilfair value can objectively be determined for any remaining undelivered element.

The majority of our software license arrangements isnon-perpetual and includes software license updates and product support whichare recognized ratably over the term of the arrangement, typically one year. Softwarelicense updates provide customers with rights to unspecified software productupgrades, maintenance and patches released during the term of the supportperiod. The majority of our customers purchase both software and hardwaremaintenance and product support when they purchase the systems. In addition,substantially all customers renew these maintenance agreements annually. Revenuefrom multi-year licensing arrangements are accounted for as subscriptions, withbillings recorded as unearned revenue and recognized as revenue ratably overthe billing coverage period, generally one year.

Our Gaming Operations earn recurring revenue thatconsists of the operation of wide-area progressive jackpot systems and revenuesfrom gaming machines placed in casinos on a daily lease or rental basis. Revenuefrom these sources is recognized based on the contractual terms of theparticipation or rental agreements and is generally based on a share of moneywagered, a share of the net winnings, or on a fixed daily rental rate basis.

In accordance withindustry practice, we recognize gaming revenues in our casino operations as thenet win from gaming machine operations, which is the difference between coinsand currency deposited into the machines and payments to customers.

*Inventories*

Inventories are stated atthe lower of cost, determined on a first-in, first-out basis, ormarket. Cost elements included for work-in-process and finishedgoods consist of raw materials, freight, direct labor and manufacturingoverhead. Given the size of the account balance, and the subjective nature of “market”values, management has determined that inventories represent criticalaccounting policies. Accordingly we regularly review inventory quantities andquality and record charges for both obsolete products and products that mayhave become impaired for a variety of reasons, including changes in technology,customer preferences and product demand. Additional valuation charges couldresult in the future as a result of these factors.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

*Property, plant andequipment and leased gaming equipment*

Property, plant and equipment are stated at cost anddepreciated over the estimated useful lives or lease terms, whichever is less,using the straight line method. Leased gaming equipment is stated at cost anddepreciated over estimated useful lives ranging from two to four years to anestimated residual value.

Significant replacements and improvements arecapitalized; while other maintenance and repairs are expensed. The cost andaccumulated depreciation of assets retired or otherwise disposed of areeliminated from the accounts and any resulting gain or loss is credited orcharged to income as appropriate.

Given the changes intechnology, customer preferences and product demand, we regularly review andevaluate the recoverability of our investment in such assets, as well as theestimated useful lives used to depreciate these assets. There is the potentialfor acceleration of future depreciation, or even an asset write-down, if suchfactors were determined to have an adverse impact on our ability to realize ourfull investment in such assets.

*Intangible assets,including goodwill*

We review goodwill andother intangible assets for impairment annually and whenever events orcircumstances indicate carrying value may not be recoverable or warrant arevision to the estimated remaining useful life in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 144, *Accountingfor the Impairment or Disposal of Long-lived Assets,*and**SFAS No. 142,*Goodwill and otherIntangible Assets.* Intangible assets primarily consist ofacquisition-related software and trademarks, which are amortized over three tothirteen years, and goodwill which is not amortized. Some of the intangiblesrepresent products that have been deployed such as SDG’s central-determinationgames and others that are just now being deployed such as MindPlay’s table gametechnology. The success or failure of such products and their ability togenerate future cash flows will have a significant impact on the timing ofamortization expense and/or write-downs in those future periods.

*Impairment of Long-livedAssets*

We review long-livedassets whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability of long-lived assetsare measured by a comparison of the carrying amount of the asset to future netcash flows expected to be generated by the asset, undiscounted and withoutinterest. Such estimations involve significant judgments. If such assets aredetermined to be impaired, the impairment to be recognized is measured by theamount by which the carrying amount of the assets exceeds the fair value of theassets. For assets held for sale, the Company carries such assets at fair valueless estimated costs to sell.

*Jackpot Liabilities*

We recognize a liability for jackpots not yet won andjackpot expense for the cost to fund jackpots in the future. Jackpots arepayable in either equal installments over a 20-year period or immediatelyin the case of instant win progressive jackpots. Winners may elect to receive asingle payment for the present value of a jackpot discount at applicableinterest rates in lieu of annual installments.

Our jackpot liabilitiestotaled $13.0 million at June 30, 2005, including $4.8 million for theconsolidated VIE’s, and totaled $12.1 million at June 30, 2004. Changes inour estimates and assumptions, including the number of jackpot winners who mayelect single-payments in the future could impact our jackpot expense andjackpot liability.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

*Allowances ForDoubtful Accounts*

Allowances for doubtfulaccounts are maintained at levels determined by our management to adequatelyprovide for collection losses. In determining estimated losses, managementconsiders economic conditions, the activity in gaming markets, the financialcondition of customers, changes in technology and other factors whichmanagement believes are relevant.

*Capitalized Costs*

In accordance with SFAS No. 86, *Accounting for the Costs of Computer Software to be Sold, Leased, orOtherwise Marketed*,internally generated software development costs associated with new productsand significant enhancements to existing software products are expensed asincurred until technological feasibility has been established.

We incur significant regulatory approval costs for ourproducts. Such costs are capitalized once technological feasibility has beenestablished and are amortized generally over three years reflective of theestimated product life cycle. Product testing costs related to projects thatare discontinued are expensed when such determination is made. Fees incurred forsuch regulatory approvals totaled approximately $8.9 million and $8.5 millionfor the fiscal years ended June 30, 2005 and 2004, respectively. Of theseamounts incurred, during the fiscal years ended June 30, 2005 and 2004, wecapitalized a total of $2.0 million and $4.8 million respectively that wasdirectly attributable to products, and amortization expense for previouslycapitalized amounts totaled $0.9 million and $0.8 million respectively. Duringfiscal year 2005, we modified our capitalization policy, which previously hadno minimum, to capitalize individual charges greater than $1,000.

Given the subjectivenature of such capitalized costs, we have instituted a strict review processthat includes a full review of the costs incurred and the nature and prospectsof the related product. After costs are capitalized, they are monitored toensure that they are earning revenues through product sales. Future write-offsare possible if such products do not produce adequate cash flows.

*Income taxes*

Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of assets and liabilities and their respective taxbases. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in the periodthat includes the enactment date. Taxes on income of our foreign subsidiariesare provided at the tax rates applicable to the tax jurisdictions in which theyare located.

The recoverability ofcertain deferred tax assets is based in part on estimates of future income andthe timing of temporary differences, and the failure to fully realize suchdeferred tax assets could result in a higher tax provision in future periods. Ournet deferred tax assets totaled $45.8 million and $33.6 million at June 30,2005 and 2004, respectively. Our accrued income taxes totaled $1.8 million at June 30,2005 and $5.7 million at June 30, 2004.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

*Recently issuedaccounting pronouncements*

In December 2004, the FASB issued SFAS No. 123R(revised 2004), *Share-Based Payment*(“SFAS 123R”). SFAS 123Rrequires recognition of share-based compensation in the financial statementsbeginning with our fiscal quarter ended September 30, 2005. We willcontinue to compute compensation expense for stock options using theBlack-Scholes valuation model, and will utilize the modified prospective methodfor adoption of SFAS 123R.

In March 2005, the SEC issued Staff AccountingBulletin (“SAB”) No. 107, *Share-Based Payment* (“SAB No. 107”), to provide interpretive guidance onSFAS No. 123R valuation methods, assumptions used in valuation models, andthe interaction of SFAS No. 123R with existing SEC guidance. SAB No. 107also requires the classification of stock compensation expense in the samefinancial statement line as cash compensation, and will therefore impact ourcost of gaming equipment and systems, casino operations (and related grossprofits and margins), research and development costs, and selling, general andadministrative expenses. We estimate that the expensing of stock options willreduce per net income for fiscal year 2006 by approximately $4.1 million (or$0.08 per share) for the unvested options outstanding as of June 30, 2005.This amount excludes the accelerated vesting of approximately 2.4 millionoptions in June 2005 (see Note 1 to the consolidated financialstatements).

See Note 1 to theconsolidated financial statements, Description of Business and Summary ofSignificant Accounting Principles, for a description of other recently issuedaccounting pronouncements which are relevant to the Company but which webelieve will not have a material impact on the Company.

**Results Of Operations**

Ourresults of operation include the accounts of Alliance Gaming Corporation, andits wholly-owned and partially-owned, controlled subsidiaries.

| ** **                                   | ** ** | **Overall Consolidated Operating Results**                          | ** ** | **Increase/(Decrease)** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **2005**                                                                           | ** ** | **% Rev**          | ** ** | **2004** | ** ** | **% Rev** | ** ** | **2003** | ** ** | **% Rev** | ** ** | **05 vs. 04** | ** ** | **04 vs. 03** | ** ** |
| ** **                                   | ** ** | **(dollars in millions, except earnings per share)** | ** ** |
| Revenues                                     |       | $                                                                                  | 484.0      |                    |       | 100 | % |   | $ | 480.4 |   |   | 100 | % |   | $ | 363.2 |   |   | 100 | % |   |   | 1 | % |   |   | 32 | % |   |
| Gross profit                                 |       | 221.6                                                                              |       |                    | 46         | % |   | 267.6 |   |   | 56 | % |   | 197.3 |   |   | 54 | % |   |   | (17 | )% |   |   | 36 | % |   |
| Operating income  (loss)                     |       | (5.7                                                                               | )          |                    | (1         | )% |   | 92.1 |   |   | 19 | % |   | 71.7 |   |   | 20 | % |   |   | NM |   |   |   | 28 | % |   |
| Income (loss)  from continuing operations    |       | $                                                                                  | (20.3      | )                       |       | (4 | )% |   | $ | 39.7 |   |   | 8 | % |   | $ | 28.1 |   |   | 8 | % |   |   | NM |   |   |   | 41 | % |   |
| Income (loss)  from discontinued  operations |       | (4.7                                                                               | )          |                    | (1         | )% |   | 40.9 |   |   | 9 | % |   | (17.6 | ) |   | (5 | )% |   |   | NM |   |   |   | 332 | % |   |
| Net income (loss)                            |       | $                                                                                  | (25.0      | )                       |       | (5 | )% |   | $ | 80.6 |   |   | 17 | % |   | $ | 10.5 |   |   | 3 | % |   |   | NM |   |   |   | 668 | % |   |

 

We report ourrevenue and income in two segments:

·       ***Bally Gaming and Systems***(which includes *Gaming Equipment, Systems and GamingOperations*)

·       ***Casino Operations***

39

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

Bally Gaming and Systemsrevenue represents approximately 89.2%, 89.1% and 86.0% of total revenues forthe fiscal years ended June 30, 2005, 2004 and 2003, respectively. CasinoOperations revenue represents approximately 10.8%, 10.9% and 14.0% of total revenuefor the fiscal years ended June 30, 2005, 2004 and 2003, respectively.Further descriptions of the fluctuations between fiscal year ends are discussedin depth under each respective segment disclosure below.

***Bally Gaming and Systems***

Through our Bally Gaming and Systems segment we areone of the leading providers of technology to the gaming industry. The gamingindustry has been moving to games which use ticket-in ticket-out (“TITO”)technology over the last several years, thereby reducing coin handling costsand down time for games waiting on the casino floor. During fiscal year 2005,the sale of new gaming devices in the domestic market declined as a result ofthe rapid adoption of TITO capable games during the preceding years. Inaddition, during fiscal year 2005, there were fewer new casino openings andthere were no new domestic markets that opened. 

We believe that fiscal year 2006 will represent anopportunity for modest revenue growth for our Gaming Equipment and GamingOperations divisions. Our expectation is based on our belief that the majorityof casino operators will not return to their traditional buying patterns forreplacement games during fiscal year 2006, the domestic market expansionopportunities remain uncertain and several of the international marketopportunities that we are currently pursuing will likely not impact ourfinancial results until fiscal year 2007 and beyond. In addition, the aftermathof Hurricane Katrina will negatively impact our wide-area and daily feerevenues throughout fiscal year 2006. However, we anticipate that the negativeimpact of Hurricane Katrina on our Gaming Equipment and Gaming Operationsdivisions may be offset by sales to properties as they reopen during fiscalyear 2006 and beyond.

We believe that Systems revenues could increase infiscal year 2006 as a result of casino operators continued focus on promotionsand bonusing software as tools to enhance their player loyalty programs. Inaddition, we provide systems technology to several of the large multi-propertycasino operators that have made recent acquisitions or are currently developingnew properties, and we anticipate such customers will deploy our systemstechnology solutions.

However, the wide number of new products that we areintroducing, the uncertain market conditions and the changing competitivelandscape make forecasting for fiscal year 2006 particularly difficult.

40

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

Thesummary financial results and operating statistics for Bally Gaming and Systemsare as follows:

| ** **                          | ** **   | **Year Ended June 30,** | ** **   |
|-------------------------------------|--------------|----------------------------------------|--------------|
| ** **                          | ** **   | ** **                             | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
| ** **                          | ** **   | **2005**                               | ** **   | **% Rev** | ** ** | **2004** | ** ** | **% Rev** | ** ** | **2003** | ** ** | **% Rev** | ** ** | **05 vs. 04** | ** ** | **04 vs. 03** | ** ** |
| ** **                          | ** **   | **(dollars in millions)**    | ** **   |
| Revenues                            | *** *** | *** ***                           | *** *** |   | *** *** | *** *** |   | *** *** | *** *** |   | *** *** | *** *** |   | *** *** | *** *** |   | *** *** | *** *** |   |   | *** *** | *** *** |   |   | *** *** | *** *** |   |
| Gaming Equipment                    |         | $                                      | 203.7        |   |   | 47 | % |   | $ | 226.4 |   |   | 53 | % |   | $ | 175.9 |   |   | 56 | % |   |   | (10 | )% |   |   | 29 | % |   |
| Systems                             |         | 97.0                                   |         |   | 22 | % |   | 122.6 |   |   | 29 | % |   | 80.7 |   |   | 26 | % |   |   | (21 | )% |   |   | 52 | % |   |
| Gaming Operations                   |         | 131.3                                  |         |   | 31 | % |   | 79.1 |   |   | 18 | % |   | 55.6 |   |   | 18 | % |   |   | 66 | % |   |   | 42 | % |   |
| Total revenues                      |         | $                                      | 432.0        |   |   | 100 | % |   | $ | 428.1 |   |   | 100 | % |   | $ | 312.2 |   |   | 100 | % |   |   | 1 | % |   |   | 37 | % |   |
| Gross margin                        |         |                                   |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment                    |         | $                                      | 42.8         |   |   | 21 | % |   | $ | 104.2 |   |   | 46 | % |   | $ | 74.1 |   |   | 42 | % |   |   | (59 | )% |   |   | 41 | % |   |
| Systems                             |         | 76.0                                   |         |   | 78 | % |   | 91.6 |   |   | 74 | % |   | 63.9 |   |   | 79 | % |   |   | (17 | )% |   |   | 43 | % |   |
| Gaming Operations                   |         | 69.5                                   |         |   | 53 | % |   | 39.4 |   |   | 50 | % |   | 29.5 |   |   | 53 | % |   |   | 76 | % |   |   | 34 | % |   |
| Total gross  margin                 |         | $                                      | 188.3        |   |   | 44 | % |   | $ | 235.2 |   |   | 55 | % |   | $ | 167.5 |   |   | 54 | % |   |   | (20 | )% |   |   | 40 | % |   |
| Selling, general and administrative |         | $                                      | 126.3        |   |   | 29 | % |   | $ | 99.2 |   |   | 23 | % |   | $ | 71.5 |   |   | 23 | % |   |   | 27 | % |   |   | 39 | % |   |
| Restructuring  charges              |         | 3.0                                    |         |   | 1 | % |   | — |   |   | — |   |   | — |   |   | — |   |   |   | — | ** ** |   |   | — | ** ** |   |
| Impairment  charges                 |         | 3.6                                    |         |   | 1 | % |   | — |   |   | — |   |   | — |   |   | — |   |   |   | — | ** ** |   |   | — | ** ** |   |
| Research and  development costs     |         | 43.4                                   |         |   | 10 | % |   | 36.6 |   |   | 9 | % |   | 20.0 |   |   | 6 | % |   |   | 19 | % |   |   | 83 | % |   |
| Depreciation and  amortization      |         | 15.9                                   |         |   | 4 | % |   | 10.1 |   |   | 2 | % |   | 6.5 |   |   | 2 | % |   |   | 58 | % |   |   | 55 | % |   |
| Operating income  (loss)            |         | $                                      | (3.9         | ) |   | (1 | )% |   | $ | 89.3 |   |   | 21 | % |   | $ | 69.5 |   |   | 22 | % |   |   | (104 | )% |   |   | 28 | % |   |

 

| ** **                             | ** ** | **Year Ended June 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
| ** **                             | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** | **05 vs. 04** | ** ** | **04 vs. 03** | ** ** |
| Operating Statistics:                  | * *   | * *                               | * *   | * * | * * | * * | * * |   | * * | * * |   |   | * * | * * |   |
| New gaming  devices sold               |       | 13,894                                 |       | 16,382 |   | 17,120 |   |   | (15 | )% |   |   | (4 | )% |   |
| OEM units sold                         |       | 2,987                                  |       | 2,413 |   | 1,513 |   |   | 24 | % |   |   | 59 | % |   |
| New unit average  selling price        |       | $                                      | 9,671      |   | $ | 9,441 |   | $ | 8,433 |   |   | 2 | % |   |   | 12 | % |   |
| Gaming monitoring units installed base |       | 276,000                                |       | 279,000 |   | 240,000 |   |   | (1 | )% |   |   | 16 | % |   |
| Casino mgmt.  systems installed base   |       | 225                                    |       | 219 |   | 194 |   |   | 3 | % |   |   | 13 | % |   |
| Systems managed cashless  games        |       | 128,000                                |       | 83,000 |   | 28,000 |   |   | 54 | % |   |   | 196 | % |   |
| End of period  installed base:         |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wide-area progressive                  |       | 1,660                                  |       | 1,726 |   | 1,910 |   |   | (4 | )% |   |   | (10 | )% |   |
| Daily-fee games                        |       | 8,804                                  |       | 7,985 |   | 2,485 |   |   | 10 | % |   |   | 221 | % |   |
| Centrally  determined games            |       | 18,885                                 |       | 17,995 |   | — |   |   | 5 | % |   |   | — | * * |   |
|                                        |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

41

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

*Fiscal 2005 vs.Fiscal 2004*

Total revenuesincreased $3.9 million or 1% in fiscal year 2005 compared to the prior fiscalyear due to the following:

*GamingEquipment.**  *GamingEquipment revenue decreased by $22.7 million or 10% primarily due to thedecrease in domestic new unit sales to 10,805 units sold in fiscal year 2005 ascompared to 14,367 units sold in the prior fiscal year. This decrease in totalunits sold reflects the general casino industry reduction in new unit purchaseswhich followed the rapid pace of ticket-in ticket-out game replacements whichoccurred over the prior two years. In addition, the Company’s legacy videoproducts did not perform as well as competitor products, which led to theCompany’s decision to move to the new Alpha Game Engine. During 2005, therewere very few new casino openings in the United States. The decrease indomestic new unit sales was partially offset by a 53% increase in internationalnew unit sales from 2,015 in fiscal year 2004 to 3,089 in the current fiscalyear as we expanded our marketing efforts outside the United States and a 2%increase in the new unit average selling price. We believe that foreign marketswill likely expand in coming years, and will be an important source of revenuesfor us. We will continue to dedicate research and development to developingproducts for foreign markets.

*Systems.**  *Systems revenue decreased $25.6million or 21% primarily as a result of:

·       Adecrease in new property installations in the current year. In the currentyear, new property installations represented approximately $20.0 million ofsystems revenue compared to $31.0 million in the prior fiscal year. Thedecrease in new property installations resulted from the above mentionedslowdown following the TITO system upgrades in the prior two years, and thereduced number of new casino openings during the current year. 

·       A$1.7 million increase in deferral of revenue for contracts with non-perpetuallicenses based on the accounting under SOP No. 97-2.

The decrease in new property installations waspartially offset by an increase in recurring hardware and software maintenancerevenue of 21% or $4.4 million to $25.1 million due to the larger base ofinstalled units.

*Gaming Operations.**  *Gaming Operations revenue increased66% for fiscal year 2005 compared to fiscal year 2004 due to the following:

·       Anincrease in revenue of $40.1 million or 337% to $52.0 million from centrallydetermined linked games due to a full year of revenue compared to four monthsin the prior year due to the acquisition of SDG in March 2004.

·       Anincrease in the installed base of games and the benefits of certain Class IIenhancements, such as the “One System,” for which we are generating additionaldaily fee revenue.

·       Anincrease in daily fee games placements of 10% and an increase in averagerevenue per day for both wide-area progressives and Monte Carlo daily feegames.

Gross margin declined to 44% primarily as a result ofthe write-off of obsolete inventory in the amount of $26.4 million and anincrease in sales of Class II games, which traditionally have a lower salemargin when compared to traditional (or Class III) games and which iscompensated by the recurring revenue stream they generate through license feearrangements that have terms of three to five years. The inventory write-offwas primarily a result of a substantial retooling of our product lines to thenew Alpha platform and the decline in the current market conditions.

42

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

Selling, generaland administrative expense increased 27% primarily as a result of thefollowing:

·       Theaddition of Class II and central determination operations for a full yearin fiscal year 2005.

·       Anincrease in legal expense of approximately $4.0 million resulting from higherpatent and litigation costs.

·       Anincrease in the provision for doubtful accounts receivable of $2.9 million,which includes a charge for a large customer that declared bankruptcy duringfiscal year 2005.

·       Severancecharges of $3.0 million for reductions in the workforce both domestically andin our European operations. 

We continued to make progress on reducing selling,general and administrative costs during the last half of the fiscal year 2005. 

Research and development costs increased as a resultof the increased investment in the development of the Alpha Engine System andrelated game content, and sustaining development of multiple existing gameplatforms and systems. 

Depreciation andamortization expense increased as a result of the increase inacquisition-related intangible assets and the increased base of wide-area anddaily fee games.

*Fiscal 2004 vs.Fiscal 2003*

Total revenues increased $115.9 million or 37% infiscal year 2004 compared to the prior fiscal year due to the following: 

*Gaming Equipment.*   GamingEquipment revenue increased by $50.5 million or 29% primarily due to:

·       Theacquisition of SDG in March 2004, which contributed an incremental $49.6million.

·       Higherdomestic new unit sales due to increased sales of TITO games and sales toseveral new casinos which opened during the year.

*Systems.*   Systemsrevenue increased by $41.9 million or 52% primarily as a result of:

·       Increasedsales to multi-property operators resulting from displacements of competitorsystems which occurred as certain casinos were acquired by largermulti-property operators.                         

·       Increasedsales of software licenses for our TITO solution, as well as its bonusing andpromotions software, caused by the casino industry focus on improved marketingand player retention programs and operating cost efficiencies achieved withTITO systems and games which reduces coin handling.

·       Recurringhardware and software maintenance revenue increased by 23% to $20.7 million forthe fiscal year, resulting from the larger base of installed units, which nowstands at approximately 276,000.

*GamingOperations.*   Gaming Operations revenue increased42% for fiscal year 2004 compared to the prior fiscal year due to an increaseof 221% in the installed base of daily-fee games deployed, which increased to 7,985units installed. This increase is primarily a result of the launch of the NewYork Lottery operations and the acquisition of SDG.

43

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

Gross Margin improved to 55% as a result of highermargin systems sales and gaming operations revenue, as a proportion of totalsales.

Selling, general and administrative expenses increased39% in fiscal year 2004 over 2003 primarily due to the acquisitions of SDG,MindPlay and Crown Gaming, LTD, as well as the launch of the New York Lotteryresulting in increases in all operating expense categories except bad debtexpense. In addition, selling, general and administrative expenses alsoincreased as a result of higher legal costs related to the protection of ourintellectual property rights and higher payroll and payroll related costsprimarily in our customer service departments.

Research and developmentcosts increased primarily as a result of increased headcount and reflect theadditional costs incurred to expand our product offerings.

Depreciation andamortization increased as a result of increased capital expenditures and anincrease in acquisition related intangible assets.

***Casino Operations***

Our Rainbow Casino is one of four casinos currentlyoperating in the Vicksburg, Mississippi market. Our casino primarily drawscustomers from within a 75-mile radius, which includes Jackson, Mississippi. Webelieve that fiscal year 2006 will represent a year of modest revenue growthfor our casino. While a number of properties located on the gulf coastsustained heavy damage, our casino was not damaged during the 2005 hurricanesseason. Although it was temporarily closed, we reopened the property forbusiness within four days of Hurricane Katrina once power was restored to thegeneral area. While the play levels at our casino have generally increasedfollowing the reopening, we anticipate that the play level may return to a moretypical level once the Gulf coast casinos reopen.

Thesummary of our financial results and operating statistics for our CasinoOperation is as follows:

| ** **                           | ** ** | **Year Ended June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
| ** **                           | ** ** | **2005**                               | ** ** | **% Rev** | ** ** | **2004** | ** ** | **% Rev** | ** ** | **2003** | ** ** | **% Rev** | ** ** | **05 vs. 04** | ** ** | **04 vs. 03** | ** ** |
| ** **                           | ** ** | **(dollars in millions)**    | ** ** |
| Revenue                              |       | $                                      | 52.0       |   |   | 100 | % |   | $ | 52.3 |   |   | 100 | % |   | $ | 50.9 |   |   | 100 | % |   |   | — | % |   |   | 3 | % |   |
| Gross margin                         |       | 33.3                                   |       |   | 64 | % |   | 32.2 |   |   | 62 | % |   | 29.7 |   |   | 58 | % |   |   | 3 | % |   |   | 8 | % |   |
| Selling, general  and administrative |       | 13.2                                   |       |   | 25 | % |   | 12.5 |   |   | 24 | % |   | 12.2 |   |   | 24 | % |   |   | 6 | % |   |   | 3 | % |   |
| Depreciation and  amortization       |       | 3.3                                    |       |   | 6 | % |   | 2.8 |   |   | 5 | % |   | 2.2 |   |   | 4 | % |   |   | 18 | % |   |   | 28 | % |   |
| Operating income                     |       | $                                      | 16.8       |   |   | 32 | % |   | $ | 16.9 |   |   | 32 | % |   | $ | 15.3 |   |   | 30 | % |   |   | (1 | )% |   |   | 11 | % |   |
| Operating Statistics:                |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average Number of  Gaming Devices    |       | 890                                    |       |   |   |   |   | 930 |   |   |   |   |   | 930 |   |   |   |   |   |   | (4 | )% |   |   | — |   |   |
| Average Number of Table  Games       |       | 12                                     |       |   |   |   |   | 12 |   |   |   |   |   | 15 |   |   |   |   |   |   | — |   |   |   | (20 | )% |   |
|                                      |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

44

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

*Fiscal 2005 vs.Fiscal 2004*

Rainbow Casino revenue was relatively flat in fiscalyear 2005 compared to the prior year in a market that grew 3.9% for the yearwith the majority of the increase in the fourth quarter of fiscal year 2005 dueto completion of capital improvement projects in the Vicksburg market. 

Gross margin improved to 64% in fiscal year 2005 as aresult of continued improvement in operating cost reductions and increases inslot and table wins per day per unit. 

The overall selling, general and administrativeexpenses remained relatively stable year over year as a percentage of revenue. Weplan on increasing these expenses marginally in fiscal year 2006 in order toattract players following Hurricane Katrina.

Depreciation andamortization expense increased $0.5 million resulting from additional capitalexpenditures relating to new game replacements.

*Fiscal 2004 vs.Fiscal 2003*

Rainbow Casino revenue increased by $1.4 million infiscal year 2004 resulting primarily from the remodeling project completed infiscal year 2003. The remodeling adversely effected revenues in 2003, andpositively impacted the results in 2004 due to the additional amenities addedto the property.

Gross margin improved to 62% in fiscal year 2004 as aresult of increases in slot and table wins per day per unit. 

The overall selling, general and administrativeexpenses remained relatively stable year over year as a percentage of revenue.

Depreciation andamortization expense increased 28% for the fiscal year 2004 period resultingfrom additional capital improvements made to the Rainbow Casino late in fiscalyear 2003 relating to the remodeling project.

45

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

***Parent company and other unallocated income (expense)***

Thesummary financial results of Alliance Gaming Corporation, our parent entity,are as follows:

| ** **                     | ** ** | **Year Ended June 30,** | *** *** |
|--------------------------------|------------|----------------------------------------|--------------|
| ** **                     | ** ** | ** **                             | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/(Decrease)** | ** ** |
| ** **                     | ** ** | **2005**                               | ** **   | **% Rev** | ** ** | **2004** | ** ** | **% Rev** | ** ** | **2003** | ** ** | **% Rev** | ** ** | **05 vs. 04** | ** ** | **04 vs. 03** | ** ** |
| ** **                     | ** ** | **(dollars in millions)**    | ** **   |
| General and  administrative    |       | $                                      | 17.2         |   |   | 4 | % |   | $ | 12.7 |   |   | 3 | % |   | $ | 10.9 |   |   | 3 | % |   |   | 35 | % |   |   | 16 | % |   |
| Depreciation and  amortization |       | 1.3                                    |         |   | — |   |   | 1.5 |   |   | — |   |   | 2.3 |   |   | — |   |   |   | (13 | )% |   |   | (35 | )% |   |
| Total Parent  company expense  |       | $                                      | 18.5         |   |   | 4 | % |   | $ | 14.2 |   |   | 3 | % |   | $ | 13.2 |   |   | 3 | % |   |   | 30 | % |   |   | 7 | % |   |
| Other income (expense):        | ** ** | ** **                             | ** **   |   |   |   | ** ** | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                |       | 1.3                                    |         |   | — |   |   | 2.3 |   |   | — |   |   | 0.2 |   |   | — |   |   |   | (43 | )% |   |   | 1,050 | % |   |
| Interest expense               |       | (18.2                                  | )            |   | (4 | )% |   | (17.9 | ) |   | (4 | )% |   | (25.6 | ) |   | (7 | )% |   |   | 1 | % |   |   | (30 | )% |   |
| Loss on extinguishment of debt |       | (0.6                                   | )            |   | — |   |   | (12.3 | ) |   | (2 | )% |   | — |   |   | — |   |   |   | (95 | )% |   |   | — |   |   |
| Other, net                     |       | 0.6                                    |         |   | — |   |   | (0.6 | ) |   | — |   |   | 0.4 |   |   | — |   |   |   | (200 | )% |   |   | (250 | )% |   |
| Total other  income (expense)  |       | $                                      | (16.9        | ) |   | (4 | )% |   | $ | (28.5 | ) |   | (6 | )% |   | $ | (25.0 | ) |   | (7 | )% |   |   | (41 | )% |   |   | 14 | % |   |
| Income tax expense (benefit)   |       | $                                      | (6.5         | ) |   | (1 | )% |   | $ | 21.5 |   |   | 4 | % |   | $ | 16.5 |   |   | 4 | % |   |   | (130 | )% |   |   | 30 | % |   |
| Minority interest              |       | (4.2                                   | )            |   | (1 | )% |   | (2.3 | ) |   | — |   |   | (2.0 | ) |   | — |   |   |   | 82 | % |   |   | 15 | % |   |

 

*Fiscal 2005 vs.Fiscal 2004*

Ourgeneral and administrative expenses at the parent company increased $4.5million, or 35% in the fiscal year 2005 primarily as a result of:

·       Increasein payroll and related expense during the fiscal year 2005, primarily due torestricted stock unit amortization totaling $2.1 million and a $0.6 millioncharge for severance benefits resulting from reorganization, offset by adecrease in salaries and wages of $1.0 million due to reduced corporateheadcount and for certain personnel reassigned to the gaming equipment andsystems segment.

·       Increasein legal fees of $1.3 million during the fiscal year 2005, relative to theongoing SEC investigation and other related matters. We expect these highercosts to continue in fiscal year 2006.

·       Increasein professional fees of $1.4 million related to Sarbanes-Oxley compliance. Weexpect these additional costs to continue into fiscal year 2006.

·       Minorityinterest increased as a result of the consolidation of certain variableinterest entities.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

·  As a result of a refinancing completed duringfiscal year 2004, we recorded a pre-tax charge in the quarter endedSeptember 30, 2003 of $12.3 million. In December 2004, we amended ourbank loan agreement, which resulted in a charge of $0.6 million which wasclassified as a loss on extinguishment of debt.

·  Interest expense for the current year totaled$18.2 million compared to $17.9 million in the prior year period due to higherinterest rates on lower total debt outstanding. Virtually all of our debt is floatingrate, therefore future interest expense will be impacted by future changes inthe LIBOR which is the base rate for our interest payments.

Our effective income taxrate for continuing operations for fiscal year 2005 was approximately 24%. Thisrate reflects a Federal tax benefit computed using a rate of 35% offset by atax charge for the estimated potential tax liability for the reorganization ofour European distribution operations, as well as reserves applied to certaindeferred tax assets. The effective rate for fiscal year 2006 is expected to bebetween 35% and 38%.

*Fiscal 2004 vs.Fiscal 2003*

General andadministrative expenses increased in fiscal year 2004 compared to the priorfiscal year primarily as a result of:

·       Increasein general corporate legal costs resulting from the class action lawsuit andrelated matters.

·       Increasein general liability and director and officer insurance costs resulting frommarket conditions.

Total other expenseincreased as a result of the September 2003 refinancing of our creditfacilities. The refinancing charge of $12.3 million was partially offset bydecreases in our net interest expense as a result of the lower interest ratesachieved in the refinancing.

***Significant Items Effecting Comparability***

*Inventory and assetwrite-downs*

We perform detailed inventory valuation procedures atleast quarterly. This process includes examining the carrying values of new andused gaming devices, parts and ancillary equipment in comparison to the currentfair market values for such equipment (less costs to sell or dispose). Some ofthe factors involved in this analysis include the overall levels of ourinventories, the current and projected sales levels for such products, theprojected markets for such products both domestically and internationally, thecosts required to sell the products including refurbishment costs andimportation costs for international shipments, and the overall projected demandfor products once the next generation of products are scheduled for release.

During fiscal year 2005 we faced declining demand forgaming devices based on our legacy platform, and therefore we continuallyassessed this particular portion of our inventory. In October 2004, wemade the strategic decision to move to our new Alpha video platform, which wasmade commercially available in April 2005 in most markets.

The decision to move ourgaming devices to the new video platform, the targeting of used equipment fornon-domestic markets, and the consolidation of certain warehouses all led toaccelerated disposals of legacy products. This process has required continualupdating of estimates for the net realizable value of 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

inventoriesdue to the subjectivity involved in projecting sales volumes, used game salesvalues, refurbishment costs, and customer demand in non-domestic jurisdictions.As a result of our ongoing analysis of inventory valuations, we have taken aseries of inventory and related asset write-downs totaling $26.4 million duringfiscal year 2005, which included a charge of $4.4 million in the fourth quarter.We continue to hold a significant number of used gaming devices, thereforethere can be no assurances that further write-downs will not occur insubsequent periods.

*Impairment charges*

We entered into an agreement during fiscal year 2004to provide a development loan to a Native American tribe to further theirpursuit of developing a gaming facility. The amounts advanced under the termsof the loan totaled $1.5 million, and we are not obligated for any additionaladvances. In March 2005, the tribe received an adverse court ruling thatwe believe materially impairs the tribe’s ability to pay the loan, and wetherefore recorded an impairment charge for the full amount of the loan.

During the March 2005 quarter, we performed areview of our intellectual property rights for various video games used on ourthen existing video platforms, which we refer to as our legacy platform. Thisreview was triggered by the declining sales of the games using our legacyplatform during fiscal year 2005. We evaluated the carrying value of certainintellectual property assets and determined that several were no longerrecoverable and were therefore deemed to be impaired. The impairment chargetotaled $1.3 million.

During the March 2005quarter, we also evaluated the useful lives and salvage values for our leasedgaming equipment. Based on recent historical data indicating a shortening ofthe average length such games were deployed, we decided to reduce thedepreciable life for certain video products to two years. The change in theuseful life resulted in an impairment charge of $0.8 million to write-off theundepreciated portion of the game values (down to salvage value) for games atthe end of their two-year life.

*Refinancing andloan amendment charges*

During fiscal year 2005, we amended our bank loanagreement. The fee incurred for the amendment totaled approximately $1.0million, and resulted in a charge of $0.6 million to write off a portion of thepreviously capitalized fees.

During fiscal year 2004, weinitiated a tender offer for all of our outstanding 10% Senior SubordinatedNotes due 2007, which we refer to as our senior subordinated notes, at a priceof 103.33% plus a .25% tender premium. The offer was completed on September 16,2003. As a result, we recorded a pre-tax charge in the September 2003quarter of $12.3 million, which included a $5.0 million charge of the earlyextinguishment of the senior subordinated notes, $7.0 million for the write offof deferred financing costs, and $0.3 million in fees and expenses.

*Severance charges*

During fiscal year 2005,we undertook an extensive review of our operations and reduced our workforceduring the September 2004 quarter and the March 2005 quarter. As aresult of these reductions in force, we incurred severance charges totaling$3.6 million for the fiscal year 2005.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

***Discontinued Operations***

As previously discussed, we sold our Nevada routeoperations, the Rail City Casino and Bally Wulff during fiscal year 2004.

On June 30, 2004, we completed the sale of UnitedCoin to Century Gaming, Inc. and received approximately $100 million incash and the assumption by Century Gaming of approximately $5 million in debt. Additionally,Century Gaming has agreed to acquire a certain number of gaming devices fromour Bally Gaming and Systems business unit over a five-year period. United Coinrevenue totaled $220.9 million and $202.4 million for the years ended June 30,2004, and 2003, respectively. For the same periods, operating income totaled$22.5 million and $7.0 million respectively. Infiscal year 2004, we reported a gain on the sale before income taxes of $15.3million, or $9.1 million after tax. During fiscal year 2005, the gain on salewas adjusted for charges incurred for an adverse outcome in a patent infringementcase and the resolution of certain sale related liabilities, the sum of whichtotaled $6.3 million net of tax, which is included in the discontinuedoperations section of the statement of operations for the fiscal year ended June 30,2005.

The sale of the Rail City Casino to the Sands Regentwas completed on May 3, 2004. Total consideration was $37.9 million incash. Rail City revenue totaled $19.2 million and $21.2 million for the yearsended June 30, 2004 and 2003, respectively. For the same periods, operatingincome totaled $5.4 million and $5.0 million respectively. We reported a gainon the sale before income taxes of $23.1 million, or $14.3 million after tax.

On July 18, 2003, we sold Bally Wulff wallmachine and amusement game business unit to a third party equity investor for$16.5 million in cash and recorded a loss on sale totaling $25.4 million. BallyWulff reported an operating loss of $40.6 million on revenues of $60.2 millionfor fiscal year 2003.

The Louisiana routeoperations were sold in October 2004 and had revenues totaling $17.0million and $14.9 million for the years ended June 30, 2004 and 2003,respectively. For the same period, operating income totaled $2.8 million and$2.0 million respectively. We recorded a gain on the sale of $1.3 million or$0.8 million after taxes in fiscal year 2005, whichis included in the discontinued operations section of the statement ofoperations for the fiscal year ended June 30, 2005.

***Recent Developments***

In late August 2005, a devastating hurricane hit thegulf coast of Mississippi and Louisiana causing substantial damage to theGulfport and Biloxi, Mississippi area, as well as New Orleans, Louisiana. In September 2005,Louisiana was again impacted by a severe hurricane that caused additionalflooding in New Orleans as well as other locations in Louisiana.

We earn revenue in both Louisiana and Mississippi frommachine rentals and participations in various casinos that were damaged by thehurricanes. In some instances, the machines have been damaged or destroyed; inother cases, the machines are undamaged, but the casinos are currently closed.

We carry both property and business interruptioninsurance which will serve to offset some of the losses indicated above. Atthis time we are actively working with our insurance providers to assess lossesand associated recoveries, but anticipate the full claim cycle will cover anextended period of time. Therefore, we cannot reasonably estimate the netproceeds to be recovered in connection with these losses.

Initial indications are that the casinos in the Biloxiand Gulfport areas will need to be rebuilt and will not open for a protractedperiod of time. Some casinos may decide not to rebuild. Casinos in New Orleansmay need major reconstruction and, given the devastation in the area, may beclosed for months. Casinos 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

outside of these areas mayalso need some restoration, but others have reopened for business, althoughtheir business may be at lower than historical levels.

For the September 2005 quarter, the impact on ourGaming Operations division as a result of the hurricane is estimated to be lessthan $0.02 per diluted share. Revenue was negatively impacted by approximately$1.4 million related to games scheduled to be sold to customers in the affectedarea, with an associated gross margin of $0.9 million. Our balance sheetexposure for accounts receivable and net book value of games placed in affectedcasinos is approximately $1.9 million.

Management believes thatthe impact of the hurricane will continue throughout fiscal year 2006. At thistime we estimate the total impact to revenue and gross margin will be $9.8million and $4.9 million, respectively, for fiscal year 2006 period.

**Financial Condition**

***Liquidity***

As of June 30, 2005, we had $33.2 million in cashand cash equivalents. In addition, we had net working capital of approximately$129.3 million, a decrease of approximately $133.6 million from June 30,2004, which is explained in “—Working Capital” below. Consolidated cash andcash equivalents at June 30, 2005 includes approximately $2.7 million ofcash utilized in our Casino Operations that is held in vaults, cages or changebanks. Additionally, pursuant to various state gaming regulations, certain cashaccounts totaling approximately $13.4 million as of June 30, 2005, aremaintained to ensure availability of funds to pay wide-area progressive jackpotawards which are classified as restricted cash on the consolidated balancesheets. In addition, we purchase U.S. Treasury Strip Securities for the benefitof jackpot winners who elect to receive annual or weekly installment payments. Thesesecurities are included in restricted long-term investments in the accompanyingconsolidated balance sheets, and totaled $10.1 million and $2.5 million as of June 30,2005 and 2004, respectively.

On September 5, 2003, we completed a refinancingtransaction whereby we entered into a new $275.0 million term loan and a $125.0million revolving credit facility. We used the proceeds from the refinancingtransaction to (1) repay an aggregate of approximately $188.0 millionoutstanding under our existing term loan, (2) repurchase the $150 millionaggregate amount of our senior subordinated notes, and (3) pay $5.0million in transaction fees and expenses. The fees and expenses were capitalizedand are being amortized on the straight-line basis over the remaining term ofthe loan. The term loan has a 1% per year mandatory principal amortizationafter the first year, and a six-year maturity. The revolving credit facilitycommitment decreases ratably over its five-year term to a 60% balloon.

In December 2003, we increased the term loan by$75.0 million to a total of $350.0 million. We used the proceeds primarily tofund the acquisition of SDG. As a result of the increase, we incurred anadditional $1.6 million in debt issuance costs, which amount has beencapitalized and is amortized on the straight-line basis over the remaining termof the term loan.

The sale of our Rail City Casino was completed in May 2004,and the sale of United Coin was completed in June 2004. The bank loanagreement governing the term loan and the revolving credit facility requiredthat we use approximately 50% of the net proceeds from the disposition of theseassets to reduce the term loan and revolving credit facility principal balanceson a pro rata basis. As a result, in August, 2004, we made a payment topermanently reduce the term loan by $31.6 million, and paid down the revolvingcredit facility from $70.0 million to zero.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

In December 2004, we amended our bank loanagreement. The amendment provides for (1) an increase in the maximumallowable leverage ratio under the bank loan agreement to a minimum of 4.75times at June 30, 2005, which declines thereafter, (2) a reduction inthe revolving credit facility commitment to $75.0 million and (3) anincrease in the term loan interest rate to LIBOR plus 3.00%, which can beadjusted to be LIBOR plus 3.75% based on certain credit rating and leverageratio criteria. We incurred a fee of approximately $1.0 million in connectionwith the amendment. As of June 30, 2005, we had $314.9 million outstandingunder our term loan accruing interest at a rate of 6.77%, and zero outstandingunder the revolving credit facility.

As a result of the additional time required tocomplete the year end closing process we failed to deliver to our lenders our2005 audited financial statements and the unaudited interim financialstatements for the fiscal quarter ended September 30, 2005 in a timelymanner, and therefore were not in compliance with certain of our debt covenantsunder the bank loan agreement. Pursuant to an agreement with the lenders, wecan cure the default by delivering the financial statements to the lenders by December 31,2005. Immediately upon the filing of this Annual Report on Form 10-Kwe intend to deliver to the lenders our 2005 audited financial statements andthe unaudited interim financial statements for the fiscal quarter ended September 30,2005 which we believe will cure the default. During the default period throughthe date of the filing of this Annual Report on Form 10-K, weincurred default interest of approximately $0.7 million. See “Risk Factors”below for a discussion of the risks associated with our non-compliance withcertain of our debt covenants under the bank loan agreement.

We are in compliance with our financial covenantsunder the bank loan agreement, which consist of a leverage ratio, a fixedcharges coverage ratio, and a minimum EBITDA (as that term is defined in thebank loan agreement) ratio. The leverage ratio is computed as total averagedebt outstanding during the quarter divided by the trailing 12 months EBITDAexcluding certain cash and non-cash charges, and is further adjusted to removeEBITDA from discontinued operations at the time those operations are sold. TheCompany’s leverage ratio as of June 30, 2005 was 4.6 times versus thecovenant maximum of 4.75 times.

Cash flows from operating activities are derivedprimarily from the cash receipts from the sale of goods and services, theoperation of wide-area progressive systems, lease payments, and monthly cashreceipts from maintenance agreements for our casino systems customers. Inaddition, we generate cash through our casino operations. We utilize our cashto acquire materials for the manufacture of goods for resale or lease, payroll,and all other selling, general and administrative expenses.

Management believes thatcash flows from current operating activities and the availability under therevolving credit facility will provide us with sufficient capital resources andliquidity. Although the leverage ratio limited our availability under therevolving credit facility at June 30, 2005, access to the revolving creditfacility in the future will depend on our ability to generate adequate levelsof EBITDA, as described above. At June 30, 2005, we had no materialcommitments for capital expenditures.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

***Working Capital***

Thefollowing table presents the components of consolidated working capital at June 30,2005 and 2004 (dollars in 000s):

| ** **                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|-------------------|------------|
| Cash and cash  equivalents                            |       | $        | 33,170     |     | $          | 154,258    |       | $                 | (121,088   | ) |   | (78 | )% |   |
| Restricted cash                                       |       | 13,421   |       | 15,590   |       | (2,169     | )          |              | (14        | )% |   |
| Accounts and  notes receivable, net                   |       | 99,430   |       | 128,317  |       | (28,887    | )          |              | (23        | )% |   |
| Inventories                                           |       | 62,920   |       | 63,280   |       | (360       | )          |              | (1         | )% |   |
| Deferred tax  assets, net                             |       | 29,192   |       | 19,602   |       | 9,590      |       |              | 49         | % |   |
| Other current  assets                                 |       | 27,439   |       | 28,955   |       | (1,516     | )          |              | (5         | )% |   |
| Assets of  discontinued operations held for sale      |       | —   |       | 4,442    |       | (4,442     | )          |              | (100       | )% |   |
| Total current assets                                  |       | 265,572  |       | 414,444  |       | (148,872   | )          |              | (36        | )% |   |
| Accounts payable                                      |       | 36,807   |       | 37,515   |       | (708       | )          |              | (2         | )% |   |
| Accrued  liabilities                                  |       | 43,239   |       | 48,415   |       | (5,176     | )          |              | (10        | )% |   |
| Jackpot  liabilities                                  |       | 13,025   |       | 12,075   |       | 950        |       |              | 8          | % |   |
| Deferred revenue                                      |       | 31,293   |       | 37,635   |       | (6,342     | )          |              | (17        | )% |   |
| Taxes payable                                         |       | 1,752    |       | 5,718    |       | (3,966     | )          |              | (69        | )% |   |
| Current  maturities of long-term debt                 |       | 10,163   |       | 5,866    |       | 4,297      |       |              | 73         | % |   |
| Liabilities of  discontinued operations held for sale |       | —   |       | 4,337    |       | (4,337     | )          |              | (100       | )% |   |
| Total current liabilities                             |       | 136,279  |       | 151,561  |       | (15,282    | )          |              | (10        | )% |   |
| Net working  capital                                  |       | $        | 129,293    |     | $          | 262,883    |       | $                 | (133,590   | ) |   | (51 | )% |   |

 

For the year ended June 30, 2005, our net workingcapital, declined $133.6 million. The $121.1 million decrease in cash and cashequivalents was most significantly impacted by our use of $101.6 million inproceeds from the sale of United Coin and Rail City to pay down the term loanand revolving credit facility in accordance with the bank loan agreement, asdiscussed above, as well as cash used to deploy wide-area and daily-fee gamingdevices.

The decrease inworking capital was also affected by:

·       Anet decrease in accounts and notes receivable relating to the early payments bycertain significant customers, as well as our lower revenue levels in thesecond half of fiscal year 2005, which were caused by the transition to the newAlpha Game Engine, and a reduction in purchases by casinos following the TITOplacements over the preceding two years.

·       Anet decrease in inventory, which resulted from inventory obsolescence(non-cash) charges of $26.4 million. Excluding such charges, inventoryincreased $11.7 million during fiscal year 2005 due to the build up ofinventory related to our new products being introduced.

·       Adecrease in other assets, primarily as a result of: (i) a $1.4 milliondecrease in deferred costs directly related to deferred revenues discussedbelow, (ii) a decrease in refundable deposits of $1.7 million and (iii) adecrease in prepaid insurance and royalties, all of which were offset by a $2.2million increase in trial games.

·       A decrease in accruedliabilities, primarily as a result of: (i) a $6.4 million decrease indeferred revenue of related to transactions involving the delivery of games andsystems not meeting the 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

revenue recognitionrequirements of SOP No. 97-2 in fiscal 2004 that were subsequentlyrecognized in fiscal 2005, (ii) a decrease of approximately $4.0 millionin divesture related accruals for the sale of United Coin, (iii) a $3.9million decrease in payroll and payroll related accruals, and (iv) a $2.0million decrease in royalty accrual due to lower sales, all of which werepartially offset by a $7.4 million increase in patent litigation accruals.

***Cash Flow***

During the yearended June 30, 2005, cash flows provided by operating activities ofcontinuing operations totaled $52.1 million as a result of:

·       Areported net loss of $(25.0) million, which includes certain non-cash inventoryand asset impairment charges totaling $30.0 million, primarily resulting fromthe writedown of certain legacy products to net realizable value due primarilyto the introduction of the Alpha Game Engine.

·       Anincrease in inventory of $11.7 million, primarily resulting from the build upof inventory related to our new products being introduced.

·       Adecrease in accounts and notes receivables of $33.1 million, primarilyresulting from a decrease in fourth quarter sales of $31 million from fiscal2004 to 2005, that was primarily related to the strategic shift to our newAlpha Game Engine sales of which began late in the June 2005 quarters.

·       Adecrease in accounts payable, accrued liabilities, and jackpot liabilities of$21.5 million, due primarily to timing of payments to vendors and lower levelsof purchases due to the lower fourth quarter sales levels discussed above.

During the yearended June 30, 2005, cash flows used in investing activities of continuingoperations totaled $65.1 million as a result of:

·       Capitalexpenditures of $12.4 million.

·       Costsincurred to deploy additional leased gaming devices totaling $40.6 million.

·       Additionsto other long-term assets of $2.2 million.

·       SDGearn out buyout of $12.0 million, described in Note 4 of the consolidatedfinancial statements, Business Combinations.

During the yearended June 30, 2005, cash used in financing activities of continuingoperations totaled $108.1 million as a result of:

·       Ourpay down of the term loan and revolving credit facility of $101.6 milliondiscussed above.

·       Principalpayments on other long term debt totaling $6.3 million.

·       Cashprovided from exercise of stock options of $1.1 million.

·       $1.0million in cash used to pay the fees and expenses related to the amendment ofthe bank loan agreement amendment discussed above.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**Contractual Commitments**

We arecommitted to make future payments pursuant to various contracts and agreements.A summary of those contractual obligations existing as of June 30, 2005,is as follows (in $000s):

| ** **                        | ** **   | **2006**     | ** **   | **2007**     | ** **   | **2008**     | ** **   | **2009**     | ** **   | **2010**     | ** **   | **Total**    | ** **   |
|-----------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| Debt:                             | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Term loan  facility(a)            |         | $            | 3,500        |         | $            | 3,500        |         | $            | 3,500        |         | $            | 3,500        |         | $ | 300,882 |   | $ | 314,882 |   |
| Revolving credit  facility(b)     |         | —       |         | —       |         | —       |         | —       |         | —       |         | —       |         |
| Subordinated  debt(c)             |         | 2,800        |         | 2,800        |         | 2,800        |         | 2,800        |         | 2,800        |         | 14,000       |         |
| Other debt                        |         | 3,863        |         | 372          |         | 2,000        |         | —       |         | —       |         | 6,235        |         |
| Estimated  interest payments(d)   |         | 22,344       |         | 21,773       |         | 21,267       |         | 20,772       |         | 20,559       |         | 106,715      |         |
|                              |         | 32,507       |         | 28,445       |         | 29,567       |         | 27,072       |         | 324,241      |         | 441,832      |         |
| Other commitments:                |         |         |         |         |         |         |         |         |         |         |         |         |         |
| Net minimum  rentals              |         | 2,641        |         | 2,278        |         | 1,512        |         | 1,114        |         | 407          |         | 7,952        |         |
| MindPlay  earn-out(e)             |         | —       |         | —       |         | —       |         | —       |         | —       |         | —       |         |
| Purchase  commitments(f)          |         | —       |         | —       |         | —       |         | —       |         | —       |         | —       |         |
| Employment  agreements(g)         |         | 980          |         | 980          |         | 245          |         | —       |         | —       |         | 2,205        |         |
| Kirkland  consulting agreement(h) |         | 600          |         | 600          |         | 300          |         | —       |         | —       |         | 1,500        |         |
| Total commitments                 |         | $            | 36,728       |         | $            | 32,303       |         | $            | 31,624       |         | $            | 28,186       |         | $ | 324,648 |   | $ | 453,489 |   |

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(a)           The termloan facility requires principal payments of $3.5 million per year with thebalance due in 2010.

(b)          There arecurrently no amounts outstanding on the $75.0 million revolving creditfacility.

(c)           In December 2004,we agreed to terminate the SDG earn out for $40.0 million, of which $12.0million was paid in cash and $28.0 million in the form of an unsecuredpromissory note. In June 2005, $14.0 million of the principal balance ofthe unsecured promissory note was extinguished through the issuance ofapproximately 1.0 million shares of common stock.  The remaining $14.0 million outstanding as of June 30,2005 is payable over the subsequent five years.

(d)          Our debt is virtuallyall variable rate (tied to LIBOR); therefore, we computed the estimated futureinterest payments for our total debt outstanding based on the average interestrate in effect as of June 30, 2005 of 6.77%.

(e)           Pursuant to theMindPlay purchase agreement, we are obligated to make certain contingentearn-out payments to the former principals of MindPlay, amounts that cannotcurrently be estimated.

(f)             Except in certainrare instances, Bally Gaming and Systems is not required by its suppliers toenter into quarterly commitments for products.

(g)           We have employment agreementswith most of our employees with positions of Vice President or above. Theseagreements generally provide for an initial rate of pay and the terms of theseverance benefits generally range from three to twelve months salarycontinuation with similar non-compete periods. Almost all such agreementscontain language that the employee is still an “at will” employee, and as suchcan be terminated at anytime subject to the individual termination provisions. Theonly multi-year arrangement is with Richard Haddrill, our CEO effective October 1,2004, which covers a three-year term, with a base salary of $980,000. Only Mr. Haddrill’scompensation is reflected in the table above.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

(h)          Pursuant to an AdvisoryAgreement with Kirkland Investment Corporation (100% owned by Joel Kirschbaumwho is a director of Alliance, and therefore treated as a related-party) dated July 1,2004, we agreed to pay Kirkland $600,000 annually for a period of 3.5 years forconsulting services.

Our long-term debt is virtually all floating rate andtherefore future interest payments will be impacted by future LIBOR ratechanges as well as the balance of debt outstanding in those future periods. Interestpayments for fiscal year 2005 totaled $17.5 million.

The payment obligations inthe above table are based on the contractually scheduled due dates. The onlypayment acceleration that could be demanded of us would generally be in theevent of a default under the bank credit agreement that was not cured withinthe provisions set forth in that agreement.

**Off Balance Sheet Arrangements**

We do not have any offbalance sheet arrangements.

***Risk Factors***

Investing in our commonstock involves risks. Prospective investors in our common stock shouldcarefully consider, among other things, the following factors and otherinformation contained in this document, including our financial statements andthe notes to those statements, prior to making an investment decision. We haveidentified the following important factors that could cause actual results todiffer materially from those projected in any forward-looking statements we maymake from time to time.

**The gaming industry is intensely competitive. We facecompetition from a number of companies, some of which have greater resources,and if we are unable to compete effectively, our business could be negativelyimpacted.**

*Bally Gaming andSystems*

Competition among gaming machine manufacturers isbased on, among other things, competitive customer pricing and financing terms,appeal to the player, product quality and having an extensive distribution andsales network. There are a number of established, well-financed and well-knowncompanies producing machines that compete with each Bally Gaming and Systemsproduct line in each of the Bally Gaming and Systems markets. While there are anumber of competitors in the field, a single competitor, IGT, dominates thedomestic market for gaming machines. In addition, certain technology-orientedcompanies recently entered or may soon enter the gaming machine market. Certainof these competitors have access to greater capital resources than we do, andas a result, may be better positioned to compete in the marketplace.

The casino enterprise systems market iscrowded, with IGT, Aristocrat, Acres Gaming, Inc., MIS and, to a lesserextent, Konami and Mikohn Gaming Corporation, comprising the competition. Thecompetition is intense due to the number of providers, as well as the limitednumber of casinos and jurisdictions in which they operate. Pricing, productfeature and function, accuracy and reliability are all main factors indetermining a provider’s success in selling its system.

*Casino Operations*

The principal competitivefactors in the casino operations industry include the quality and location ofthe facility, the nature and quality of the amenities and customer servicesoffered, and the implementation 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

andsuccess of marketing programs. Our Rainbow Casino in Vicksburg, Mississippifaces intense direct competition from other gaming facilities serving theVicksburg market. As the overall size of the potential customer base islimited, competition from casinos in nearby locations may further dilute themarket from which Vicksburg casinos draw most of their patrons. Moreover,additional potential gaming sites remain in and around Vicksburg. Some of thesesites may be closer to larger population centers and, if developed, may enjoy acompetitive advantage over our casino.

**Our success in the gaming industry depends in largepart on our ability to develop innovative products and systems; i**fwe fail to keep pace with rapid change in product design, manufacturing andmarketing strategies our business could be negatively impacted.

Our revenues dependon the earning power and life span of our games. Newer games tend to have ashorter life than more traditional games, and as a result, we face pressure todesign and deploy successful games to maintain our revenue stream and to remaincompetitive. Our future success depends to a large extent upon our ability tocontinue to design, manufacture and market technologically sophisticated andentertaining products that achieve high levels of player acceptance. However, our ability to develop new and innovativeproducts could be adversely affected by:

·       adecline in the popularity of our gaming products with players,

·       alack of success in developing new products, services or systems,

·       aninability to roll out new games, services or systems on schedule as a result ofdelays in connection with regulatory product approval in the applicablejurisdictions, or otherwise,

·       anincrease in the popularity of competitors’ games, and

·       a negative change in thetrend of consumer acceptance of our newest systems innovations including ourAlpha Game Engine and our MindPlay System.

**The competitive contract terms required in non-traditionalgaming markets may affect our future revenues.**

Management believes thatcustomer leasing and financing terms have become increasingly importantcompetitive factors for the company in non-traditional markets such as Class IIand other Native American jurisdictions. We sometimes are required to grantextended payment terms on gaming machines, systems and other gaming equipmentto gain entry into a developing market that we would not otherwise extend. Whilethe product normally collateralizes these financings, in an event of default,the resale value of the collateral may be considerably less than the amountfinanced. Accordingly, we have greater exposure to fluctuations in thefinancial condition of our customers in emerging markets than has historicallybeen the case in the established markets.

**The unpredictable growth of non-traditional gamingmarkets may affect our business and prospects.**

The continued growth ofnon-traditional gaming markets for electronic gaming machines, systems andother gaming equipment depends heavily on the public’s acceptance of gaming inthese markets, as well as the ongoing development of the regulatory approvalprocess by national and local governmental authorities. A portion of our growthis directly tied to our ability to access these new markets. We cannot predictwhich new jurisdictions or markets, if any, will approve the operation ofelectronic gaming machines, the timing of any such approval, the public’sacceptance of our gaming machines in these markets or our market share orprofitability in these markets.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**We may not be able to attract or retain the managementor employees necessary to remain competitive in our industry.**

The competition forqualified personnel in the gaming industry is intense. Our future successdepends on the retention and continued contributions of our key management,finance, marketing, and staff personnel, many of whom would be difficult orimpossible to replace. Our success is also tied to our ability to recruitadditional key personnel in the future. We cannot assure you that we will beable to retain our current personnel or recruit any additional key personnelrequired. In addition, we do not have employment agreements with many membersof our senior management. The loss of services of any of our personnel couldhave a material adverse effect on our business, financial condition, results ofoperations and prospects.

**The gaming industry is heavily regulated and changesin regulation by gaming authorities may adversely impact our ability to operatethe business.**

The manufacture anddistribution of gaming machines and the conduct of gaming operations aresubject to extensive federal, state, local and foreign regulation by variousgaming authorities. Our ability to continue to operate in certain jurisdictionscould be adversely affected by:

·       unfavorablepublic referendums,

·       unfavorablelegislation affecting or directed at manufacturers or gaming operators, such asreferendums to increase taxes on gaming revenues,

·       adversechanges in or finding of non-compliance with applicable governmental gamingregulations,

·       delaysin approvals from regulatory agencies,

·       alimitation, conditioning, suspension or revocation of any of our gaminglicenses, and

·       unfavorabledeterminations or challenges of suitability by gaming regulatory authoritieswith respect to our officers, directors, major stockholders or key personnel.

Although the laws, rules andregulations of the various jurisdictions in which we operate vary in theirtechnical requirements, virtually each jurisdiction requires licenses, permits,qualification documentation, including evidence of integrity and financialstability, and other forms of approval to engage in gaming operations or themanufacture and distribution of gaming machines. Our officers, directors, majorstockholders and key personnel are also subject to significant regulatoryscrutiny. In the event that gaming or governmental authorities determine thatany person is unsuitable to act in such capacity with respect to the company,we could be required to terminate our relationship with such person. To ourknowledge, the Company and our key personnel have obtained, or applied for, allgovernment licenses, registrations, findings of suitability, permits andapprovals necessary to conduct their respective activities in the variousjurisdictions that we operate. However, there can be no assurance thoselicenses, registrations, findings of suitability, permits or approvals will berenewed in the future, or that new forms of approval necessary to operate inemerging or existing markets will be given.

**Gaming operators are subject to additional taxes andfees that could change at any time.**

The gaming industry istypically subject to significant taxation and fee assessment in addition tothose corporate and state income taxes generally assessed on businessoperations. These additional taxes and fees are subject to increase at anytime, and may be materially increased either prospectively or 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

retroactively.There can be no assurance as to future changes in taxation and fee assessmenton the gaming industry. Any material increase could adversely affect ourability to operate our business.

**Our intellectual property protections may beinsufficient to properly safeguard our technology; expenses incurred withrespect to protecting and defending intellectual property rights couldadversely affect our business.**

The gaming industry is constantly employing newtechnologies in both new and existing markets. We rely on a combination ofpatent and other technical security measures to protect our products, andcontinue to file for patents protecting such technologies. Notwithstandingthese safeguards, our competitors may still be able to obtain our technology orto imitate our products. Furthermore, others may independently develop productssimilar or superior to ours.

Competitors and otherthird parties may infringe on our intellectual property rights, or may allegethat we have infringed on their intellectual property rights. We may incursignificant litigation expenses protecting our intellectual property ordefending our use of intellectual property, reducing our ability to fundproduct initiatives. These expenses could have an adverse effect on our futurecash flow and results of operations. We are currently subject to litigationregarding patent infringement which, if resolved adverse to the Company, couldhave material impact on our business. Litigation can also divert managementfocus from running the day-to-day operations of the business. There can be noassurances that certain of our products, including those with currently pendingpatent applications, will not be determined to have infringed upon an existingthird party patent.

**We are currently subject to securities and derivativelitigation, the unfavorable outcome of which might have a material adverseeffect on our business.**

A number of federal classaction lawsuits and state derivative lawsuits have been filed against us,including certain of our current and former officers, alleging violations ofsecurities laws. We strongly believe that these lawsuits are without merit andare vigorously defending them and have notified our applicable insurers. Wecannot, however, determine with certainty the outcome or resolution of theseclaims or the timing of their ultimate resolution. In addition to the expenseand burden incurred in defending these lawsuits and any damages that we maysuffer, our management’s efforts and attention may be diverted from theordinary business operations in order to address these claims. If the finalresolution of any of these lawsuits is unfavorable to us, our financialcondition, results of operations, cash flows and liquidity might be materiallyadversely affected if our existing insurance coverage is unavailable or inadequateto resolve the matter.

**The restatement may subject us to actions oradditional litigation which could have an adverse effect on our business,results of operations, financial condition and liquidity.**

We have restated our previously issued audited financialstatements as of June 30, 2004, and for the fiscal years ended June 30,2004 and 2003 and other related financial information for the fiscal yearsended June 30, 2004, 2003 and 2002 and the unaudited information for thefiscal quarters ended June 30, 2004, September 30, 2004 and 2003, December 31,2004 and 2003, and March 31, 2005 and 2004. The restatement may result inadditional scrutiny in our ongoing SEC investigation or to new regulatoryactions or civil litigation which could require us to pay fines or otherpenalties or damages and could have an adverse effect on our business, resultsof operations, financial condition and liquidity. The restatement may alsoresult in negative publicity and we may lose or fail to attract and retain keycustomers, employees and management personnel as a result of these matters.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

In some jurisdictions,audited financial statements must be filed with the gaming regulatoryauthorities. The late filing of this Annual Report on Form 10-Kcould generate inquiries from regulators, including possible disciplinaryaction. However, the Company has been keeping regulators informed of thesituation and has received no indication that any disciplinary action will befiled in any jurisdiction.

**Ongoing SEC investigations could adversely affect us.**

The SEC had beenconducting an informal inquiry into certain matters surrounding the allegationsrelating to the securities class action litigation and our methods of revenuerecognition. On August 18, 2005, the SEC issued a formal order ofinvestigation with respect to these matters. In accordance with its normalpractice, the SEC has not advised us when its investigation may be concluded,and we are unable to predict the outcome of this investigation. While we arecooperating fully with the investigation, adverse developments in connectionwith the investigation, including any expansion of the scope of theinvestigation, could negatively impact us and could divert the efforts andattention of our management team from our ordinary business operations. Inconnection with any SEC investigation, it is possible that we will be requiredto, among other things, pay fines, consent to injunctions on future conduct,further restate our financial statements or suffer other penalties, any ofwhich could have a material adverse effect on our business.

**We have material weaknesses in our internal controlsover financial reporting, which could adversely affect our ability to reportour financial condition, results of operations and cash flows accurately.**

As required by Section 404 of the Sarbanes-OxleyAct of 2002, management has conducted an assessment of our internal controlover financial reporting. In performing our assessment management identifiedmaterial weaknesses in our internal control over financial reporting andconcluded that our internal control over financial reporting was not effectiveas of June 30, 2005. For a detailed description of these materialweaknesses, see Item 9A, Controls and Procedures.

Material weaknesses in ourinternal control over financial reporting could adversely impact our ability toprovide timely and accurate financial information. We have taken and willcontinue to take certain measures to strengthen our internal controls, as setforth under Item 9A, Controls and Procedures. However, additional work remainsto be done to address the identified material weaknesses. If we areunsuccessful in implementing or following our remediation initiatives plan, orfail to update our internal controls as our business evolves, or to integrateacquired businesses into our controls system, we may not be able to reportaccurately our financial condition, results of operations or cash flows ormaintain effective disclosure controls and procedures. If we are unable toreport financial information accurately or maintain effective disclosurecontrols and procedures, we could be subject to, among other things, anadditional SEC enforcement action, additional securities litigation and ageneral loss of investor confidence, any one of which by itself could adverselyaffect our business and prospects.

**We face increased costs and have extensive workremaining to remedy the material weaknesses in our internal control overfinancial reporting.**

We have extensive workremaining to remedy the identified material weaknesses in our internal controlover financial reporting. This work has extended into the 2006 fiscal year andwill continue until we are able to remediate the material weaknesses we haveidentified. These matters have required, and will continue to require, asignificant amount of management time and a significant commitment of externalresources. The costs of these efforts are substantial and could have a materialadverse impact on the Company’s financial performance. We expect that they willcontinue to do so in future periods.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**Certain consequences of our reporting situation underthe federal securities laws may adversely affect our financial condition andresults of operations, including our ability to raise capital.**

Our failure to meet the reportingrequirements of the federal securities laws affects our ability to access thecapital markets. We are restricted in our ability to make any registeredoffering of securities until we can present unaudited interim financialstatements for the September 2005 quarter. We are also ineligible to use “short-form”registration that allows us to incorporate by reference our Form 10-K,Form 10-Q and other SEC reports into our registration statements, orshelf registration until we have filed all of our periodic reports in a timelymanner for a period of twelve months.

We are also ineligible touse Form S-8 until we have prepared and filed all of our delinquentperiodic reports. We use Form S-8 to register grants of equitycompensation to our employees, including grants in the form of options andrestricted stock. The unavailability of Form S-8 reduces ourflexibility in granting options and restricted stock to our employees.

In addition, the NYSE hasbroad power to commence delisting proceedings for violations of its rules andmay do so at any time. Because we are late in making our SEC filings, the NYSEcould commence delisting proceedings against the Company; however, they havenot indicated an intention to do so.

**Consumer spending on leisure activities is affected bychanges in the economy and consumer tastes, as well as other factors that aredifficult to predict and beyond our control.**

We cannot assure you thatdemand for our products or services will remain constant. Consumers’willingness to spend money on leisure activities such as gaming is affected bychanges in the economy and consumer tastes, both of which are both difficult topredict and beyond our control. Continued adverse developments affectingeconomies throughout the world, including a general tightening of theavailability of credit, increasing interest rates, increasing energy costs,acts of war or terrorism, natural disasters, declining consumer confidence orsignificant declines in the stock market could lead to a further reduction indiscretionary spending on leisure activities adversely affecting our business.

**Internationaloperations, unfavorable political developments, weak foreign economies andother foreign risks may negatively impact our financial condition and resultsof operations.**

Ourbusiness is dependent on international markets as a portion of our revenues. Asof June 30, 2005, Bally Gaming and Systems had $16.8 million ofreceivables, or 18% of our total receivables, from customers in foreigncountries. We expect that receivables with respect to foreign sales willcontinue to account for a portion of our total revenues. As a result, ourbusiness in these markets is subject to a variety of risks, including:

·       recessionsin foreign economies;

·       theadoption and expansion of trade restrictions;

·       expropriation,nationalization and limitation on repatriation of earnings;

·       currencyexchange fluctuations;

·       reducedprotection of intellectual property rights in some countries;

·       longerreceivables collection periods and greater difficulty in collecting accountsreceivable;

·       difficultiesin managing foreign operations;

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·       social,political and economic instability;

·       unexpectedchanges in regulatory requirements;

·       actsof war and terrorism;

·       abilityto finance foreign operations;

·       changesin consumer tastes and trends;

·       tariffsand other trade barriers;

·       actsof war or terrorism; and

·       U.S.government requirements for export.

There can be no assurancesthat any of these international developments, or others, would not adverselyaffect our financial condition and results of operation.

**Our bank loan agreement imposes significantrestrictions and failure to comply with these restrictions could result in theacceleration of a substantial portion of our debt, which we may not be able torepay or refinance.**

Our bank loanagreement contains a number of covenants that, among other things, restrict ourability and certain of our subsidiaries to:

·       disposeof assets,

·       incuradditional indebtedness and issue preferred stock,

·       paydividends or make other distributions,

·       enterinto certain acquisitions,

·       repurchaseequity interests or subordinated indebtedness,

·       issueor sell equity interests of our subsidiaries, and

·       engagein mergers or consolidations or certain other transactions with subsidiariesand affiliates.

In addition, the bank loan agreement requires us tomaintain compliance with certain financial ratios, including certain leverageratios. Our ability to comply with such ratios, meet our debt serviceobligations or reduce our total debt is dependent upon our future performance,which may be affected by events beyond our control. There can be no assurancethat we will be able to comply with such restrictions and limitations, or thatthey will not adversely affect our ability to finance our future operations orcapital needs, or engage in other business activities that would otherwise bein the company’s interest.

A breach of any of thesecovenants or our inability to comply with the required financial ratios couldresult in a default under the bank loan agreement. In the event of any suchdefault, the lenders could elect to declare all borrowings outstanding underthe bank loan agreement, together with any accrued interest and other fees, tobe due and payable, as well as require us to apply all available cash to repaythe amounts. If we were unable to repay the indebtedness upon its acceleration,the lenders could proceed against the underlying collateral. There can be noassurance that our assets would be sufficient to repay the amount in full, orthat we would be able to borrow sufficient funds to refinance the indebtedness.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**Virtuallyall of our debt is subject to variable interest rates; rising interest ratescould negatively impact our business.**

Certain borrowings underour bank loan agreement bear interest at a variable rate. In addition, we mayincur other variable rate indebtedness in the future. Carrying indebtednesssubject to variable interest rates makes the Company more vulnerable toeconomic and industry downturns, as well as reduces our flexibility inresponding to changing business and economic conditions. Increases in interestrates on this indebtedness would increase our interest expense, which couldadversely affect our cash flow, our ability to service our debt and togenerally grow the business.

**Currentborrowings, as well as potential future financings, may substantially increaseour current indebtedness.**

No assurance can begiven that we will be able to generate the cash flow necessary to permit us tomeet our fixed charges and payment obligations with respect to our debt. Wecould be required to incur additional indebtedness to meet these fixed chargesand payment obligations. Should we incur additional debt, among other things,such increased indebtedness could:

·       adverselyaffect our ability to expand the business, market our products and makeinvestments and capital expenditures;

·       adverselyaffect the cost and availability of funds from commercial lenders, debtfinancing transactions and other sources; and

·       createcompetitive disadvantages compared to other companies with lower debt levels.

Any inability of us toservice our fixed charges and payment obligations, or incurrence of additionaldebt, would have an adverse effect on our cash flows, results of operations andbusiness generally.

**Aninability to maintain sufficient liquidity could negatively affect expectedlevels of operations and new product development.**

Future revenue may not besufficient to meet operating, product development and other cash flowrequirements. Sufficient funds to service our debt and maintain new productdevelopment efforts and expected levels of operations may not be available, andadditional capital, if and when needed by us, may not be available on termsacceptable to us. If we cannot obtain sufficient capital on acceptable termswhen needed, we may not be able to carry out our planned product developmentefforts and level of operations, which could harm our business.

**Ourfinancial results vary from quarter to quarter, which could negatively impactour business.**

Various factorsaffect our quarterly operating results, some of which are not within ourcontrol. These factors include, among others:

·       thefinancial strength of the gaming industry;

·       consumer’swillingness to spend money on leisure activities;

·       thetiming and introduction of new products and services;

·       themix of products and services sold;

·       thetiming of significant orders from and shipments to customers;

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

·       productand service pricing and discounts;

·       thetiming of acquisitions of other companies and businesses or dispositions; and

·       generaleconomic conditions.

These and other factorsare likely to cause our financial results to fluctuate from quarter to quarter.Based on the foregoing, we believe that quarter-to-quarter comparisons of ourresults of operations may not be meaningful. In addition, such fluctuations couldcause us to be unable to comply with the financial ratios in our bank loanagreement.

**Certainmarket risks may affect our business, results of operations and prospects.**

In the normal course of our business, we are routinelysubjected to a variety of market risks, examples of which include, but are notlimited to, interest rate movements, collectibility of receivables andrecoverability of residual values on leased assets. Further, some of our payorsmay experience financial difficulties, or may otherwise not pay accountsreceivable when due, resulting in increased write-offs. Although we do notanticipate any material losses in these risk areas, no assurances can be madethat material losses will not be incurred in these areas in the future.

Our strategic plan, involving growth through theacquisition of other companies, may not succeed.

Our strategic planinvolves, in part, growth through the acquisition of other companies. Suchgrowth involves a number of risks, including:

·       thedifficulties related to combining previously separate businesses;

·       thesubstantial diversion of management’s attention from day-to-day operations;

·       theassumption of liabilities of an acquired business, including unforeseenliabilities;

·       thefailure to realize anticipated benefits, such as cost savings and revenueenhancements;

·       thedilution of existing stockholders due to the issuance of equity securities,utilization of cash reserves, or incurrence of debt in order to fund theacquisitions;

·       thepotentially substantial transaction costs associated with acquisitions; and

·       thedifficulties related to assimilating the products, personnel and systems of anacquired business and to integrating distribution and other operationalcapabilities.

We have adopted a shareholder rights plan, which,together with provisions in our restated articles of incorporation and Nevadalaw, could discourage or prevent a potential takeover of our company that mightotherwise result in you receiving a premium over the market price for yourcommon stock.

We adopted a shareholder rights plan pursuant to whichwe distributed one right for each outstanding share of common stock held bystockholders of record as of March 12, 1998. Because the rights maysubstantially dilute the stock ownership of a person or group attempting atake-over of us without the approval of our Board of Directors, even if such achange in control would result in our stockholders receiving a premium fortheir shares, the plan could make it more difficult for a third party to acquireus, or a significant percentage of our outstanding capital stock, without firstnegotiating with our Board of Directors. Additionally, our restated articles ofincorporation permit our Board of Directors to issue special shares from timeto time, with such rights and preferences as they consider appropriate. OurBoard 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

of Directors couldauthorize the issuance of special shares with terms and conditions and undercircumstances that could have an effect of discouraging a takeover or othertransaction.

As a Nevada corporation,we are also subject to certain provisions of the Nevada General Corporation Lawthat have anti-takeover effects and may inhibit a non-negotiated merger orother business combination. These provisions are intended to encourage any personinterested in acquiring us to negotiate with, and to obtain the approval of,our Board of Directors in connection with such a transaction. However, certainof these provisions may discourage a future acquisition of the Company,including an acquisition in which the stockholders might otherwise receive apremium for their shares. As a result, stockholders who might desire toparticipate in such a transaction may not have the opportunity to do so.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

*Currency RateFluctuations*

Revenues and results ofoperations derived from our non-U.S. subsidiaries are denominated in theirlocal currencies and 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 wehave foreign operations have strengthened versus the U.S. dollar, whichresulted in assets and liabilities denominated in local currencies beingtranslated into more dollars. The Company does not currently utilize hedginginstruments.

*Market risks*

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

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

Theresults of the sensitivity analysis at June 30, 2005 are as follows:

*Interest Rate Risk*

We had total debt ofapproximately $335.1 million, consisting primarily of the $314.9 million termloan under our senior credit facilities and the $14.0 million subordinated loanand other debt at approximately $6.2 million. The interest rate for the termloan is reset every six months. If the LIBOR rates were to increase or decreaseby 100 basis points, with all other factors remaining constant, earnings woulddecrease or increase by approximately $3.4 million on a pre-tax basis.

*Foreign CurrencyExchange Rate Risk*

Our foreign subsidiariesgenerally use their domestic currency as their functional currency. A 10%fluctuation in the exchange rates of these currencies against the U.S. dollar wouldresult in a corresponding change in earnings reported in the consolidated groupof approximately $0.6 million.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

*Estimates*

Our financial statementsare prepared using estimates and assumptions that affect the reported amountsof assets and liabilities. Actual results may differ from these estimateseither favorably or unfavorably, which may impact future results.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**RESTATEMENTOF PREVIOUSLY ISSUED FINANCIAL STATEMENTS**

As described in Note 2 to our consolidated financialstatements, we have restated our previously reported audited financialinformation for the fiscal years ended June 30, 2004 and 2003 and ourpreviously reported unaudited financial information for the fiscal quartersended September 30, 2004 and 2003, December 31, 2004 and 2003, March 31,2005 and 2004 and June 30, 2004. The adjustments relate primarily torevenue recognition, accounting for inventory costs and other adjustments.

Our consolidated financialstatements, including the notes thereto, and supplementary financialinformation are listed in Item 15, Exhibits and Financial Statement Schedules,and are included after the signature page beginning at page F-1.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**Disclosure Controls and Procedures**

As required by Rule 13a-15(b) promulgated under theExchange Act, our management, with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, evaluated the design and operatingeffectiveness as of June 30, 2005 of our disclosure controls andprocedures, as defined in Rule 13a-15(e) promulgated under theExchange Act. Based on this evaluation our Chief Executive Officer and ChiefFinancial Officer concluded that, because of the deficiencies in our internalcontrol over financial reporting described below, as of June 30, 2005 ourdisclosure controls and procedures were not effective.

Notwithstanding management’s assessmentthat our internal control over financial reporting was ineffective as of June 30,2005 and the material weaknesses described below, we believe that theconsolidated financial statements included in this Annual Report on Form 10-Kcorrectly present our financial condition, results of operations and cash flowsfor the fiscal years covered thereby in all material respects.

**InternalControl Over Financial Reporting**

**Management’sReport on Internal Control Over Financial Reporting**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Rule 13a-15(f) promulgatedunder the Exchange Act. Internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of an issuer’s financial statements for externalpurposes in 

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accordancewith accounting principles generally accepted in the United States of America (“GAAP”).Internal control over financial reporting includes policies and proceduresthat:

·       pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of an issuer’s assets;

·       providereasonable assurance that transactions are recorded as necessary to permit preparationof financial statements in accordance with GAAP, and that an issuer’s receiptsand expenditures are being made only in accordance with authorizations of itsmanagement and directors; and

·       providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of an issuer’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also, theapplication of any evaluation of effectiveness to future periods is subject tothe risk that controls may become inadequate because of changes in conditions,or that compliance with the policies or procedures may deteriorate.

As required by Rule 13a-15(c) promulgatedunder the Exchange Act, our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour internal control over financial reporting as of June 30, 2005. Management’sassessment was based on criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission in *InternalControl—Integrated Framework* (“COSO”). Our assessment identifieddeficiencies that were determined to be material weaknesses.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. Because of the materialweaknesses described below, management concluded that our internal control overfinancial reporting was not effective as of June 30, 2005.

The specificmaterial weaknesses identified by management are described as follows:

·       **Inadequate staffing and training in finance andaccounting:  **Management has identified two broad issues relatedto our finance and accounting staff. First, accounting personnel did not havean adequate understanding of the complex rules over revenue recognitionand how the application of those rules applied to our evolving business inrecent years. This issue contributed to the majority of the dollar amount andnumber of financial statement adjustments required to fiscal year end 2005 aswell the need for the restatement of the previously issued financial statements.Second, a high level of turnover of key finance and accounting personnel infiscal year 2005, a year in which we were integrating the SDG acquisition,resulted in certain controls not operating effectively as of June 30, 2005.As a result of these two issues, our finance and accounting staff was, in somecases, inadequately trained and, in fiscal year 2005, understaffed. Theseweaknesses resulted in material adjustments to fiscal year end 2005 andcontributed to the restatement of the 2004 and 2003 consolidated financialstatements due to: (i) misinterpretation of certain accounting literature,(ii) lack of understanding and interpretation of customer contracts, (iii) untimelyapplication of accounting principles, (iv) improper classification ofcertain balance sheet and income statement items and (v) untimelyperformance of the year end evaluation of obsolete inventory and fixed assetreserves.

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·       **Ineffective controls related to the preparation ofcertain account analyses, account summaries and account reconciliations:  **Certaincontrols designed to ensure timely preparation, review and approval of certainaccount analyses and reconciliations did not operate effectively. Specifically,certain reconciliations in areas including accounts receivable, accruedliabilities, other current assets, and property, plant and equipment were notperformed in a timely manner. In certain circumstances we did not adequatelyfollow up or resolve the reconciliation of certain items. These weaknessesresulted in material adjustments to fiscal year end 2005 and contributed to arestatement of 2004 and 2003 consolidated financial statements.

·       **Inadequate controls related to revenue recognition:  **Wedid not have appropriate internal controls related to the recognition ofrevenue for game and system sales, including the lack of a comprehensivecontract administration function to address the operating, legal, financial andaccounting ramifications of game and system revenue contracts. Our controlswere not adequate to capture and analyze the terms and conditions of allcontracts to ensure the proper recording of revenue contracts with standard andnon-standard terms, including FOB destination provisions, extended paymentterms and other contractual arrangements that can affect the timing and amountof revenue to be recognized. Certain of our revenue transactions are accountedfor in accordance with the AICPA’s Statement of Position 97-2, “SoftwareRevenue Recognition” (“SOP No. 97-2”), as amended, which includescomplex revenue recognition criteria that were not always adequately assessed. Theseweaknesses were the result of a material deficiency in the design of internalcontrol over financial reporting and resulted in material adjustments to fiscalyear end 2005 and contributed to the restatement of the 2004 and 2003consolidated financial statements as follows:

(i)             decrease in gamingand systems revenues by $6.0 million $8.5 million and $23.2 million in fiscalyears 2005, 2004 and 2003, respectively;

(ii)         decrease in cost of salesby $4.2 million, $2.9 million and $9.9 million in fiscal years 2005, 2004 and2003, respectively.

·       **Inadequate controls related to inventory valuation:  **TheCompany did not design and implement sufficient controls related to thevaluation of inventory. As a result inventory, prior to year-end adjustmentswas not stated at the lower of cost or market value due to the following: (i) certainmanufacturing labor and overhead costs were not charged to inventory because wedid not accurately assess the purchase price variance associated with the useof standard costs within our accounting systems, (ii) the restocking ofexcess inventory pulled for work orders was not always properly identified andremoved from the bill of materials and (iii) certain packaging materialshad not always been properly charged to cost of sales. This weakness resultedin material adjustments to fiscal year end 2005 and contributed to therestatement of the 2004 and 2003 consolidated financial statements. The neteffect of these adjustments increased cost of goods sold by $1.9 million, $0.7million and $0.6 million for the fiscal years ended June 30, 2005, 2004and 2003 respectively.

·       **Ineffective controls related to income taxes:  **Ourpolicies and procedures did not include adequate review of certain complexincome tax issues, resulting in material deficiencies in the operatingeffectiveness of internal controls over financial reporting. These deficienciesresulted in an adjustment of our effective tax rate resulting from theestablishment of reserves for certain tax credits, and additional U.S. andforeign deferred tax expense related to our foreign operations. Certainadjustments were also required for deferred taxes related to a prioracquisition totaling $8.3 million as of June 30, 2004.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

·       **Ineffective controls at the entity level:  **As evidenced by the materialweaknesses described above, and management’s final assessment of our internalcontrols, we have determined that our entity-level controls related tothe control environment, risk assessment, monitoring function and disseminationof information and communication activities did not operate effectively,resulting in a material weakness in each COSO component. Such entity levelcontrols, and a comprehensive monitoring of internal controls by the internalaudit function, are part of the framework to ensure that the designed system ofinternal control is operating effectively to ensure that significanttransactions are adequately identified, recorded and disclosed.

Our independent registeredpublic accounting firm, Deloitte & Touche, LLP, has issued anattestation report on management’s assessment of our internal control overfinancial reporting which is set forth below.

**Changes in Internal Control**

Based on the evaluationrequired by Rule 13a-15(d) of the Exchange Act, there were nochanges to our internal control over financial reporting during the fiscalquarter ended June 30, 2005 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

**Remediation Plan**

Subsequent to June 30,2005, we have undertaken, and will continue to undertake, extensive work toremedy the material weaknesses described above, including identifying specificremediation initiatives. As of December 2005, we have identified and begunto implement the following actions:

·       Developingstandard contract language that can be altered only with legal departmentapproval, including a process to communicate such changes to finance andaccounting in a timely manner;

·       Developinga contract administration and formal review process to approve contracts priorto execution of all sale contracts;

·       Employingadditional finance and accounting staff and adding additional qualifiedpersonnel and consultants to assist in the remediation of internal controldeficiencies;

·       Trainingfinance and accounting staff on the application of technical accountingpronouncements and skills specific to their job functions; and

·       Creatingstandardized reconciliation templates to assist in the reconciliation process.

The implementation of these initiatives and additionalprocedures being developed is a priority for us in fiscal year 2006.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**IndependentAuditor’s Attestation Report on Management’s Report on Internal Control OverFinancial Reporting**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Tothe Board of Directors and Stockholders of Alliance Gaming Corporation

Las Vegas, Nevada

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Alliance Gaming Corporation and Subsidiaries (the “Company”)did not maintain effective internal control over financial reporting as of June 30,2005, because of the effect of the material weaknesses identified in management’sassessment based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”). The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles,and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

A material weaknessis a significant deficiency, or combination of significant deficiencies, thatresults in more than a remote likelihood that a material misstatement of theannual or interim financial 

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statementswill not be prevented or detected. The following material weaknesses have beenidentified and included in management’s assessment:

·       **Inadequate staffing and training in finance andaccounting:  **Accounting personnel did not have an adequateunderstanding of certain rules over revenue recognition and how those rules appliedto its business. Additionally, the Company experienced a high level of turnoverof key finance and accounting personnel in fiscal year 2005 and an inability torecruit and retain qualified finance and accounting staff. As a result, theCompany’s finance and accounting staff was inadequately trained andunderstaffed. These weaknesses resulted in material adjustments to the Company’sconsolidated financial statements for the year ended June 30, 2005 andcontributed to the restatement of the 2004 and 2003 consolidated financialstatements due to: (i) misinterpretation of certain accounting literature,(ii) lack of understanding and interpretation of customer contracts, (iii) untimelyapplication of accounting principles, (iv) improper classification ofcertain balance sheet and income statement items and (v) untimely performanceof the year end evaluation of obsolete inventory and fixed asset reserves.

·       **Ineffective controls related to the preparation ofcertain account analyses, account summaries and account reconciliations:  **Certaincontrols designed to ensure timely performance, review and approval of certainaccount analyses and reconciliations did not operate effectively. Specifically,certain reconciliations in areas including accounts receivable, accruedliabilities, other current assets, and property, plant and equipment were notperformed in a timely manner. In certain circumstances the Company did notproperly resolve reconciling items. These weaknesses resulted in materialadjustments to the Company’s consolidated financial statements for the yearended June 30, 2005 and contributed to the restatement of the 2004 and2003 consolidated financial statements.

·       **Inadequate controls related to revenue recognition:  **TheCompany did not have appropriate internal controls related to the recognitionof revenue for game and system sales, including the lack of a comprehensivecontract administration function to address the operating, legal, financial andaccounting ramifications of game and system revenue contracts. The Company’scontrols were not adequate to capture and analyze the terms and conditions ofall contracts to ensure the proper recording of revenue contracts with standardand non-standard terms, including FOB destination provisions, extended paymentterms and other contractual arrangements that can affect the timing and amountof revenue to be recognized. Certain revenue transactions are accounted for inaccordance with the AICPA’s Statement of Position 97-2, “Software RevenueRecognition” (SOP No. 97-2), which includes complex revenuerecognition criteria that were not adequately assessed. These weaknesses werethe result of a material deficiency in the design of internal control overfinancial reporting, and resulted in material adjustments to the consolidatedfinancial statements for the fiscal year ended June 30, 2005 and contributed tothe restatement of the 2004 and 2003 consolidated financial statements.

·       **Inadequate controls related to inventory valuation:  **TheCompany did not design and implement sufficient controls related to thevaluation of inventory. As a result inventory, prior to year end adjustments,was not stated at the lower of cost of market value due to the following: (i) certainmanufacturing labor and overhead costs were not charged to inventory becausethe Company did not accurately assess the purchase price variance associatedwith the use of standard costs within the accounting systems, (ii) therestocking of excess inventory pulled for work orders was not always properlyidentified and removed from the bill of materials and (iii) certainpackaging materials had 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

not always been properlycharged to cost of sales. This weakness resulted in material adjustments to theCompany’s consolidated financial statements for the year ended June 30,2005 and contributed to the restatement of the 2004 and 2003 consolidatedfinancial statements.

·       **Ineffective controls related to income taxes:  **TheCompany’s policies and procedures did not include adequate review of certaincomplex income tax issues, resulting in material deficiencies in the operatingeffectiveness of internal control over financial reporting. These deficienciesresulted in an adjustment of the effective tax rate resulting from the establishmentof reserves for certain tax credits, additional U.S. and foreign deferred taxexpense related to foreign operations, and adjustments to deferred taxesrelated to a prior acquisition and contributed to the restatement of the 2004consolidated financial statements.

·       **Ineffective controls at the entity level:  **As evidenced by the materialweaknesses described above, the Company determined that entity-level controlsrelated to the control environment, risk assessment, monitoring function anddissemination of information and communication activities did not operateeffectively, resulting in material weaknesses in each COSO component. Suchentity level controls, and a comprehensive monitoring of internal controls bythe internal audit function, are part of the framework to ensure that that thedesigned system of internal control is operating effectively to ensure thatsignificant transactions are adequately identified, recorded and disclosed.

These material weaknesses were considered indetermining the nature, timing, and extent of audit tests applied in our auditof the consolidated financial statements as of and for the year ended June 30,2005 of the Company and this report does not affect our report on suchconsolidated financial statements.

In our opinion, management’s assessment that theCompany did not maintain effective internal control over financial reporting asof June 30, 2005, is fairly stated, in all material respects, based on thecriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission . Also in our opinion, because of the effect of thematerial weaknesses described above on the achievement of the objectives of thecontrol criteria, the Company has not maintained effective internal controlover financial reporting as of June 30, 2005, based on the criteriaestablished in *Internal Control-Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements as of and for the year ended June 30, 2005 of the Company andour report dated December 29, 2005, expressed an unqualified opinion onthose consolidated financial statements.
| DELOITTE & TOUCHE,  LLP |
|----------------------------------|
| Las Vegas, Nevada                |
| December 29,  2005          |

 

**ITEM 9B.**       OTHERINFORMATION

None

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

**Directors,Executive Officers and Other Significant Employees**

Thename, age, present principal occupation or employment and five-yearemployment history of each of our directors and executive officers is set forthbelow. No director or executive officer is related by blood, marriage oradoption to any other director or executive officer.

| **Name**           | ** ** | ** ** | ** ** | **Age**                                                                       | ** ** | **Position with the Company** |
|--------------------|------------|------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------|
| Richard Haddrill   |       | 52         |       | Director, President,  Chief Executive Officer                                 |
| Jacques André |       | 68         |       | Director                                                                      |
| Anthony DiCesare   |       | 43         |       | Director                                                                      |
| Joel Kirschbaum    |       | 54         |       | Director                                                                      |
| Stephen Race       |       | 56         |       | Director                                                                      |
| David Robbins      |       | 46         |       | Director, Chairman of  the Board of Directors                                 |
| Kevin Verner       |       | 47         |       | Director                                                                      |
| Steven Des Champs  |       | 40         |       | Senior Vice President,  Chief Financial Officer                               |
| Mark Lipparelli    |       | 40         |       | Executive Vice President  of Operations                                       |
| Mark Lerner        |       | 56         |       | Senior Vice President  for Law and Government, Secretary and  General Counsel |
| Robert Luciano     |       | 47         |       | Chief Technology Officer                                                      |
| Robert Miodunski   |       | 54         |       | President and Chief  Executive Officer(1)                                     |
| Robert Saxton      |       | 52         |       | Executive Vice  President, Gaming, and Treasurer                              |
| Ramesh Srinivasan  |       | 45         |       | Executive Vice President, Bally Systems Division                              |

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(1)          Mr. Miodunskiresigned as President and Chief Executive Officer of the Company effective asof September 30, 2004, pursuant to the Separation and Consulting Agreementdated as of June 30, 2004, more fully described below under Item 11,Executive Compensation.

**Biographies**

***Richard Haddrill.******  ***Mr. Haddrill, age 52, became adirector in April 2003 and, effective October 1, 2004, was appointedChief Executive Officer of the Company. Prior to becoming Chief ExecutiveOfficer of the Company, Mr. Haddrill most recently completed five years asCEO of Manhattan Associates, Inc., a leader in software solutions to thesupply chain industry throughout the world. During his tenure at Manhattan, thecompany expanded its product offerings and market share, more than tripledrevenues to almost $200 million and increased its share price more than eightfold. Mr. Haddrill previously served as President and CEO for PowerhouseTechnologies, Inc., a successful technology and gaming company fromSeptember 1996 until June 1999, when Powerhouse was acquired byAnchor Gaming, a publicly traded gaming company that was acquired by IGT in2001. Mr. Haddrill currently serves as Vice Chairman of ManhattanAssociates, Inc., and previously served on the board of directors of DankaBusiness Products, a digital imaging systems products provider and servicesproducer until October 2004, and Outlooksoft, a provider of corporateperformance management solutions until June 2005.

 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

***David Robbins.******  ***Mr. Robbins,age 46, initially served as a director for the Company from July 1994 to September 1997and as Chairman of the Board of Directors of the Company from February 1997to September 1997. Mr. Robbins received a B.S. in Economics from theWharton School of the University of Pennsylvania and a J.D. from the New YorkUniversity School of Law. Mr. Robbins was also licensed as a certifiedpublic accountant (inactive status) in the state of New York. From 1984 through2004, he practiced corporate, securities and real estate law at various lawfirms, as an associate, partner and of counsel. From 1993 through the present, Mr. Robbinsinvested in various private equity and other investment opportunities, andsince January 1996 has managed funds for private investors, includingprivate investment partnerships that invest in public securities and a privateequity investment partnership. In addition to serving on the Company’s Board, Mr. Robbinspreviously served on the board of directors of Medisys, plc, a health carediagnostics company. Mr. Robbins has served as an assistant adjunctprofessor of law at the Benjamin N. Cardozo Law School, where he taught coursesin corporate finance, securities and real estate.

***Jacques André.******  ***Mr. André, age 68, became a director in August 1996.Mr. André was a Vice President of A.T. Kearney Executive Search, aglobal management consulting firm from October 2002 until February 2005.Mr. André was a partner with Ray & Berndtson, Inc. aninternational executive search firm, from 1975 until 2002.

***Anthony DiCesare.******  ***Mr. DiCesare,age 43, became a director in July 1994. Mr. DiCesare was employed byKirkland Investment Corporation (“KIC”), which was the sole general partner ofKirkland-Ft. Worth Investment Partners, L.P., an investment partnership,from April 1991 to July 1994. Mr. DiCesare served as ExecutiveVice President-Development of the Company from July 1994 through June 1997.He has been a personal investor since 1997.

***Joel Kirschbaum.******  ***Mr. Kirschbaum, age 54, became adirector in July 1994 and served as Chairman of the Board of Directors ofthe Company from July 1994 to March 1995. Mr. Kirschbaum is thesole stockholder, director and officer of KIC. Previously, he worked atGoldman, Sachs & Co. for 13 years, during the last six of which he wasa General Partner.

***Stephen Race.****  *Mr. Race, age 56, became adirector in June 2005. From 1999 to 2004, Mr. Race worked with avariety of private equity groups analyzing leveraged buyout opportunities inconsumer branded goods and services, and with venture capital groups onfinancial restructuring of selected portfolio companies, often serving asacting chief executive officer. Mr. Race also served as interim CEO torestructure and sell a troubled dot com. From 1995 to 1998, Mr. Raceserved as CEO of Microprose, Inc., a NASDAQ video game company. From 1993to 1995, Mr. Race served as President of the division of SONY ComputerEntertainment responsible for development and launch of the PlayStation videogame. Prior to that time, Mr. Race provided a broad range of managementcounsel primarily in the areas of marketing, strategic planning, mergers andacquisitions, and new business development. In 1990, Mr. Race served asGeneral Manager of Reebok at the time of introduction and launch of the “PUMP”athletic footwear technology. Mr. Race also previously served as Chairmanand CEO of Homestar International, Executive Vice President and one of thefounders of Worlds of Wonder, Inc., and as Vice President of Marketing andCommunications, International Division, of Atari, Inc. Mr. Race holdsdegrees in economics and energy management from the University of Pennsylvaniaand an M.B.A. from the Wharton Graduate School of Finance and Commerce.

***Kevin Verner.******  ***Mr. Verner,age 47, became a director in April 2001. From 1997 to 2000, Mr. Vernerheld various positions with WMS Industries, Inc., and WMS Gaming, the lastof which was Chief Operating Officer. Prior to his employment at WMS, Mr. Vernerwas Vice President of New Business 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

Development at R.J.Reynolds Tobacco Co., where he held various marketing and senior managementpositions for sixteen years. Mr. Verner is currently a consultant andprovides interim management to early-stage companies to include financialplanning, securing of seed funding, management recruitment and development ofoperating budgets and pro forma financial projections. Mr. Verner is alsoa CEO advisor for Chicago venture fund Alpha Capital Fund III and providesconsultation on enterprise valuation and due diligence for consumer productsinvestments.

***Steven Des Champs.******  ***Mr. DesChamps, age 40, was appointed Chief Financial Officer in March 2005,succeeding Mr. Robert Saxton in this position. Mr. Des Champsre-joined the Company in February 2000 as Vice President—Finance, waspromoted to Chief Accounting Officer in August 2000 and Senior VicePresident in October 2002. The Company previously employed Mr. DesChamps in the capacity of Director of Finance from October 1995 to November 1998.From December 1998 to January 2000, Mr. Des Champs was the ChiefFinancial Officer for PDS Financial, a provider of lease financing for thegaming industry.

***Mark Lipparelli.*****  **Mr. Lipparelli, age 40, joinedthe Company as Executive Vice President of Bally Systems in 2002. Mr. Lipparellicurrently serves as Executive Vice President of Operations, a position heassumed in March 2005. As head of Operations, he oversees Manufacturing, IntellectualProperty, Strategic Planning, Product Compliance, Human Resources andInformation Technology. Previously, Mr. Lipparelli served as ExecutiveVice President and then President of Shuffle Master, Inc., a gaming supplycompany. Prior to joining Shuffle Master, Mr. Lipparelli was ChiefFinancial Officer of Camco, Inc., a retail chain holding company. From1998 to 2000, he was Senior Vice President of Entertainment Systems for BallyGaming and Systems. Mr. Lipparelli also previously served as VicePresident of Finance for Casino Data Systems and worked for the Nevada StateGaming Control Board from 1988 to 1993.

***Mark Lerner.******  ***Mr. Lerner,age 56, joined the Company in December 1996 as Assistant General Counsel.A former deputy attorney general for the Nevada Gaming Commission and State ofNevada Gaming Control Board, Mr. Lerner has been practicing law since1980. Before joining Alliance he was general counsel to Becker Gaming, Inc.,a Las Vegas gaming company. From 1987 to 1994, Mr. Lerner practiced law atJones, Jones, Close & Brown (now Jones Vargas), a prominent Las Vegascommercial and litigation law firm.

***Robert Luciano.******  ***Mr. Luciano,age 47, joined the Company in March 2004 as Chief Technology Officer inconnection with the Company’s acquisition of SDG. Mr. Luciano founded SDGin 1996 as a research, development and consulting company focusing on thegaming industry. Prior to founding SDG, Luciano was employed by IGT in theposition of Vice President of Advanced Engineering. Prior to joining IGT, Mr. Lucianoheld several engineering positions with a variety of companies includingSoabar, a division of Avery International, and Mobil Oil Corporation.

***Robert Miodunski.******  ***Mr. Miodunski*,*age 54*,*joined the Company in March 1994 and served as, among other things, adirector beginning in February 2000 and Chief Executive Officer beginningin April 2001 until he resigned from both positions effective September 30,2004. Commencing January 1, 2005, Mr. Miodunski began serving as aconsultant to the Company. From January 1991 to March 1994, Mr. Miodunskiwas President of Mulholland-Harper Company, a sign manufacturing andservice company. From 1984 through 1990, Mr. Miodunski held variouspositions with Federal Signal Company, the last of which was Vice President andGeneral Manager of the Midwest Region of the Sign Group. Mr. Miodunski waselected to Alliance’s Board of Directors in February 2000.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

***Robert Saxton.*****  **Mr. Saxton, age 52, joined theCompany in July 1982 as Corporate Controller. Mr. Saxton became aVice President of United Coin in 1987 and was elected Vice President—CasinoOperations of Alliance Gaming in December 1993, and Senior Vice President—CasinoGroup in June 1996. In March 2000, Mr. Saxton was appointedChief Financial Officer and Treasurer of the Company, and in December 2003was promoted to Executive Vice President. In March 2005, Mr. Saxtonwas appointed Executive Vice President of Bally Gaming. In this capacity, Mr. Saxtonis responsible for the daily management of Gaming Operations, Customer Service,and Domestic & International Sales in the Games Division of BallyGaming, Inc. He continues to serve as Treasurer of the Company and since1994 has served as President of Rainbow Casino located in Vicksburg,Mississippi.

***Ramesh Srinivasan.******  ***Mr. Srinivasan,age 45, joined the Company in March 2005 as Executive Vice President ofBally Systems. From 1998-2005, Mr. Srinivasan was an Executive VicePresident, Senior Vice President and Vice President for Manhattan Associates,and brings a strong blend of technical and customer experiences to the Company.Mr. Srinivasan is responsible for system sales, services and productdevelopment.

**AuditCommittee of the Board of Directors**

The Audit Committee of theBoard of Directors is comprised of Messrs. Jacques André, David Robbinsand Kevin Verner. The composition of the Audit Committee was changed as of October 27,2004 to comply with the corporate governance requirements of the NYSE withrespect to the independence, financial literacy and financial expertise ofAudit Committee members. The Board of Directors has determined that Mr. Robbinsis an audit committee financial expert, pursuant to Item 401(h) ofRegulation S-K. The Board of Directors made this determination based on Mr. Robbins’qualifications and business experience, as briefly described above under “—Biographies.”

**Code of Ethics**

We amended our Code ofEthics and Business Conduct in October, 2005 for our chief executive, chieffinancial and principal accounting officers, as well as our directors (the “Codeof Ethics”). In the event we make any amendment to, or grants any waiver from,a provision of the Code of Ethics that applies to the principal executiveofficer, principal financial officer or principal accounting officer thatrequires disclosure under applicable SEC rules, we intend to disclose suchamendment or waiver and the reasons therefore on our website *www.alliancegaming.com*. The full text of the Code of Ethicsis available by following links to “Investor Relations” and “CorporateGovernance” on our website *www.alliancegaming.com*,or upon written request to us. Requests should be addressed to: Alliance Gaming Corporation, 6601 South BermudaRoad, Las Vegas, Nevada 89119, Attention: Corporate Secretary.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) ofthe Exchange Act requires our directors and executive officers and persons whoown more than 10 percent of a registered class of our equity securities to filewith the SEC and the NYSE initial reports of ownership and reports of changesin ownership of our common stock and other of our equity securities. Theseindividuals are required by the SEC’s regulations to furnish us with copies ofall Section 16(a) reports filed by such persons. To our knowledge,based solely on our review of the copies of such reports furnished to us, all Section 16(a) filingrequirements applicable to the our directors, executive officers and greaterthan ten percent beneficial owners were complied with on a timely basis duringthe fiscal year ended June 30, 2005, except that (i) on October 18,2005, a Form 3 was filed on behalf of 

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Mr. RameshSrinivasan, an executive officer of Bally Gaming, reporting Mr. Srinivasan’sownership of 11,000 shares of common stock, 1,000 shares of restricted stock,and options to purchase 300,000 shares of common stock on March 9, 2005,and (ii) on July 27, 2005, a Form 3 and Form 4 were filedon behalf of Stephen M. Race, a director, reporting Mr. Race’s appointmentto the Board of Directors on June 30, 2005 and the award of stock optionsto purchase 50,000 shares of common stock in connection therewith,respectively.

**ITEM 11.**         EXECUTIVECOMPENSATION

**Report on Executive Compensation**

As of the end ofthe fiscal year ended June 30, 2005, the Compensation Committee consistedof Messrs. Jacques André, David Robbins and Kevin Verner, each of whom isan independent director. The composition of the Compensation Committee waschanged as of October 27, 2004, to comply with the corporate governancerequirements of the NYSE with respect to the independence of CompensationCommittee members. The Compensation Committee’s duties and responsibilities areset forth in a formal charter adopted by the Board of Directors and include,among others things:

·       Reviewand approve executive compensation philosophy.

·       Approveall executive compensation plans and structures.

·       Approveannual and long-term incentive performance metrics, as well as determine andapprove payouts.

·       Approvecompensation for the Company’s management executive committee, consisting ofcertain members of senior management, as well as senior management of theCompany’s subsidiaries.

·       Approveplan payouts to the members of the management executive committee that areoutside of approved parameters.

·       Recommendapproval for all management incentive plans, including stock options, to theBoard of Directors, and approve new change-in-control or special retentionplans.

·       Approvebonus criteria, incentives, including stock options and payouts foremployee-directors.

***GeneralCompensation Philosophy.***   The Compensation Committee’s general philosophy has been,and continues to be, providing a compensation package to attract and retain themost highly qualified executive officers while providing incentives to createstockholder value. To accomplish this objective, the Compensation Committeevaries total cash compensation based on the Company’s performance in achievingthe financial and non-financial objectives, and aligns long-term incentivecompensation closely with the stockholder’s interests. However, theCompensation Committee believes that it will continue to be constrained bycompetitive factors as there continues to be demand from competing businessesto attract and retain management talent of the type the Company desires torecruit.

The Compensation Committee believes as a generalmatter, but particularly with respect to senior executive officers, that themost effective method of compensation, and the method that most closely alignsmanagement’s interest with those of the Company’s stockholders, is long-termcompensation tied to the creation of stockholder value. Thus, it has been theCompany’s policy where feasible and consistent with competitive marketconditions, and unless otherwise obligated by contract, to attempt to limitbase cash compensation while providing incentives for management to increasestockholder value. The Company hopes to achieve this goal of focusing onlong-term compensation through the use of stock options and, 

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where appropriate,restricted stock and restricted stock units. The Compensation Committeebelieves this compensation philosophy has the greatest probability of achievingsignificant returns to stockholders.

Pearl Meyer & Partners, a Clark ConsultingPractice, has also been retained to advise the Compensation Committee onmatters relating to executive compensation. Pearl Meyer & Partners wasengaged by and reports directly to the Compensation Committee.

***Base Salaries.***   Basesalary levels are the fixed portion of an executive’s compensation package. TheCompensation Committee annually reviews and determines the base salaries ofmembers of senior management, except as limited by contractual obligation.Where adjustable, salary levels reflect a combination of factors, includingcompetitive pay levels, the executive’s experience and tenure, and the Company’soverall annual budget for merit increases and the executive’s individualperformance. In each case, the Compensation Committee takes into account theresults achieved by the executive, his or her future potential, scope ofresponsibilities and experience, and competitive salary practices. However, theCompany’s compensation formulas for certain executives’ salaries during thefiscal year ended June 30, 2005, were largely determined based onpre-existing contractual arrangements in place from the previous fiscalperiods.

***Bonuses.***   Annualperformance bonuses are tied to the Company’s overall performance, as well asthe performance of each executive and of his or her area of responsibility. TheCompensation Committee sets certain financial and operational objectives thatare designed to promote key Company initiatives, such as achievement ofspecific strategic, operational or financial tasks or targets, includingBusiness Unit performance, operating income and EPS, which the Board ofDirectors believes will result in increases in stockholder value. As a resultof the Company’s performance on many of these metrics during fiscal year 2005,the Company did not pay any cash bonuses for the fiscal year ended June 30,2005, other than as contractually obligated with respect to one executiveofficer and bonuses paid to two executive officers early in fiscal 2005 inconnection with a transaction occurring in fiscal 2004.

***Long-TermCompensation.***   Long-term compensation isprovided by stock options and, from time to time when appropriate, restrictedstock or restricted stock units. The Compensation Committee believes thatlong-term compensation tied to stockholder value should constitute a significantportion of an executive’s compensation as options are intended to providelong-term compensation specifically tied to increases in the price of theCompany’s common stock. Options are granted at the market price of the Company’scommon stock on the date of grant, and provide compensation only to the extentthe market price of the common stock increases between the date of grant andthe date the option is exercised. Restricted stock and restricted stock unitsalso tie compensation to the long term appreciation of the Company’s commonstock by restricting the holders’ ability to receive and/or dispose of therelated shares of common stock.

The total number of options granted in each year,which may vary, is tied to a number of factors including, but not limited to,overall Company performance, individual performance of the executive, andcompetitive and retention considerations.

The Compensation Committee continues to review itsoverall long-term incentive structure in light of the shifting competitive and regulatoryenvironment. The Compensation Committee, with input from senior management andoutside consultants, may decide to make changes to the long-term compensationprogram in the future.

***401(k) Plan.***   TheCompany offers a 401(k) plan. Employees are eligible to participate aftercompletion of six months of service. Employees may defer from 1% to 25% ofeligible earnings up to the 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

IRS maximum of $14,000 for2005. Participating employees who have attained age 50 are allowed tocontribute an extra $3,000 in the 401(k) plan as “catch-up” contributions.Employee contributions are 100% vested. Participants hired before November 1,2001, are 100% vested in both employee and employer contributions. Forparticipants hired on or after November 1, 2001, employer-matchingcontributions become vested based on a five-year vesting schedule, to vest 20%per year, for each year of service. The Company, on a discretionary basis, maymake matching contributions at the end of each quarter. Matching contributionsmay be made each pay period in lieu of each quarter. The current match is 50%of the participant’s contribution up to 6% of employee compensation. Alliance Gaming Corporation may makea discretionary Profit Sharing contribution to the 401(k) plan each year.

***Chief ExecutiveOfficer Compensation.***   Effective as of September 30,2004, Mr. Miodunski resigned as President and Chief Executive Officer ofthe Company, at which time Mr. Haddrill assumed responsibility for bothpositions. On June 30, 2004, Mr. Haddrill and the Company enteredinto an Employment Agreement (the “Haddrill Agreement”) pursuant to which Mr. Haddrillbegan serving as the Company’s Chief Executive Officer as of October 1,2004. Mr. Haddrill’s annual salary as President and Chief ExecutiveOfficer is $980,000, as provided for in the Haddrill Agreement. Mr. Haddrill’scontract does not provide for an annual cash bonus; therefore, Mr. Haddrilldid not receive a cash bonus for fiscal year 2005. Additionally, during fiscalyear 2005 Mr. Haddrill was awarded a stock option grant covering 430,000shares of common stock which vest as set forth under “—Option/SAR Grants inLast Fiscal Year.” Of the 430,000 shares, vesting of 95,000 was accelerated asdescribed below under *“—*Acceleration ofOption Vesting*.*” Mr. Haddrill was also granted$1,900,000 in restricted stock during fiscal year 2005 pursuant to the HaddrillAgreement which vest on October 1, 2010; provided, however, that thevesting will be accelerated to 50% of the total award on each of October 1,2005, and October 1, 2006, if the Company attains certain strategic and/orfinancial measures, which are to be mutually agreed to by the Board ofDirectors and Mr. Haddrill. Measures established for the first 50%addressed the near-term and longer-term strategic positioning of theCompany’s technology platforms, game content and human and financial assets. TheBoard of Directors has determined that Mr. Haddrill achieved theseobjectives, and the first 50% have accordingly accelerated as of October 1,2005.

Pursuant to his employment agreement and hisSeparation and Consulting Agreement, Mr. Miodunski received a salary of$250,000 during fiscal year 2005 through December 31, 2004, including thethree months of fiscal year 2005 that he served as President and Chief ExecutiveOfficer. Mr. Miodunski did not receive a bonus for fiscal year 2005 inrespect of his service as President and Chief Executive Officer; however,pursuant to the terms of his Separation and Consulting Agreement, Mr. Miodunskireceived a bonus of $1,000,000 for the successful sale of United Coin on June 30,2004, $500,000 of which was paid in July 2004 and $500,000 of which ispayable in twenty-four monthly installments beginning January 1, 2005. Inaddition, pursuant to the Separation and Consulting Agreement, Mr. Miodunskiwill receive $250,000 annually for services as a consultant to the Board ofDirectors for four years.

***Acceleration ofOption Vesting.***   On June 13, 2005, theBoard of Directors approved a resolution accelerating the vesting andexerciseability of all outstanding, unvested stock options granted to employeeswith an exercise price equal to or greater than $15.00 per share. Thisaccelerated vesting will affect options for approximately 2,400,000 shares ofthe Company’s common stock, including an aggregate of 500,000 options held by Mr. Haddrill.All performance-based vesting criteria were also eliminated with respect to the500,000 options held by Mr. Haddrill. In order to prevent unintendedpersonal benefits to individuals resulting from the accelerated vesting ofoptions, sales of the shares of the Company’s common stock acquired uponexercise of any such options referenced above will be restricted in a mannersuch that the 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

sales restrictionsparallel the vesting requirements previously applicable to such options. Thedecision to accelerate vesting of these underwater stock options was madeprimarily to avoid recognizing compensation expense in the Company’s futureincome statements upon the Company’s adoption of SFAS No. 123Reffective on July 1, 2005. Because the option subject to the accelerationvesting were “underwater”, the Company believes that these options may not beoffering a sufficient incentive to employees when compared to the potentialfuture compensation expense that the Company would incur under SFAS 123R.

***Deductibility ofCompensation Under Internal Revenue Code Section 162(m).***   Section 162(m) ofthe Internal Revenue Code of 1986, as amended (the “Tax Code”) places a limitof $1,000,000 on the amount of compensation that Alliance may deduct in any oneyear with respect to its CEO and each of the next four most highly compensatedexecutive officers. If the Company were to seek and obtain approval fromstockholders for certain performance-based compensation, then such compensationwould not be subject to the deduction limitation.

Respectfully submitted,

COMPENSATIONCOMMITTEE
| Kevin Verner, *Chairman* |
|--------------------------|
| Jacques André       |
| David Robbins            |

 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**Summary Compensation Table***

Thefollowing table sets forth the compensation paid or to be paid by the Companyto its chief executive officer, former chief executive officer and the fourother most highly compensated executive officers receiving over $100,000 peryear (collectively, the “Named Executive Officers”) for services rendered inall capacities to the Company during the fiscal year ended June 30, 2005,2004 and 2003.

|                                          | ** ** | ** ** | ** ** | **Annual Compensation**           | ** ** | **Long-Term Compensation** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|----------------------------------------|------------|---------------------------------|------------|------------|------------|
| Name &  Principal Position | ** ** | ** ** | ** ** | **Fiscal  Year  Ended  June 30,** | ** ** | **Salary**                      | ** ** | **Bonus**  | ** ** | **Restricted  Stock Awards**(1) | ** ** | **Securities  Underlying  Options**(2) | ** ** | **All  Other  Compensation(3)** | ** ** |
| Richard Haddrill(4)                      |       |       | 2005       |                                   |       | $                               | 701,077    |       | $          | — |   |   | $ | 2,073,718 | (5) |   |   | 430,000 |   |   |   | $ | 342,970 | (6) |   |
| President and Chief                      |       |       | 2004       |                                   |       | —                          |       | —     |       |   | 6,498,835 | (7) |   |   | 600,000 |   |   |   | 60,000 | (6) |   |
| Executive Officer                        |       |       | 2003       |                                   |       | —                          |       | —     |       |   | — |   |   |   | 50,000 |   |   |   | 10,000 | (6) |   |
| Steven Des Champs                        |       |       | 2005       |                                   |       | 240,000                         |       | 20,000     |       |   | — |   |   |   | 100,000 |   |   |   | 7,634 |   |   |
| Sr. Vice President,                      |       |       | 2004       |                                   |       | 237,308                         |       | 116,000    |       |   | — |   |   |   | 25,000 |   |   |   | 5,996 |   |   |
| Chief Accounting                         |       |       | 2003       |                                   |       | 237,308                         |       | 192,500    |       |   | — |   |   |   | 22,500 |   |   |   | 5,387 |   |   |
| and Chief Financial Officer              |       |       |       |                                   |       |                            |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert Saxton                            |       |       | 2005       |                                   |       | 370,000                         |       | —     |       |   | — |   |   |   | 50,000 |   |   |   | 9,108 |   |   |
| Executive Vice                           |       |       | 2004       |                                   |       | 357,307                         |       | 279,240    |       |   | — |   |   |   | 50,000 |   |   |   | 6,328 |   |   |
| President and                            |       |       | 2003       |                                   |       | 333,000                         |       | 350,000    |       |   | — |   |   |   | 50,000 |   |   |   | 5,700 |   |   |
| Treasurer                                |       |       |       |                                   |       |                            |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mark Lerner                              |       |       | 2005       |                                   |       | 235,000                         |       | 20,000     |       |   | — |   |   |   | 25,000 |   |   |   | 9,106 |   |   |
| Sr. Vice President and                   |       |       | 2004       |                                   |       | 232,308                         |       | 94,000     |       |   | — |   |   |   | 25,000 |   |   |   | 6,307 |   |   |
| General Counsel                          |       |       | 2003       |                                   |       | 223,650                         |       | 168,750    |       |   | — |   |   |   | 22,500 |   |   |   | 5,250 |   |   |
| Robert Luciano                           |       |       | 2005       |                                   |       | 250,000                         |       | 50,000     |       |   | — |   |   |   | 600,000 |   |   |   |   |   |   |
| Chief Technology                         |       |       | 2004       |                                   |       | 57,692                          |       | 49,500     |       |   | — |   |   |   |   |   |   |   |   |   |   |
| Officer                                  |       |       |       |                                   |       |                            |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert Miodunski(8)                      |       |       | 2005       |                                   |       | 250,000                         |       | 500,000    | (9)        |   | — |   |   |   | — |   |   |   | 284,290 | (9) |   |
| Former Chief                             |       |       | 2004       |                                   |       | 478,846                         |       | 465,000    |       |   | — |   |   |   | 100,000 |   |   |   | 6,375 |   |   |
| Executive Officer                        |       |       | 2003       |                                   |       | 450,000                         |       | 522,000    |       |   | — |   |   |   | 100,000 |   |   |   | 5,500 |   |   |
|                                          |            |            |            |                                        |            |                                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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*                    As used in thetables provided under the caption “Executive Compensation,” the character “—”is used to represent zero.

(1)          Constitutes grants ofRestricted Stock Units (“RSUs”). Per the requirements of Regulation S-K item 402(b)(2)(iv)(A),dollar value calculated by multiplying the closing market price of our commonstock on the date of grant by the number of shares awarded. The closing priceof our common stock on December 22, 2004 and June 30, 2004, the datesof grant, were $13.25 and $17.16, respectively. See footnotes 5 and 7 belowgrading the terms of the RSU grants.

(2)          All grants made pursuantto the Company’s Amended and Restated 2001 Long Term Incentive Plan.

(3)          Unless indicatedotherwise, “All Other Compensation” represents contributions made by theCompany to the Company’s 401(k) Plan.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

(4)          Mr. Haddrill beganserving as the Company’s President and Chief Executive Officer on October 1, 2004.

(5)          On December 22,2004, the Company issued to Mr. Haddrill 156,507 RSUs. The number of RSUsgranted was determined by dividing $1,900,000 by the average per share closingprice of our common stock on the NYSE for the 20 business days prior to thedate of grant. The 156,507 RSUs had an aggregate value of $2,194,228.14 on June 30,2005, based on the per share closing price of our common stock on the NYSE of$14.02. In accordance with the Haddrill Agreement, the vesting of 50% of theaward was accelerated to October 1, 2005, as a result of the Board ofDirector’s determination that the Company achieved certain strategic and/orfinancial objectives for the nine month period ending on October 1, 2005(see “—Chief Executive Officer Compensation” above). In addition, the vestingof the remaining 50% is subject to acceleration as of October 1, 2006. VestedRSUs represents Mr. Haddrill’s right to receive an equivalent number ofshares of our common stock as follows:  (i) 75%of the shares of common stock represented by the vested RSUs shall be issued toMr. Haddrill (1) on the later of (a) October 1, 2007 or (b) thefirst date on which such payment or any portion thereof is no longer subject tothe limits of Section 162(m) of the Internal Revenue Code (the “Code”)in which case that portion of the payment that is no longer subject to suchlimits shall be issued to Mr. Haddrill at the time such limits becomeinapplicable, or (2) in the event that Mr. Haddrill’s employment withthe Company is terminated prior to October 1, 2007, on the first date inwhich such payment or any portion thereof is no longer subject to the limits ofSection 162(m) of the Code in which case that portion of the paymentthat is no longer subject to such limits shall be issued to Mr. Haddrillat the time such limits become inapplicable, and (ii) 25% of the shares ofcommon stock represented by the vested RSUs shall be issued to Mr. Haddrill(1) on the later of (a) October 1, 2008 or (b) the firstdate on which such payment or any portion thereof is no longer subject to thelimits of Section 162(m) of the Code in which case that portion ofthe payment that is no longer subject to such limits shall be issued to Mr. Haddrillat the time such limits become inapplicable, or (2) in the event that Mr. Haddrill’semployment with the Company is terminated prior to October 1, 2008, on thefirst date in which such payment or any portion thereof is no longer subject tothe limits of Section 162(m) of the Code in which case that portionof the payment that is no longer subject to such limits shall be issued to Mr. Haddrillat the time such limits become inapplicable.  No dividends will be paid on the RSUs unlessand until the underlying shares of common stock have been issued in Mr. Haddrill’sname as described above. Except as described below under “—Employment andSeverance Arrangements—Haddrill Agreement,” all unvested RSUs shall beimmediately forfeited if Mr. Haddrill ceases to serve as the Company’sChief Executive Officer.

(6)          Amount represents$337,136 paid in moving and relocation expenses and $5,654 in contributionsmade by the Company to the Company’s 401(k) Plan. Prior to his appointmentas Chief Executive Officer, Mr. Haddrill received compensation as a boardmember totaling $60,000 and $10,000 for the fiscal years ended June 30,2004 and 2003, respectively.

(7)          On June 30, 2004,the Company issued to Mr. Haddrill 377,030 RSUs. The number of RSUsgranted was determined by dividing $6,500,000 by the average per share closingprice of our common stock on the NYSE for the 20 business days prior to thedate of grant. The 377,030 RSUs had an aggregate value of $5,285,960.60 on June 30,2005, based on the per share closing price of our common stock on the NYSE of$14.02. The RSUs vest in one-third equal installments on each of October 1,2005, October 1, 2006 and October 1, 2007 provided that Mr. Haddrillis continuously employed by the Company as Chief Executive Officer until eachsuch vesting date, except as otherwise provided in Mr. Haddrill’semployment agreement, as described below under “—Employment and Severance 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

Arrangements—HaddrillEmployment Agreement.”  Vested RSUsrepresents Mr. Haddrill’s right to receive an equivalent number of sharesof our common stock as follows:  (i) 75%of the shares represented by the vested RSUs shall be issued to Mr. Haddrill(1) on the later of (a) October 1, 2007 or (b) the firstdate on which such payment or any portion thereof is no longer subject to thelimits of section 162(m) of the Code in which case that portion of thepayment that is no longer subject to such limits shall be issued to Mr. Haddrillat the time such limits become inapplicable, or (2) in the event that theHaddrill Agreement is terminated, on the first date in which such payment orany portion thereof is no longer subject to the limits of Section 162(m) ofthe Code in which case that portion of the payment that is no longer subject tosuch limits shall be issued to Mr. Haddrill at the time such limits becomeinapplicable, and (ii) 25% of the shares represented by the vested RSUsshall be issued to Mr. Haddrill (1) on the later of (a) October 1,2008 or (b) the first date on which such payment or any portion thereof isno longer subject to the limits of section 162(m) of the Code in whichcase that portion of the payment that is no longer subject to such limits shallbe issued to Mr. Haddrill at the time such limits become inapplicable, or (2) inthe event that the Haddrill Agreement is terminated, on the first date in whichsuch payment or any portion thereof is no longer subject to the limits of Section 162(m) ofthe Code in which case that portion of the payment that is no longer subject tosuch limits shall be issued to Mr. Haddrill at the time such limits becomeinapplicable. No dividends will be paid on the RSUs unless and until theunderlying shares of common stock have been issued in Mr. Haddrill’s name.Except as described below under “—Employment and Severance Arrangements—HaddrillEmployment Agreement,” all unvested RSUs shall be immediately forfeited if Mr. Haddrillceases to serve as the Company’s Chief Executive Officer.

(8)          Mr. Miodunskiresigned as President and Chief Executive Officer of the Company effective asof September 30, 2004, pursuant to the Separation and Consulting Agreementdated as of June 30, 2004, described below under “—Employment andSeverance Agreements—Miodunski Separation and Consulting Agreement.”

(9)          Amountrepresents $250,000 paid pursuant to Mr. Miodunski’s Separation andConsulting Agreement described below under “—Employment and SeveranceAgreements—Miodunski Separation and Consulting Agreement,” $5,769 incontributions made by the Company to the Company’s 401(k) Plan, and$28,521 which was paid for accrued vacation.

**Employmentand Severance Arrangements**

***Haddrill EmploymentAgreement.******  ***On June 30, 2004, Mr. Haddrilland the Company entered into the Haddrill Agreement, pursuant to which Mr. Haddrillbegan serving as the Company’s Chief Executive Officer as of October 1,2004. The term of the Haddrill Agreement continues until October 1, 2007,unless earlier terminated or extended, as provided for in the HaddrillAgreement. Mr. Haddrill receives a base annual salary of $980,000,participation in the Company’s benefit programs for corporate officers andother perquisites. If Mr. Haddrill’s employment is terminated by theCompany without cause or by Mr. Haddrill for good cause (as defined in theHaddrill Agreement), Mr. Haddrill will receive severance pay in an amountequal to his base salary for one year from the date of termination or until theexpiration of the term of the Haddrill Agreement, whichever occurs first. Further,Mr. Haddrill shall be entitled to retain the rights granted under theRSUs, provided that the vesting of the RSUs shall be pro rated through thetwelve-month period following the month in which the termination occurs, andthe sales restrictions on the stock options granted pursuant to the HaddrillAgreement shall lapse as to a pro rata portion of such options through the dateof termination. Upon a Change in Control of the Company, as defined in theHaddrill Agreement, Mr. Haddrill will receive a payment of $980,000 andwill be entitled to retain all of 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

the RSUs and stock optionsgranted pursuant to the Haddrill Agreement, all of which will vest immediatelyupon the Change in Control, and the sale restrictions on the stock options willimmediately lapse. The Haddrill Agreement also contains certain non-competeprovisions.

The Haddrill Agreement was amended as of December 22,2004. The December 22, 2004 amendment provided for, among other things, agrant of an additional 300,000 stock options and $1,900,000 in RSUs.

The Haddrill Agreement, as amended, was amended for asecond time, effective as of June 13, 2005 (the “Second Amendment”). TheSecond Amendment documented the terms and conditions of the acceleration of Mr. Haddrill’sstock options approved by the Board of Directors on June 13, 2005, asdescribed below under “—Acceleration of Option Vesting,” and clarified theterms of Mr. Haddrill’s RSUs to comply with Section 409A of theInternal Revenue Code.

***MiodunskiSeparation and Consulting Agreement.******  ***On June 30,2004, Mr. Miodunski and the Company entered into a Separation andConsulting Agreement pursuant to which Mr. Miodunski resigned as Presidentand Chief Executive Officer effective September 30, 2004. Pursuant to theagreement, Mr. Miodunski received a $1,000,000 bonus for the successfulsale of United Coin, $500,000 of which was paid in July 2004 and $500,000which is payable in twenty-four monthly installments beginning January 1, 2005.In addition, pursuant to the agreement, Mr. Miodunski will receive$250,000 annually for services as a consultant to the Board of Directors for aperiod of four years.

***Des ChampsEmployment Agreement.***   On January 28,2000, Mr. Des Champs and the Company entered into a letter agreement whichgenerally provides for a base salary, which is currently set at $290,000 peryear, participation in the Company’s compensation programs for corporateofficers, participation in the Company’s cash bonus program at amountsdetermined by the Board of Directors and severance benefits of six months’ basesalary if Mr. Des Champs is terminated without cause, including as aresult of or subsequent to a change in control.

***Lerner EmploymentAgreement.******  ***On August 15, 2000, Mr. Lernerand the Company entered into a letter agreement which generally provides for abase salary, which is currently set at $235,000 per year, participation in theCompany’s compensation programs for corporate officers, participation in theCompany’s cash bonus program at amounts determined by the Board of Directorsand severance benefits of six months’ base salary if Mr. Lerner isterminated without cause, including as a result of or subsequent to a change incontrol.

***Luciano EmploymentAgreement.***   On March 2, 2004, Mr. Lucianoand the Company entered into a letter agreement which generally provides for abase salary, which is currently set at $250,000 per year, an annual bonus of$50,000, participation in Bally’s Management Incentive Program (“MIP”) at thebusiness unit head level in an amount determined by the Board of Directors, andif Mr. Luciano is terminated without cause, severance benefits under theMIP in an amount determined by annualizing the amount Mr. Luciano wouldhave received in respect of the number of full months served in the fiscal yearin which Mr. Luciano is terminated.

On April 13, 2005, Mr. Luciano and theCompany entered into an amendment to the letter agreement providing for, amongother things, the grant of 600,000 stock options on July 1, 2005. Theamendment also provides that if Mr. Luciano is terminated without cause,any stock options granted to Mr. Luciano that have vested at the time oftermination shall remain outstanding and exercisable until the firstanniversary of the date of termination, but in no event beyond the originalterm of such options.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**Option/SAR Grantsin Last Fiscal Year**

Thefollowing table relates to options granted to the Named Executive Officersduring the fiscal year ended June 30, 2005.

|                   | ** ** | **Individual Grants** | ** ** | **Potential Realizable**                                        | ** ** |
|-------------------|------------|----------------------------|------------|----------------------------------------------------------------------|------------|
| ** **        | ** ** | ** **                 | ** ** | **Number of   Securities  Underlying  Options /SARS** | ** ** | **% of Total  Options/SARS  Granted  to Employees** | ** ** | **Exercise** | ** ** | **Expiration** | ** ** | **Value at Assumed  Annual Rates of Stock  Price Appreciation for  Option Term(a)** | ** ** |
| **Name**          | ** ** | ** **                 | ** ** | **Granted**                                                          | ** ** | **in Fiscal Year** | ** ** | **Price** | ** ** | **Date** | ** ** | **5%** | ** ** | **10%** | ** ** |
| Richard Haddrill  |       |                       | 35,000     | (b)                                                                  |       |   | 0.92 | % |   |   | $ | 14.77 |   |   |   | 6/13/15 |   |   | 325,108 |   | 823,886 |   |
|                   |       |                       | 95,000     | (c)                                                                  |       |   | 2.50 | % |   |   | 17.16 |   |   |   | 10/27/14 |   |   | — |   | 653,979 |   |
|                   |       |                       | 300,000    | (d)                                                                  |       |   | 7.88 | % |   |   | 13.35 |   |   |   | 12/22/14 |   |   | 2,518,723 |   | 6,382,939 |   |
| Steven Des Champs |       |                       | 25,000     | (e)                                                                  |       |   | 0.66 | % |   |   | 13.86 |   |   |   | 8/17/14 |   |   | 217,912 |   | 552,232 |   |
|              |       |                       | 75,000     | (e)                                                                  |       |   | 1.97 | % |   |   | 11.16 |   |   |   | 1/18/15 |   |   | 526,385 |   | 1,333,963 |   |
| Robert Saxton     |       |                       | 50,000     | (e)                                                                  |       |   | 1.31 | % |   |   | 13.86 |   |   |   | 8/17/14 |   |   | 435,825 |   | 1,104,464 |   |
|                   |       |                       | 40,000     | (f)                                                                  |       |   | 1.05 | % |   |   | 11.29 |   |   |   | 3/04/15 |   |   | 284,009 |   | 719,734 |   |
| Mark Lerner       |       |                       | 25,000     | (e)                                                                  |       |   | 0.66 | % |   |   | 13.86 |   |   |   | 8/17/14 |   |   | 217,912 |   | 552,232 |   |
| Robert Luciano    |       |                       | 600,000    | (g)                                                                  |       |   | 15.75 | % |   |   | 11.16 |   |   |   | 1/18/15 |   |   | 4,211,079 |   | 10,671,700 |   |
| Robert Miodunski  |       |                       | —     |                                                                 |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |

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(a)           Amounts shown in thesecolumns are derived by multiplying the exercise price by the annualappreciation rates shown (compounded for the term of the options), multiplyingthis product by the number of shares of common stock covered by the options,and subtracting the aggregate exercise price of the options. The dollar amountsset forth under this heading are the result of calculations at the 5 percentand 10 percent rates set by the SEC, and are not intended to forecast possiblefuture appreciation, if any, of the price of a share of common stock.

(b)          On June 13, 2005each director of the Company received a grant of 35,000 fully vested options atan exercise price of $14.77 per share of common stock.

(c)           On June 13, 2005the Company accelerated the vesting of these options such that they were fullyvested as of June 13, 2005. See**“—Employmentand Severance Arrangements—Haddrill Employment Agreement” above and “—Accelerationof Option Vesting” below.

(d)          Options vest as follows:(i) 200,000 in one-third equal installments on each of October 1,2005, October 1, 2006 and October 1, 2007 provided that Mr. Haddrillis continuously employed by the Company as Chief Executive Officer until eachsuch vesting date, (ii) 100,000 on October 1, 2007 provided that Mr. Haddrillis continuously employed by the Company as Chief Executive Officer through suchdate, each except as otherwise provided in Mr. Haddrill’s employmentagreement, as described above under “—Employment and Severance Arrangements—HaddrillEmployment Agreement.”

(e)           Options vest in threeequal installments on the first, second and third anniversaries of the date ofgrant.

(f)             Optionsvest in two equal installments on the first and second anniversaries of thedate of grant.

(g)           Optionsvest in five equal installments on the first, second, third, fourth and fifthanniversaries of the date of grant.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**Aggregated OptionExercises in Last Fiscal Year and Fiscal Year-End Option Values**

Thefollowing table reflects the options exercised during the fiscal year ended asof, and outstanding options held by the Named Executive Officers at, June 30,2005:

| ** **        | ** ** | **Shares  Acquired on** | ** ** | **Value**    | ** ** | **Number of Unexercised  Options at  June 30, 2005** | ** ** | **Value of Unexercised In-the-  Money Options at  June 30, 2005(a)** | ** ** |
|-------------------|------------|------------------------------|------------|--------------|------------|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | ** **                   | ** ** | **Exercise** | ** ** | **Realized**                                                                  | ** ** | **Exercisable**                                                                                         | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Richard Haddrill  |       |                         | —     |         |       | —                                                                        |       |                                                                                                    | 780,000    |   |   |   | 300,000 |   |   |   | $ | — |   |   |   | $ | 201,000 |   |   |
| Steven Des Champs |       |                         | —     |         |       | —                                                                        |       |                                                                                                    | 47,503     |   |   |   | 100,000 |   |   |   | 2,026 |   |   |   | 218,500 |   |   |
| Robert Saxton     |       |                         | 20,004     |         |       | $                                                                             | 115,073    |                                                                                                    |       | 133,335 |   |   |   | 90,000 |   |   |   | 9,000 |   |   |   | 117,200 |   |   |
| Mark Lerner       |       |                         | —     |         |       | —                                                                        |       |                                                                                                    | 47,503     |   |   |   | 25,000 |   |   |   | 2,026 |   |   |   | 4,000 |   |   |
| Robert Luciano    |       |                         | —     |         |       | —                                                                        |       |                                                                                                    | —     |   |   |   | 600,000 |   |   |   | — |   |   |   | 1,716,000 |   |   |
| Robert Miodunski  |       |                         | —     |         |       | —                                                                        |       |                                                                                                    | 200,008    |   |   |   | — |   |   |   | 9,002 |   |   |   | — |   |   |
|                   |            |                              |            |              |            |                                                                               |            |                                                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Representsthe amount by which the market value of the underlying stock at June 30,2005 ($14.02 per share) exceeds the aggregate exercise price of the options.

**Acceleration of Option Vesting**

On June 13, 2005, theBoard of Directors approved a resolution accelerating the vesting andexerciseability of all outstanding, unvested stock options granted to employeeswith an exercise price equal to or greater than $15.00 per share. Thisaccelerated vesting affected options for approximately 2,400,000 shares of theCompany’s common stock, including an aggregate of 500,000 options granted to Mr. Haddrillpursuant to the Haddrill Agreement. All performance-based vesting criteria werealso eliminated with respect to such 500,000 options of Mr. Haddrill. Salesof the shares of common stock acquired upon exercise of any such optionsreferenced above are restricted in a manner such that the sales restrictionsparallel the vesting requirements previously applicable to such options. Thedecision to accelerate vesting of these underwater stock options was madeprimarily to avoid recognizing compensation expense in the Company’s futurestatements of operations upon the Company’s adoption of SFAS No. 123Reffective on July 1, 2005.  Becausethe options subject to the acceleration vesting were “underwater”, the Companybelieves that these options may not be offering a sufficient incentive toemployees when compared to the potential future compensation expense that theCompany would incur under SFAS 123R.

**Directors’ Compensation**

***Arrangements withDirectors.******  ***Directors of the Company who are alsoemployees are generally not separately compensated for their services asdirectors. Except as set forth below under “—Other Arrangements” with respectto Messrs. Robbins and Kirschbaum, and excluding Mr. DiCesare, eachnon-management director receives $50,000 per year plus $5,000 per year for eachcommittee on which each non-management director serves, except that thechairman of each committee receives $10,000 for such committee service. Eachnew non-employee director receives a grant of options to purchase 50,000 sharesof common stock upon appointment to the Board of Directors as well. Additionally,on June 13, 2005 each director received a fully vested option to purchase35,000 shares of common stock at an exercise price of $14.77 per share. Alloptions granted to directors of the Company remain outstanding for the fullterm, whether or not the director continues to be a director of the Company,unless the director resigns or is 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

removed as a directorbefore the expiration of the term the director is serving at the time of thegrant, in which event the options expire 60 days after resignation or removal. Directorsare also reimbursed for their reasonable out-of-pocket expenses incurred onCompany business. The Company may grant both employee and non-employeedirectors additional cash compensation and options as time commitments,responsibilities and other circumstances may warrant.

***Director’s ShareOwnership Guidelines.*****  **TheBoard adopted a formal share ownership policy and guidelines for non-managementdirectors on October 26, 2004. The guidelines specify that eachnon-management director shall acquire and hold common stock valued at twice theannual base compensation paid to the director at the time of the director’sappointment or election to the board. The policy further provides thatpurchases under the policy be made within three years of the director’sappointment, election or adoption date of the policy with the director holdingat least that amount of stock during the director’s tenure.

On January 8, 2004, each director was grantedoptions to purchase 195,000 shares of common stock at an exercise price of$24.65 per share. Effective June 13,2005, the Board of Directors approved a resolution accelerating the vesting andexerciseability of all outstanding, unvested options granted to directors on January 8,2004. All performance-based vesting criteria were also eliminated with respectto such options. Directors may not sell any of the shares of stock acquiredupon exercise of these options before January 8, 2008.

***Other Arrangements.******  ***Effective July 1,2004, the Company entered into an agreement with Mr. Robbins in which heagreed to serve as the Chairman of the Board of Directors and as a member ofthe Office of the Chairman for a period of three and one-half years. Pursuantto this agreement Mr. Robbins receives total fees of $325,000 per year forsuch services.

Effective July 1,2004, the Company entered into an agreement with Mr. Kirschbaum in which heagreed to serve as a member of the Office of the Chairman for a period of threeand one-half years. Pursuant to this agreement Mr. Kirschbaum receivesfees of $100,000 per year for such services.

**CompensationCommittee Interlocks and Insider Participation**

During the fiscal yearended June 30, 2005, Messrs. André, Haddrill, Kirschbaum, Robbins andVerner served on the Compensation Committee of the Board of Directors. EffectiveOctober 27, 2005, in response to the new requirements for the CompensationCommittee to consist of only independent board members, the composition of thecommittee was changed to be comprised of Messrs. André, Robbins and Verner.Mr. Haddrill began serving as the Company’s President and Chief ExecutiveOfficer on September 30, 2004. Mr. Kirschbaum is the solestockholder, director and officer of KIC, which, effective July 1, 2004,was party to an Advisory Services Agreement with the Company which calls forthe Company to pay KIC $600,000 annually for advisory and related services for aperiod of three and one-half years.

86

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**Stock Performance Graph**

The following graphcompares the Company’s cumulative total stockholder return on its common stockfor the five years ending June 30, 2005, with cumulative total return,assuming reinvestment of dividends, of (i) the S&P 500, (ii) theRussell 2000 and (iii) an index of peer companies the Company believes arecomparable in terms of their lines of business. The company peer group consistsof IGT, Progressive Gaming International Corporation, Shuffle Master and WMSGaming. The presentation assumes a $100 investment on June 30, 2000, thelast trading day prior to the end of the Company’s 2000 fiscal year. TheCompany has not paid any dividends during the applicable period.

****

**Comparison of 60 Month Cumulative Return**

| ** **  | ** ** | **6/00** | ** ** | **6/01** | ** ** | **6/02** | ** ** | **6/03** | ** ** | **6/04** | ** ** | **6/05** | ** ** |
|-------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| AGI         |       | $        | 100        |     | $          | 1,610.70 |       | $        | 2,047.58   |     | $          | 3,102.54 |       | $ | 2,815.42 |   | $ | 2,300.45 |   |
| S&P 500 |       | 100      |       | 85.10    |       | 69.85    |       | 70.03    |       | 83.41    |       | 88.68    |       |
| Russell 200 |       | 100      |       | 100.60   |       | 91.93    |       | 90.42    |       | 120.59   |       | 131.98   |       |
| Peer group  |       | 100      |       | 230.40   |       | 186.35   |       | 329.34   |       | 513.72   |       | 410.87   |       |
|             |            |          |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

**Beneficial Ownership**

Thefollowing table sets forth certain information as of December 6, 2005,with respect to the beneficial ownership of common stock, which constitutes ouronly outstanding class of voting securities, by (i) each person who, toour knowledge, beneficially owned more than 5% of the outstanding common stock,(ii) each director, (iii) the Named Executive Officers and (iv) allof our executive officers and directors as a group. Except as indicated,beneficial ownership includes the sole power to vote and to dispose of thesecurities in question. The mailing address for each of the beneficial ownerslisted below is c/o Alliance Gaming Corporation, 6601 South Bermuda Road, LasVegas, Nevada 89119, unless noted otherwise.

| ** **                                       | ** ** | **Amount of Beneficial** | ** ** | **Percent of** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------|------------|
| **Beneficial Owner**                        | ** ** | ** **                         | ** ** | **Ownership**       | ** ** | **Class** | ** ** |
| Alfred Wilms(1)                                  |       |                               | 3,832,892  |                |       |   | 7.35 | % |   |
| Jacques André                               |       |                               | 363,572    | (2)                 |       |   | * |   |   |
| Steve Des Champs                                 |       |                               | 74,180     | (3)                 |       |   | * |   |   |
| Anthony DiCesare                                 |       |                               | 272,728    | (4)                 |       |   | * |   |   |
| Richard Haddrill                                 |       |                               | 1,152,927  | (5)                 |       |   | 2.18 | % |   |
| Joel Kirschbaum                                  |       |                               | 2,455,602  | (6)                 |       |   | 4.63 | % |   |
| Mark Lerner                                      |       |                               | 55,836     | (7)                 |       |   | * |   |   |
| Robert Luciano                                   |       |                               | 1,448,313  | (8)                 |       |   | 2.77 | % |   |
| Robert Miodunski                                 |       |                               | 200,008    | (9)                 |       |   | * |   |   |
| Stephen Race                                     |       |                               | 50,000     | (10)                |       |   | * |   |   |
| David Robbins                                    |       |                               | 642,148    | (11)                |       |   | 1.22 | % |   |
| Robert L. Saxton                                 |       |                               | 200,004    | (12)                |       |   | * |   |   |
| Kevin Verner                                     |       |                               | 310,000    | (13)                |       |   | * |   |   |
| All executive officers  and directors as a group |       |                               | 7,540,066  | (14)                |       |   | 13.37 | % |   |
|                                                  |            |                                    |            |                     |            |  |  |  |  |  |  |

----

*                         Less than1%

(1)               Mr. Wilms’mailing address is 2, St. Jansvliet, bus 6-2000 Antwerp, Belgium. Informationwith respect to Mr. Wilms’ beneficial ownership of common stock was takenfrom Schedule 13D dated January 6, 2004.

(2)               Includes 36,428shares of common stock owned and 327,144 shares of common stock subject tooptions that are currently exercisable or will become exercisable within 60days.

(3)               Includes 2,000shares of common stock owned and 72,180 shares of common stock subject tooptions that are currently exercisable or will become exercisable within 60days.

(4)               Represents sharesof common stock subject to options that are currently exercisable or willbecome exercisable within 60 days.

(5)               Includes 69,000shares of common stock owned, 203,930 restricted stock units that are currentlyvested or will have been vested within 60 days and 879,997 shares of commonstock subject to options that are currently exercisable or will becomeexercisable within 60 days.

88

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

(6)               Includes 1,530,390shares of common stock owned and 925,212 shares of common stock subject tooptions that are currently exercisable or will become exercisable within 60days.

(7)               Represents sharesof common stock subject to options that are currently exercisable or willbecome exercisable within 60 days.

(8)               Includes 1,328,313shares of common stock owned and 120,000 shares of common stock subject tooptions that are currently exercisable or will become exercisable within 60days.

(9)               Represents sharesof common stock subject to options that are currently exercisable or willbecome exercisable within 60 days.

(10)        Represents shares ofcommon stock subject to options that are currently exercisable or will becomeexercisable within 60 days.

(11)        Includes 87,144 shares ofcommon stock owned and 555,004 shares of common stock subject to options thatare currently exercisable or will become exercisable within 60 days.

(12)        Includes 50,004 shares ofcommon stock owned and 150,000 shares of common stock subject to options thatare currently exercisable or will become exercisable within 60 days.

(13)        Includes 10,000 shares ofcommon stock owned and 300,000 shares of common stock subject to options thatare currently exercisable or will become exercisable within 60 days.

(14)        Includes4,182,357 shares of common stock subject to options that are currentlyexercisable or will become exercisable within 60 days.

**Equity Compensation Plans**

The information requiredby this Item 12 with respect to our equity compensation plans is set forthabove under Item 5, Market for Registrant’s Common Equity, Related ShareholderMatters and Issuer Purchases of Equity Securities—Equity Compensation Plans.

**ITEM 13.   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

Mr. Kirschbaum, a director of the Company, is thesole stockholder, director and officer of KIC, which, effective July 1,2004, was party to an Advisory Services Agreement with the Company which callsfor the Company to pay KIC $600,000 annually for advisory and related servicesfor a period of three and one-half years.

In December 2004, we settled the earn out relatedto the acquisition of SDG with the former shareholder of SDG for an aggregateamount of $40 million consisting of a one-time cash payment of $12.0 millionand the issuance of $28.0 million in subordinated debt. Mr. Luciano, theCompany’s Chief Technology Officer, was the primary shareholders of SDG.Mr. Luciano received approximately $7.4 million in cash and $17.2 millionin subordinated debt in connection with the settlement. On June 28, 2005,the Company converted an aggregate of $14.0 million in subordinated debt andaccrued interest thereon into approximately 1.0 million shares of common stock.Mr. Luciano received 881,841 of the approximately 1.0 million shares ofcommon stock The remaining $14.0 million insubordinated debt payable in connection with the settlement to the former SDGshareholders, including Mr. Luciano, is payable in annual installmentsthrough 2009. At the Company’s discretion, the note principal and accruedinterest thereon can be paid in cash, or can be converted into shares of theCompany’s common stock using the average stock price for the 20 business daysprior to the delivery of such shares.

89

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

We also lease a warehouseand office facility from an entity owned by Mr. Luciano. Rental payments forthe fiscal years ended June 30, 2005 and 2004 totaled $412,000 and $103,000,respectively.

**ITEM 14.   PRINCIPALACCOUNTANT FEES AND SERVICES**

**Feespaid to Registered Public Accounting Firm**

Thefollowing table presents the aggregate fees billed by Deloitte &Touche LLP, our principal Independent Registered Public Accounting Firm, forservices provided during fiscal years 2005 and 2004:

| ** **             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Audit fees             |       | $        | 3,077,160  |     | $          | 332,400 |   |
| Audit-related  fees(1) |       | 158,115  |       | 154,218  |       |
| Tax fees(2)            |       | 673,523  |       | 680,147  |       |
| All other fees(3)      |       | —   |       | 20,600   |       |
| Total Fees             |       | $        | 3,908,798  |     | $          | 1,187,365 |   |

----

(1)          Consists primarily offees paid for accounting and auditing consultation services, audits of theCompany’s employee benefits plans and services related to Sarbanes-Oxleyreadiness.

(2)          Consists primarily offees paid for tax compliance and preparation services and tax consultationrelating to the acquisition or disposition of certain subsidiaries.

(3)          Consists primarily offees paid for consultation regarding stock compensation and other matters.

The Audit Committeereviews and approves all services to be provided by Deloitte & ToucheLLP. The Audit Committee has considered the effect of non-audit servicesprovided by Deloitte & Touche LLP on Deloitte & Touche LLP’sindependence, and does not believe that such independence has been impaired orotherwise compromised.

**Pre-Approval Policy**

Pursuant to the Audit Committee’s pre-approvalpolicies and procedures for certain audit and non-audit services, the Company’sexternal auditor cannot be engaged to provide any audit and non-audit servicesto the Company unless the engagement is pre-approved by the Audit Committee incompliance with the Sarbanes-Oxley Act of 2002. The audit, audit related, taxand other fees and services described above were pre-approved by the AuditCommittee for 2005 and 2004.

90

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this Annual Report on Form 10-K:

1.                 FinancialStatements:

·       Reportof Independent Registered Public Accounting Firm

·       ConsolidatedBalance Sheets as of June 30, 2005 and 2004 (restated).

·       ConsolidatedStatements of Operations for the Years Ended June 30, 2005, 2004(restated) and 2003 (restated)

·       ConsolidatedStatements of Stockholders’ Equity  forthe Years Ended June 30, 2005, 2004 (restated) and 2003 (restated)

·       ConsolidatedStatements of Cash Flows for the Years Ended June 30, 2005, 2004(restated) and 2003 (restated)

·       Notes to consolidatedfinancial statements

2.                 FinancialStatement Schedules:  Not applicable.

3.                 Exhibits:
| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Description** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.1              |       | Amended and Restated Stock Purchase Agreement by and  among Alliance Gaming Corporation, Sierra Design Group, and Robert Luciano,  as Trustee for the Robert Luciano Family Trust, dated March 2, 2004,  filed on March 12, 2004 as Exhibit 2.1 to the Current Report on  Form 8-K of Alliance Gaming Corporation, and incorporated herein  by reference. |
| 2.2*             |       | Amendment No. 1,  dated December 30, 2004, to the Amended and Restated Stock Purchase  Agreement, dated March 2, 2004, by and among Alliance Gaming Corporation,  Sierra Design Group, and Robert Luciano, as Trustee for the Robert Luciano  Family Trust.                                                                                                              |
| 2.3              |       | Agreement and Plan of  Merger by and among Alliance Gaming Corporation, APT Games, Inc., United  Coin Machine Co., and Century Gaming, Inc. dated May 4, 2004, filed  on July 6, 2004 as Exhibit 2.1 to the Current Report on Form 8-K  of Alliance Gaming Corporation, and incorporated herein by reference.                                   |
| 3.1              |       | Restated Articles of  Incorporation of Alliance Gaming Corporation, as amended, filed on  May 7, 2004 as Exhibit 4.6 to the Registration Statement on  Form S-8 (File No. 333-115271) of Alliance Gaming  Corporation, and incorporated herein by reference.                                                                                              |
| 3.2*             |       | Bylaws of Alliance  Gaming Corporation.                                                                                                                                                                                                                                                                                                                                       |
| 4.1              |       | Rights Agreement dated  as of March 9, 1998 between Alliance Gaming Corporation and American  Stock Transfer & Trust Company, filed on March 10, 1998 as  Exhibit 1 to the Registration Statement on Form 8-A of  Alliance Gaming Corporation, and incorporated herein by reference.                                                             |
| 4.2*             |       | First Amendment to  Rights Agreement dated as of September 15, 1998 between Alliance Gaming  Corporation and American Stock Transfer & Trust Company.                                                                                                                                                                                                           |

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

 
| 10.1   |   | Loan Agreement, dated as  of September 5, 2003 among Alliance Gaming Corporation, the various  lenders named therein, Bank of America, N.A. as Administrative Agent, CIBC  World Markets Corp., as Syndication Agent and Wells Fargo Bank, N.A., as  Documentation Agent, filed On September 12, 2003 as Exhibit 99.2 to  the Current Report on Form 8-K of Alliance Gaming Corporation, and  incorporated herein by reference.                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2*  |   | Amendment No. 1 dated February 18, 2004 to  Loan Agreement, dated as of September 5, 2003 among Alliance Gaming  Corporation, the various lenders named therein, Bank of America, N.A. as  Administrative Agent, CIBC World Markets Corp., as Syndication Agent and  Wells Fargo Bank, N.A., as Documentation Agent.                                                                                                                                                            |
| 10.3   |   | Amendment No. 2  dated December 10, 2004 Loan Agreement, dated as of September 5,  2003 among Alliance Gaming Corporation, the various lenders named therein,  Bank of America, N.A. as Administrative Agent, CIBC World Markets Corp., as  Syndication Agent and Wells Fargo Bank, N.A., as Documentation Agent, filed  on December 15, 2004 as Exhibit 10.1 to the Current Report on  Form 8-K of Alliance Gaming Corporation, and incorporated by  reference. |
| 10.4   |   | Alliance Gaming  Corporation 1996 Long Term Incentive Plan, filed on August 21, 1997 with  the Registration Statement on Form S-8 (File No. 333-34077)  of Alliance Gaming Corporation, and incorporated herein by reference.                                                                                                                                                                                                                                                   |
| 10.5*  |   | Restricted Stock  Agreement by and between Alliance Gaming Corporation and Richard Haddrill,  dated as of June 30, 2004.                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6*  |   | Stock Option Agreement  by and between Alliance Gaming Corporation and Richard Haddrill, dated as of  June 30, 2004.                                                                                                                                                                                                                                                                                                                                                                      |
| 10.7*  |   | Stock Option Agreement  by and between Alliance Gaming Corporation and Richard Haddrill, dated as of  October 27, 2004.                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8*  |   | Restricted Stock  Agreement by and between Alliance Gaming Corporation and Richard Haddrill,  dated as of December 22, 2004.                                                                                                                                                                                                                                                                                                                                                              |
| 10.9   |   | Alliance Gaming  Corporation Amended and Restated 2001 Long Term Incentive Plan, filed on  November 2, 2004 as Exhibit 4.1 to Post Effective Amendment  No. 1 to Registration Statement on Form S-8 (File  No. 333-115271) of Alliance Gaming Corporation, and incorporated  herein by reference.                                                                                                                                                                     |
| 10.10  |   | Amendment No. 1 to  the Alliance Gaming Corporation Amended and Restated 2001 Long Term Incentive  Plan, filed on January 15, 2005 as Exhibit 4.2 to the Registration  Statement on Form S-8 (File No. 333-122064) of Alliance  Gaming Corporation, and incorporated herein by reference.                                                                                                                                                                             |
| 10.11* |   | Form of Stock  Option Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.12* |   | Form of Director  Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13* |   | Form of Director  Stock Option Agreement dated June 13, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14* |   | Casino Management  Agreement, dated as of October 28, 1993, among Rainbow Casino Partnership  -Vicksburg, L.P., Mississippi Ventures, Inc. and The Rainbow Casino  Corporation.                                                                                                                                                                                                                                                                                                      |

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

 
| 10.15* |   | Second Amended and  Restated Agreement of Limited Partnership, dated as of March 29,1995, by  and between United Gaming Rainbow and The Rainbow Casino Corporation.                                                                                                                                                                                                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16  |   | Amended and Restated  Trademark License Agreement dated July 8, 1992, by and between Bally  Gaming International, Inc. and Bally Manufacturing Corporation, filed on  July 9, 1992 as Exhibit 10(i)(d) to the Registration Statement  on Form S-1 (File No. 33-48347) of Bally Gaming  International, Inc., and incorporated herein by reference.                                              |
| 10.17* |   | Second Amendment to Trademark License Agreement and  Settlement Agreement, dated March 31, 1995, by and between Bally  Entertainment Corporation and Bally Gaming International, Inc. and Bally  Gaming, Inc.                                                                                                                                                                                                           |
| 10.18  |   | 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., filed on May 29, 1996 as Exhibit 10.77  to Amendment No. 2 to the Registration Statement on Form S-2  (File No. 333-02145) of Alliance Gaming Corporation, and  incorporated herein by reference. |
| 10.19  |   | Agreement between  Alliance Gaming Corporation and David Robbins dated July 1, 2004, filed  on July 6, 2004 as Exhibit 10.3 to the Current Report on  Form 8-K of Alliance Gaming Corporation, and incorporated herein  by reference.                                                                                                                                                                              |
| 10.20  |   | Advisory Services  agreement between Alliance Gaming Corporation and Kirkland Investment  Corporation dated July 1, 2004, filed on July 6, 2004 as  Exhibit 10.5 to the Current Report on Form 8-K of Alliance  Gaming Corporation, and incorporated herein by reference.                                                                                                                                          |
| 10.21* |   | Prepayment Agreement,  dated as of June 28, 2005 by and among Alliance Gaming Corporation,  Robert Luciano, Jr. and Robert Luciano, Jr. as trustee of the  Robert Luciano Family Trust dated February 27, 1995.                                                                                                                                                                                                    |
| 10.22  |   | Employment Agreement  between Alliance Gaming Corporation and Richard Haddrill, dated as of  June 30, 2004, filed on July 6, 2004 as Exhibit 10.1 to the  Current Report on Form 8-K of Alliance Gaming Corporation, and  incorporated herein by reference.                                                                                                                                                        |
| 10.23  |   | Amendment dated  December 22, 2004, to the Employment Agreement by and between Alliance  Gaming Corporation and Richard Haddrill, filed on February 9, 2005 as  Exhibit 10.40 to the Quarterly Report on Form 10-Q for the  quarter ended December 31, 2004, and incorporated herein by reference.                                                                                                            |
| 10.24* |   | Second Amendment to  Employment Agreement by and between Alliance Gaming Corporation and Richard  Haddrill, effective as of June 13, 2005.                                                                                                                                                                                                                                                                                        |
| 10.25  |   | Amended and Restated  Employment Agreement, effective April 24, 2001, between Alliance Gaming  Corporation and Robert L. Miodunski, filed on September 27, 2001 as  Exhibit 10.30 to the Annual Report on Form 10-K for the  fiscal year ended June 30, 2001, and incorporated herein by reference.                                                                                                           |
| 10.26  |   | Separation and  Consulting Agreement dated as of June 30, 2004 by and between Alliance  Gaming Corporation and Robert L. Miodunski, filed on July 6, 2004 as  Exhibit 10.2 to the Current Report on Form 8-K of Alliance  Gaming Corporation, and incorporated herein by reference.                                                                                                                                |

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

 
| 10.27* |   | Employment Agreement  dated January 28, 2000 between Alliance Gaming Corporation and Steve Des  Champs.                                                                                                                                                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28  |   | Employment Agreement dated August 15, 2000  between Alliance Gaming Corporation and Mark Lerner, filed on  September 26, 2002 as Exhibit 10.35 to the Annual Report on  Form 10-K for the fiscal year ended June 30, 2002 of Alliance  Gaming Corporation, and incorporated herein by reference. |
| 10.29* |   | Employment Agreement  dated March 2, 2004 between Alliance Gaming Corporation and Robert  Luciano.                                                                                                                                                                                                                   |
| 10.30* |   | Amendment dated  April 13, 2005 to Employment Agreement between Alliance Gaming  Corporation and Robert Luciano.                                                                                                                                                                                                     |
| 10.31* |   | Executive Employment Agreement dated March 9,  2005 by and between Alliance Gaming Corporation and Ramesh Srinivasan.                                                                                                                                                                                                |
| 21*    |   | Subsidiaries of the  Registrant                                                                                                                                                                                                                                                                                           |
| 23.1*  |   | Consent of  Deloitte & Touche LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                                                                 |
| 31.1*  |   | Certification of Chief  Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a).                                                                                                                                                                                                                        |
| 31.2*  |   | Certification of Chief  Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a).                                                                                                                                                                                                                        |
| 32.1*  |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                    |
| 32.2*  |   | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                    |

----

*       Filedherewith.

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**ALLIANCE GAMING CORPORATION FORM 10-K Year Ended June 30, 2005**

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

| aLLIANCE  gAMING CORPORATION |                                                | DATED: December 29, 2005 |
|------------------------------|-----------------------------------------------------|-------------------------------|
| By                           | /s/ RICHARD  M.  HADDRILL                 |                          |   |
|                         | Richard M. Haddrill                                 |                          |   |
|                         | *Chief Executive Officer*                           |                          |   |
|                         | *(Principal Executive Officer)*                     |                          |   |
| By                           | /s/ STEVEN M. DES CHAMPS                            |                          |   |
|                         | Steven M. Des Champs                                |                          |   |
|                         | *Senior Vice President and Chief Financial Officer* |                          |   |
|                         | *(Principal Financial and  Accounting Officer)*     |                          |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.
|                              | **Name** | ** **                                         | ** ** | ** **              | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|------------------------------|----------|----------------------------------------------------|------------|-------------------------|-----------|------------|------------|------------|----------|------------|
| /s/ RICHARD M. HADDRILL      |     | Chief Executive  Officer                           |       | December 29,  2005 |
| Richard M. Haddrill          |     | (Principal Executive Officer),  and Director       |       |                    |
| /s/ STEVEN M. DES CHAMPS     |     | Senior Vice  President and Chief Financial Officer |       | December 29,  2005 |
| Steven M. Des Champs         |     | (Principal Financial and  Accounting Officer)      |       |                    |
| /s/ JACQUES ANDRÉ  |     | Director                                           |       | December 29,  2005 |
| Jacques André           |     |                                               |       |                    |
| /s/ ANTHONY DICESARE         |     | Director                                           |       | December 29,  2005 |
| Anthony DiCesare             |     |                                               |       |                    |
| /s/ JOEL KIRSCHBAUM          |     | Director                                           |       | December 29,  2005 |
| Joel Kirschbaum              |     |                                               |       |                    |
| /s/ STEPHEN RACE             |     | Director                                           |       | December 29,  2005 |
| Stephen Race                 |     |                                               |       |                    |
| /s/ DAVID ROBBINS            |     | Director and  Chairman of the Board                |       | December 29,  2005 |
| David Robbins                |     |                                               |       |                    |
| /s/ KEVIN VERNER             |     | Director                                           |       | December 29,  2005 |
| Kevin Verner                 |     |                                               |       |                    |

 

95

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Tothe Board of Directors and Stockholders of Alliance Gaming Corporation:

Las Vegas, Nevada

We have audited the accompanying consolidated balancesheets of Alliance Gaming Corporation and Subsidiaries (the “Company”) as of June 30,2005 and 2004, and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the three years in the periodended June 30, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of AllianceGaming Corporation and Subsidiaries as of June 30, 2005 and 2004, and theresults of their operations and their cash flows for each of the three years inthe period ended June 30, 2005 in conformity with accountingprinciples generally accepted in the United States of America.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of June 30,2005, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission, and our report dated December 29, 2005 expressed anunqualified opinion on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting and an adverse opinion onthe effectiveness of the Company’s internal control over financial reportingbecause of material weaknesses.

As discussed in Note 2 tothe consolidated financial statements, the accompanying 2004 and 2003consolidated financial statements have been restated.
| DELOITTE & TOUCHE  LLP |
|---------------------------------|
| Las Vegas, Nevada               |
| December 29, 2005          |

 

F-1

----

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

| ** **                                                                                                                   | ** ** | **June 30,** | ** ** | **June 30,**                             | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**          | ** ** | **2004**                                      | ** ** |
| ** **                                                                                                                   | ** ** | ** **        | ** ** | **(As restated,  see Note 2)** | ** ** |
| ASSETS                                                                                                                       |       |              |       |                                          |       |   |   |
| Current assets:                                                                                                              |       |              |       |                                          |       |   |   |
| Cash and cash equivalents                                                                                                    |       | $                 | 33,170     |                                          |       | $ | 154,258 |   |   |
| Restricted cash                                                                                                              |       | 13,421            |       |                                          | 15,590     |   |   |
| Accounts and notes  receivable, net of allowances for doubtful accounts of $10,156 and $8,850                                |       | 99,430            |       |                                          | 128,317    |   |   |
| Inventories                                                                                                                  |       | 62,920            |       |                                          | 63,280     |   |   |
| Deferred tax assets, net                                                                                                     |       | 29,192            |       |                                          | 19,602     |   |   |
| Other current assets                                                                                                         |       | 27,439            |       |                                          | 28,955     |   |   |
| Assets of discontinued  operations held for sale                                                                             |       | —            |       |                                          | 4,442      |   |   |
| Total current assets                                                                                                         |       | 265,572           |       |                                          | 414,444    |   |   |
| Long-term investments  (restricted)                                                                                          |       | 10,060            |       |                                          | 2,528      |   |   |
| Long-term receivables ,  net of allowance for doubtful accounts of $11 and $12                                               |       | 7,450             |       |                                          | 18,132     |   |   |
| Leased gaming equipment,  net of accumulated depreciation of $42,495 and $24,903                                             |       | 51,850            |       |                                          | 52,813     |   |   |
| Property, plant and  equipment, net of accumulated depreciation of $40,766 and $29,222                                       |       | 66,036            |       |                                          | 68,845     |   |   |
| Goodwill                                                                                                                     |       | 161,444           |       |                                          | 127,672    |   |   |
| Intangible assets, net of  accumulated amortization of $17,356 and $11,472                                                   |       | 49,451            |       |                                          | 57,729     |   |   |
| Deferred tax assets, net                                                                                                     |       | 16,622            |       |                                          | 14,020     |   |   |
| Other assets, net                                                                                                            |       | 19,609            |       |                                          | 12,248     |   |   |
| Total assets                                                                                                                 |       | $                 | 648,094    |                                          |       | $ | 768,431 |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                   |       |              |       |                                          |       |   |   |
| Current liabilities:                                                                                                         |       |              |       |                                          |       |   |   |
| Accounts payable                                                                                                             |       | $                 | 36,807     |                                          |       | $ | 37,515 |   |   |
| Accrued liabilities                                                                                                          |       | 43,239            |       |                                          | 48,415     |   |   |
| Deferred revenue                                                                                                             |       | 31,293            |       |                                          | 37,635     |   |   |
| Jackpot liabilities                                                                                                          |       | 13,025            |       |                                          | 12,075     |   |   |
| Income taxes payable                                                                                                         |       | 1,752             |       |                                          | 5,718      |   |   |
| Current maturities of  long-term debt, including $6,006 and $1,218 owed to related parties                                   |       | 10,163            |       |                                          | 5,866      |   |   |
| Liabilities of  discontinued operations held for sale                                                                        |       | —            |       |                                          | 4,337      |   |   |
| Total current liabilities                                                                                                    |       | 136,279           |       |                                          | 151,561    |   |   |
| Long-term debt, net of  current maturities, including $13,200 and $5,218 owed to related parties                             |       | 324,954           |       |                                          | 423,089    |   |   |
| Other liabilities                                                                                                            |       | 6,931             |       |                                          | 6,092      |   |   |
| Total liabilities                                                                                                            |       | 468,164           |       |                                          | 580,742    |   |   |
| Minority interest                                                                                                            |       | 993               |       |                                          | 1,326      |   |   |
| Stockholders’ equity:                                                                                                   |       |              |       |                                          |       |   |   |
| Special stock, 10,000,000  shares authorized: Series E, $100 liquidation value; 115 shares issued  and outstanding |       | 12                |       |                                          | 12         |   |   |
| Common stock, $.10 par  value; 100,000,000 shares authorized; 52,649,000 and 51,426,000 shares issued  and outstanding       |       | 5,268             |       |                                          | 5,145      |   |   |
| Treasury stock at cost,  526,000 and 513,000 shares                                                                          |       | (665              | )          |                                          | (501       | ) |   |
| Deferred compensation  (restricted stock units)                                                                              |       | (6,563            | )          |                                          | (6,500     | ) |   |
| Additional paid-in  capital                                                                                                  |       | 211,994           |       |                                          | 194,040    |   |   |
| Accumulated other  comprehensive income                                                                                      |       | 1,219             |       |                                          | 1,524      |   |   |
| Accumulated deficit                                                                                                          |       | (32,328           | )          |                                          | (7,357     | ) |   |
| Total stockholders’  equity                                                                                             |       | 178,937           |       |                                          | 186,363    |   |   |
| Total liabilities and stockholders’ equity                                                                              |       | $                 | 648,094    |                                          |       | $ | 768,431 |   |   |

 

See accompanying notes to consolidated financial statements.

F-2

----

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

| ** **                                                                               | ** ** | **Year Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                               | ** ** | ** **                             | ** ** | **(As restated,  see Note 2)** | ** ** | **(As restated,  see Note 2)** | ** ** |
| Revenues:                                                                                |       |                                   |       |   |   |   |   |   |   |   |   |
| Gaming Equipment and Systems                                                             |       | $                                      | 431,993    |   |   | $ | 428,128 |   |   |   | $ | 312,267 |   |   |
| Casino operations                                                                        |       | 52,037                                 |       |   | 52,280 |   |   |   | 50,945 |   |   |
|                                                                                     |       | 484,030                                |       |   | 480,408 |   |   |   | 363,212 |   |   |
| Costs and  expenses:                                                                     |       |                                   |       |   |   |   |   |   |   |   |   |
| Cost of gaming equipment and systems                                                     |       | 243,730                                |       |   | 192,790 |   |   |   | 144,725 |   |   |
| Cost of casino operations                                                                |       | 18,727                                 |       |   | 20,043 |   |   |   | 21,208 |   |   |
| Selling, general and administrative                                                      |       | 156,106                                |       |   | 124,419 |   |   |   | 94,710 |   |   |
| Research and development costs                                                           |       | 43,366                                 |       |   | 36,615 |   |   |   | 19,955 |   |   |
| Restructuring charges                                                                    |       | 3,654                                  |       |   | — |   |   |   | — |   |   |
| Impairment charges                                                                       |       | 3,599                                  |       |   | — |   |   |   | — |   |   |
| Depreciation and amortization                                                            |       | 20,570                                 |       |   | 14,404 |   |   |   | 10,950 |   |   |
|                                                                                     |       | 489,752                                |       |   | 388,271 |   |   |   | 291,548 |   |   |
| Operating income  (loss)                                                                 |       | (5,722                                 | )          |   | 92,137 |   |   |   | 71,664 |   |   |
| Other income  (expense):                                                                 |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest income                                                                          |       | 1,340                                  |       |   | 2,253 |   |   |   | 220 |   |   |
| Interest expense                                                                         |       | (18,201                                | )          |   | (17,934 | ) |   |   | (25,645 | ) |   |
| Loss on extinguishment of debt                                                           |       | (564                                   | )          |   | (12,293 | ) |   |   | — |   |   |
| Other, net                                                                               |       | 565                                    |       |   | (594 | ) |   |   | 398 |   |   |
| Income (loss) from continuing operations before  income taxes and minority interest |       | (22,582                                | )          |   | 63,569 |   |   |   | 46,637 |   |   |
| Income tax expense (benefit)                                                             |       | (6,510                                 | )          |   | 21,513 |   |   |   | 16,516 |   |   |
| Minority interest                                                                        |       | (4,245                                 | )          |   | (2,309 | ) |   |   | (2,009 | ) |   |
| Income (loss)  from continuing operations                                                |       | (20,317                                | )          |   | 39,747 |   |   |   | 28,112 |   |   |
| Income (loss) from discontinued operations, net of  income taxes                         |       | (4,654                                 | )          |   | 40,889 |   |   |   | (17,638 | ) |   |
| Net income (loss)                                                                        |       | $                                      | (24,971    | ) |   | $ | 80,636 |   |   |   | $ | 10,474 |   |   |
| Basic earnings  (loss) per share:                                                        |       |                                   |       |   |   |   |   |   |   |   |   |
| Continuing operations                                                                    |       | $                                      | (0.40      | ) |   | $ | 0.79 |   |   |   | $ | 0.57 |   |   |
| Discontinued operations                                                                  |       | (0.09                                  | )          |   | 0.82 |   |   |   | (0.36 | ) |   |
| Total                                                                                    |       | $                                      | (0.49      | ) |   | $ | 1.61 |   |   |   | $ | 0.21 |   |   |
| Diluted earnings (loss)  per share:                                                      |       |                                   |       |   |   |   |   |   |   |   |   |
| Continuing operations                                                                    |       | $                                      | (0.40      | ) |   | $ | 0.78 |   |   |   | $ | 0.56 |   |   |
| Discontinued operations                                                                  |       | (0.09                                  | )          |   | 0.80 |   |   |   | (0.36 | ) |   |
| Total                                                                                    |       | $                                      | (0.49      | ) |   | $ | 1.58 |   |   |   | $ | 0.20 |   |   |
| Weighted average  shares outstanding:                                                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Basic                                                                                    |       | 51,114                                 |       |   | 50,113 |   |   |   | 49,153 |   |   |
| Diluted                                                                                  |       | 51,114                                 |       |   | 51,248 |   |   |   | 50,139 |   |   |

 

See accompanying notes to consolidated financial statements.

F-3

----

| F-4 |
|-----|

**ALLIANCE GAMING CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFOR THE YEARS ENDED JUNE 30, 2005, 2004, AND 2003(In 000s)**

| ** **                                                                                   | ** ** | **Common Stock** | ** ** | **Series E  Special** | ** ** | **Treasury** | ** **   | **Deferred** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** **  | **Total  Stockholders’** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|--------------|--------------|--------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------|-------------|-------------------------------|------------|
| ** **                                                                                   | ** ** | **Shares**            | ** ** | **Dollars**                | ** ** | **Stock**    | ** **   | **Stock**    | ** ** | **Compensation**        | ** ** | **Capital**                           | ** ** | **Income (loss)** | ** **  | **Deficit**                   | ** ** | **Equity** | ** ** |
| Balances at  June 30, 2002, as previously reported                                      |       |                  | 49,227     |                       |       |         | $ 4,927 |         |       |                    | $ 12  |                                  |       |                   | $ (501 | )                             |       |   | $     — |   |   |   | $ 157,866 |   |   |   | $ (19,364 | ) |   |   | $ (96,954 | ) |   |   | $ 45,986 |   |   |
| Prior period  adjustment (see Note 2)                                                        |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,513 | ) |   |   | (1,513 | ) |   |
| Balances at  June 30, 2002 , as restated (see Note 2)                                   |       |                  | 49,227     |                       |       |         | 4,927        |         |       |                    | 12         |                                  |       |                   | (501        | )                             |       |   | — |   |   |   | 157,866 |   |   |   | (19,364 | ) |   |   | (98,467 | ) |   |   | 44,473 |   |   |
| Net income (As  restated, see Note 2)                                                        |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 10,474 |   |   |   | 10,474 |   |   |
| Foreign currency  translation adjustment                                                     |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | 8,760 |   |   |   | — |   |   |   | 8,760 |   |   |
| Reversal of  foreign currency translation adjustments for Bally Wulff (see Note 4) |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | 11,891 |   |   |   | — |   |   |   | 11,891 |   |   |
| Total  comprehensive income (As restated, see Note 2)                                   |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 31,125 |   |   |
| Shares issued upon  exercise of stock options                                                |       |                  | 706        |                       |       |         | 69           |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | 2,487 |   |   |   | — |   |   |   | — |   |   |   | 2,556 |   |   |
| Tax benefit of  employee stock option exercises                                              |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | 2,914 |   |   |   | — |   |   |   | — |   |   |   | 2,914 |   |   |
| Balances at  June 30, 2003, as restated (see Note 2)                                    |       |                  | 49,933     |                       |       |         | 4,996        |         |       |                    | 12         |                                  |       |                   | (501        | )                             |       |   | — |   |   |   | 163,267 |   |   |   | 1,287 |   |   |   | (87,993 | ) |   |   | 81,068 |   |   |
| Net income (As  restated, see Note 2)                                                        |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 80,636 |   |   |   | 80,636 |   |   |
| Foreign currency  translation adjustment                                                     |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | 237 |   |   |   | — |   |   |   | 237 |   |   |
| Total  comprehensive income (As restated, see Note 2)                                        |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 80,873 |   |   |
| Restricted stock  units issued                                                               |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | (6,500 | ) |   |   | 6,500 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Restricted shares  issued upon acquisition of Sierra Design Group (“SDG”)     |       |                  | 662        |                       |       |         | 66           |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | 11,883 |   |   |   | — |   |   |   | — |   |   |   | 11,949 |   |   |
| Additional paid in  capital upon issuance of warrants                                        |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | 886 |   |   |   | — |   |   |   | — |   |   |   | 886 |   |   |
| Shares issued upon  exercise of options                                                      |       |                  | 831        |                       |       |         | 83           |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | 7,205 |   |   |   | — |   |   |   | — |   |   |   | 7,288 |   |   |
| Tax benefit of  employee stock option exercises                                              |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | 4,299 |   |   |   | — |   |   |   | — |   |   |   | 4,299 |   |   |
| Balances at  June 30, 2004 (As restated, see Note 2)                                    |       |                  | 51,426     |                       |       |         | 5,145        |         |       |                    | 12         |                                  |       |                   | (501        | )                             |       |   | (6,500 | ) |   |   | 194,040 |   |   |   | 1,524 |   |   |   | (7,357 | ) |   |   | 186,363 |   |   |
| Net loss                                                                                     |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | (24,971 | ) |   |   | (24,971 | ) |   |
| Foreign currency  translation adjustment                                                     |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | (305 | ) |   |   | — |   |   |   | (305 | ) |   |
| Total  comprehensive loss                                                                    |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (25,276 | ) |   |
| Restricted stock  units issued                                                               |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | (2,126 | ) |   |   | 2,126 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Restricted stock  amortization                                                               |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | 2,063 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,063 |   |   |
| Repurchase of  shares for treasury                                                           |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | (164        | )                             |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (164 | ) |   |
| Shares issued upon  exercise of stock options                                                |       |                  | 199        |                       |       |         | 21           |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | 1,097 |   |   |   | — |   |   |   | — |   |   |   | 1,118 |   |   |
| Shares issued upon  the partial retirement of subordinated note                              |       |                  | 1,024      |                       |       |         | 102          |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | 14,209 |   |   |   | — |   |   |   | — |   |   |   | 14,311 |   |   |
| Tax benefit of  employee stock option exercises                                              |       |                  | —     |                       |       |         | —       |         |       |                    | —     |                                  |       |                   | —      |                          |       |   | — |   |   |   | 522 |   |   |   | — |   |   |   | — |   |   |   | 522 |   |   |
| Balances at  June 30, 2005                                                              |       |                  | 52,649     |                       |       |         | $ 5,268 |         |       |                    | $ 12  |                                  |       |                   | $ (665 | )                             |       |   | $ (6,563 | ) |   |   | $ 211,994 |   |   |   | $ 1,219 |   |   |   | $ (32,328 | ) |   |   | $ 178,937 |   |   |

 

----

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

| ** **                                                                                | ** ** | **Fiscal Years Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                | ** ** | ** **                                          | ** ** | **(As restated,  see Note 2)** | ** ** | **(As restated,  see Note 2)** | ** ** |
| Cash flows from operating activities:                                                     |       |                                                |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                         |       | $                                                   | (24,971    | ) |   | $ | 80,636 |   |   |   | $ | 10,474 |   |   |
| Income (loss) from  discontinued operations                                               |       | 4,654                                               |       |   | (40,889 | ) |   |   | 17,638 |   |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                                                |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                            |       | 47,869                                              |       |   | 31,484 |   |   |   | 20,436 |   |   |
| Stock-based compensation                                                                  |       | 2,063                                               |       |   | — |   |   |   | — |   |   |
| Tax benefit of employee  stock option exercise                                            |       | 522                                                 |       |   | 4,299 |   |   |   | 2,914 |   |   |
| Loss on extinguishment of  debt                                                           |       | 564                                                 |       |   | 12,293 |   |   |   | — |   |   |
| Deferred income taxes                                                                     |       | (7,393                                              | )          |   | 19,719 |   |   |   | 14,308 |   |   |
| Provision for losses on  receivables                                                      |       | 5,134                                               |       |   | 2,207 |   |   |   | 825 |   |   |
| Other operating activities  of discontinued operations                                    |       | (4,172                                              | )          |   | 2,587 |   |   |   | 6,758 |   |   |
| Inventory and other  assets write-downs                                                   |       | 30,015                                              |       |   | — |   |   |   | 38,728 |   |   |
| Other                                                                                     |       | 4,179                                               |       |   | 1,453 |   |   |   | 884 |   |   |
| Change in operating asset and liabilities, net of  effects of business acquired:          |       |                                                |       |   |   |   |   |   |   |   |   |
| Purchase of appeal bond                                                                   |       | (7,361                                              | )          |   | — |   |   |   | — |   |   |
| Accounts and notes  receivable                                                            |       | 33,112                                              |       |   | (20,926 | ) |   |   | (49,284 | ) |   |
| Inventories                                                                               |       | (11,679                                             | )          |   | (8,036 | ) |   |   | 584 |   |   |
| Other current assets                                                                      |       | 1,071                                               |       |   | (5,848 | ) |   |   | (8,643 | ) |   |
| Accounts payable                                                                          |       | (876                                                | )          |   | 7,382 |   |   |   | 7,278 |   |   |
| Accrued liabilities,  deferred revenue and jackpot liabilities                            |       | (20,593                                             | )          |   | 25,643 |   |   |   | 7,333 |   |   |
| Net cash provided  by operating activities                                                |       | 52,138                                              |       |   | 112,004 |   |   |   | 70,233 |   |   |
| Cash flows from investing activities:                                                     |       |                                                |       |   |   |   |   |   |   |   |   |
| Additions to property,  plant, and equipment                                              |       | (12,430                                             | )          |   | (11,840 | ) |   |   | (9,759 | ) |   |
| Additions to leased  gaming equipment                                                     |       | (40,589                                             | )          |   | (38,109 | ) |   |   | (21,357 | ) |   |
| Settlement of acquisition  related contingency                                            |       | (12,000                                             | )          |   | — |   |   |   | — |   |   |
| Acquisitions, net of cash  acquired                                                       |       | —                                              |       |   | (123,495 | ) |   |   | (11,528 | ) |   |
| Additions to other  long-term assets                                                      |       | (2,157                                              | )          |   | (14,956 | ) |   |   | (3,671 | ) |   |
| Restricted cash and  investments                                                          |       | 116                                                 |       |   | (2,776 | ) |   |   | (8,193 | ) |   |
| Other investing  activities of discontinued operations                                    |       | —                                              |       |   | (16,001 | ) |   |   | (11,975 | ) |   |
| Proceeds from sale of net  assets discontinued operations                                 |       | 1,911                                               |       |   | 155,212 |   |   |   | — |   |   |
| Net cash used in  investing activities                                                    |       | (65,149                                             | )          |   | (51,965 | ) |   |   | (66,483 | ) |   |
| Cash flows from financing activities:                                                     |       |                                                |       |   |   |   |   |   |   |   |   |
| Capitalized debt issuance  costs                                                          |       | (1,053                                              | )          |   | (6,954 | ) |   |   | — |   |   |
| Premium paid on early  redemption of debt                                                 |       | —                                              |       |   | (5,399 | ) |   |   | — |   |   |
| Proceeds from issuance of  long-term debt                                                 |       | —                                              |       |   | 350,000 |   |   |   | — |   |   |
| Debt extinguished in  refinancing                                                         |       | —                                              |       |   | (337,625 | ) |   |   | — |   |   |
| Net change in revolving  credit facility                                                  |       | (70,000                                             | )          |   | 70,000 |   |   |   | — |   |   |
| Pay down of term loan due  to sale of net assets of discontinued operations               |       | (31,618                                             | )          |   | — |   |   |   | — |   |   |
| Reduction of long-term  debt                                                              |       | (6,336                                              | )          |   | (3,485 | ) |   |   | (4,735 | ) |   |
| Purchase of treasury  shares                                                              |       | (164                                                | )          |   | — |   |   |   | — |   |   |
| Other financing activities  of discontinued operations                                    |       |                                                |       |   | (4,186 | ) |   |   | (2,998 | ) |   |
| Proceeds from exercise of  stock options and warrants                                     |       | 1,118                                               |       |   | 7,288 |   |   |   | 2,556 |   |   |
| Net cash (used in)  provided by financing activities                                      |       | (108,053                                            | )          |   | 69,639 |   |   |   | (5,177 | ) |   |
| Effect of exchange  rate changes on cash                                                  |       | (24                                                 | )          |   | 174 |   |   |   | 286 |   |   |
| Cash and cash equivalents:                                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Increase (decrease) for  year                                                             |       | (121,088                                            | )          |   | 129,852 |   |   |   | (1,141 | ) |   |
| Balances, beginning of  year                                                              |       | 154,258                                             |       |   | 24,406 |   |   |   | 25,547 |   |   |
| Balances, end of year                                                                     |       | $                                                   | 33,170     |   |   | $ | 154,258 |   |   |   | $ | 24,406 |   |   |

 

See accompanying notes to consolidated financial statements

F-5

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**1.   DESCRIPTIONOF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES**

Alliance Gaming Corporation (“Alliance” or the “Company”),a Nevada corporation, is a diversified, worldwide gaming company that (i) designs,manufactures and distributes gaming machines and computerized monitoringsystems for gaming machines and (ii) owns and operates one casino.

During fiscal years 2004 and 2005, the Companydisposed of several businesses including its Nevada and Louisiana routeoperations, its Bally Wulff business in Germany and its Rail City Casinooperation. Accordingly, these businesses have been classified as discontinuedoperations for all periods presented (see Note 5).

In fiscal year 2004, theCompany completed the acquisitions of Crown Gaming, LTD (“Crown”), MindPlay LLC(“MindPlay”) and Sierra Design Group (“SDG”) (see Note 4).

*Principles ofpresentation and consolidation*

The accompanying consolidated financial statementsinclude the accounts of Alliance Gaming Corporation, and its wholly owned andpartially owned, controlled subsidiaries. All significant intercompany accountsand transactions have been eliminated in consolidation.

The Company is the general partner of Rainbow CasinoVicksburg Partnership (“RCVP”), the partnership that operates the Rainbow Casino.Pursuant to transactions consummated in March 1995, the RainbowCorporation, which was the former general partner of RCVP, became a limitedpartner entitled to receive 10% of the net available cash flows after debtservice and other items, as defined (which amount increases to 20% of suchamount when annual revenues exceed $35.0 million but only on such incrementalamount), payable quarterly through December 31, 2010. The Company holdsthe remaining economic interest in the partnership.

The Company consolidates RCVP and records minorityinterest expense to reflect the portion of the earnings of RCVP attributable tothe minority shareholders.

The Company alsoconsolidates certain Atlantic City progressive trusts in accordance withFinancial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN”),*Consolidation of Variable Interest Entities*(“VIE’s”) which addresses consolidation by a business enterprise of variableinterest entities that either: (1) do not have sufficient equityinvestment at risk to permit the entity to finance its activities withoutadditional subordinated financial support or (2) will hold a significantvariable interest in, or have significant involvement with, an existing VIE.For the fiscal year 2005, the Company consolidated $5.5 million in revenues and$6.1 million in related expenses, as well as $5.8 million total assets andliabilities, primarily consisting of restricted cash accounts and restrictedinvestments (included in other assets in the consolidated balance sheet) andrelated jackpot liabilities.

*Reclassifications*

Certain reclassificationshave been made to prior year financial statements to conform to the currentyear presentation. The most significant reclassification was depreciation onleased gaming equipment which has been reclassified from depreciation andamortization to cost of gaming equipment, and systems, totaling $17.1 millionand $9.5 million for the fiscal years ended June 30, 2004 and 2003,respectively.

*Cash and cashequivalents*

Cash equivalents consistof**highly liquid debt instrumentspurchased with an original maturity of three months or less at the date ofpurchase and are carried at cost, which approximates market value. Cash andcash equivalents also includes cash utilized in Casino Operations which is heldin vaults, cages or change banks which totaled $2.7 million and $2.1 million atJune 30, 2005 and 2004, respectively.

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*Restricted cash*

The Company also maintainsjackpot reserve accounts totaling approximately $13.4 million and $15.6 millionat June 30, 2005 and 2004, respectively, to ensure availability of fundsto pay wide-area progressive jackpot awards, which are classified as restrictedcash.

*AccountsReceivable, Notes Receivable and Allowance for Doubtful Accounts*

Accounts and notes receivableare stated at face amounts less an allowance for doubtful accounts. The Companyevaluates its receivables and establishes the allowance for doubtful accountsbased on a combination of factors including but not limited to customercircumstances, credit conditions and a history of write-offs and collections. TheCompany’s receivables are considered past due if payments have not beenreceived within agreed upon invoice terms. With regard to notes receivable,interest income is recognized ratably over the life of the note receivable.

*Inventories*

Inventoriesare stated at the lower of cost, determined on a first in, first out basis, ormarket. Cost elements included in work-in-process and finished goods includeraw materials, freight, direct labor and manufacturing overhead. Inventoriesconsist of the following (in 000s):

| ** **      | ** ** | **As of June 30,** | ** ** |
|-----------------|------------|-----------------------------------|------------|
| ** **      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Raw materials   |       | $                                 | 15,975     |   | $ | 26,632 |   |
| Work-in-process |       | 5,690                             |       | 3,324 |   |
| Finished goods  |       | 41,255                            |       | 33,324 |   |
| Total           |       | $                                 | 62,920     |   | $ | 63,280 |   |

 

The Company recordedinventory write-downs totaling approximately $26.4 million during the yearended June 30, 2005. These charges are classified in cost of gamingequipment and systems in the consolidated statements of operations.

*Restrictedlong-term investments*

The Company purchases U.S.Treasury Strip Securities for the benefit of jackpot winners who elect toreceive annual or weekly installment payments. These securities are held tomaturity and recorded at cost plus interest accretion to date in accordancewith FASB Statement of Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and Equity Securities.*Suchsecurities are included in**restrictedlong-term investments in the consolidated balance sheets, and totaled $10.1million and $2.5 million as of June 30, 2005 and 2004, respectively.

*Other currentassets*

Deferred costs are chargedto cost of gaming equipment and systems when the related deferred revenue isrecognized. Prepaid and deferred royalties consist mainly of royalty and licensefees paid for the use of third party trade names, celebrity likenesses,content, and other intellectual property rights. Royalties are expensed to costof gaming equipment and systems over the estimated period of expectedconsumption based on forecasted sales and placement schedules ranging from oneto five years. If a pattern cannot be reliably determined, such costs areexpensed using the straight-line method over the contract life. The Companyalso evaluates the realization of capitalized amounts and any portions deemedunrealizable are charged to cost of gaming equipment and systems. (see Note 8).

F-7

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*Property, plant andequipment and leased gaming equipment*

Property, plant and equipment is stated at cost anddepreciated over the estimated useful lives or lease term, if less, using thestraight line method as follows: buildings and improvements, 28 to 40 years;gaming equipment, 4 to 7 years; furniture, fixtures and equipment, 3 to 7years; and leasehold improvements, 5 to 10 years. Leased gaming equipment isstated at cost and depreciated over its estimated useful life ranging from 2 to4 years. In the June 30, 2005 fiscal year, the Company evaluated theuseful life of its leased games and reduced the lives on all games to two yearsand recorded the change in estimate prospectively.

Property,plant and equipment and leased gaming equipment consist of the following (in000s):

| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Land and land  improvements           |       | $        | 19,335     |     | $          | 19,086 |   |
| Buildings and  leasehold improvements |       | 34,710   |       | 29,937   |       |
| Gaming equipment                      |       | 28,864   |       | 28,223   |       |
| Furniture,  fixtures and equipment    |       | 23,893   |       | 20,821   |       |
| Less accumulated  depreciation        |       | (40,766  | )          | (29,222  | )          |
| Property, plant and equipment, net    |       | $        | 66,036     |     | $          | 68,845 |   |
| Leased gaming equipment               |       | $        | 94,345     |     | $          | 77,716 |   |
| Less accumulated  depreciation        |       | (42,495  | )          | (24,903  | )          |
| Leased gaming  equipment, net         |       | $        | 51,850     |     | $          | 52,813 |   |

 

*Depreciation andAmortization Expense*

For the fiscal years endedJune 30, 2005, 2004 and 2003, depreciation and amortization expensetotaled $47.9 million, $31.5 million and $20.5 million, respectively. Of theseamounts, $27.3 million, $17.1 million and $9.5 million of depreciation andamortization expense were classified as cost of gaming equipment and systems inthe consolidated statements of operations.

*Impairment ofLong-Lived Assets*

The Company reviews long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of long-lived assets aremeasured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated by the asset, undiscounted and without interest.If such assets are considered to be impaired, the impairment to be recognizedis measured by the amount by which the carrying amount of the assets exceedsthe fair value of the assets. For assets held for sale, the Company carriessuch assets at fair value less estimated costs to sell.

In July 2001, the Company adopted SFAS No. 142*“Goodwill and Other Intangible Assets”*,which requires companies to cease amortizing goodwill and certain intangibleassets with indefinite useful lives. Instead, goodwill and intangible assetsdeemed to have indefinite useful lives are to be reviewed for impairmentannually based on the difference between the carrying amount and the fair valueof the assets.

The Company evaluates thecarrying value of goodwill for impairment annually during the fourth quarter ofeach fiscal year or whenever events or changes in circumstances indicate thatthe carrying value of goodwill may not be recoverable. Indicators that couldtrigger an impairment review include changes in legal, regulatory, or economicfactors, market conditions or operational performance. Impairment is measuredas the difference between the carrying amount and the fair value of thegoodwill and is recognized as a component of income from operations.

F-8

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*Other IntangibleAssets*

Intangible assets consistprimarily of acquisition-related software and trademarks, which are amortizedover 3 to 13 years (see Note 7).

*Jackpot Liabilitiesand Expenses*

The Company recognizes aliability for jackpots not yet won and jackpot expense for the cost to fundjackpots in the future. Jackpots are payable either in equal installments over20 years, or immediately in the case of instant win progressive jackpots. Winnersmay elect to receive a single payment for the present value of a jackpotdiscounted at applicable interest rates in lieu of annual installments. Interestrates eligible for use in the single payment calculation vary by jurisdictionand are impacted by market forces and other economic conditions.

*Use of Estimates*

The preparation of theconsolidated financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates.

*Revenue recognition*

The Company derives revenues from the followingsources: 1) sale of gaming machines (Gaming Equipment), 2) sales ofcomputerized monitoring systems and related recurring hardware and softwaremaintenance revenue (Systems), 3) operation of wide-area progressive systems,and lease of gaming machines (Gaming Operations revenue) and 4) CasinoOperations.

Gaming and systemsrevenue is recognized in accordance with the provisions of SOP No. 97-2,as amended, and is recognized when all of the following have been satisfied:

·       Persuasiveevidence of an arrangement exists;

·       Deliveryhas occurred;

·       Thevendors’ fee is fixed or determinable, and

·       Collectibilityis probable.

The Company sells gaming machines and computerizedmonitoring systems either through credit terms of 120 days or less or withcredit terms that may extend up to five years under contracts of sale securedby the related equipment, with interest recognized at market rates. The Companyperformed a review of contracts, with extended payment terms in excess of 6months, to determine whether there was sufficient history to conclude that theCompany has a history of collecting under the original payment terms. TheCompany concluded that sufficient history existed for extended payment termcontracts of 24 months or less. Accordingly, revenue is recorded inaccordance with the terms of sale for contracts with terms of 24 months orless, or as cash is received for contracts with payment terms in excess of 24months.

The Company also sells gaming devices underarrangements in which there are multiple elements, as that term is defined inSOP No. 97-2. Contracts may contain multiple elements such as a combinationof gaming devices, central site monitoring equipment, systems software, licensefees and training.  The Company allocatesrevenue to each element based upon its fair value as determined by “vendorspecific objective evidence.”  Vendorspecific objective evidence of fair value for all elements of an arrangement isbased upon the normal pricing and discounting practices for those products andservices when sold 

F-9

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separately. In addition,software license updates and product support services are measured by therenewal rate offered to the customer.

The Company recognizes revenue when the product isdelivered or over the period in which the service is performed and defersrevenue for any undelivered elements. If the Company cannot objectivelydetermine the fair value of any undelivered elements included in thearrangement, all revenues are deferred until all of the elements are deliveredand services have been performed, or until fair value can objectively bedetermined for any remaining undelivered element.

The majority of the Company’s software licensearrangements are non-perpetual and include software license updates and productsupport which are recognized ratably over the term of the arrangement,typically one year. Software license updates provide customers with rights tounspecified software product upgrades, maintenance and patches released duringthe term of the support period.  Themajority of the Company’s customers purchase both software and hardwaremaintenance and product support when they purchase the systems. In addition,substantially all customers renew these maintenance agreements annually.  Revenue from multi-year licensing arrangementsare accounted for as subscriptions, with billings recorded as unearned revenueand recognized as revenue ratably over the billing coverage period, generallyone year.

The gaming operation division earns recurring revenuethat consists of the operation of wide-area progressive jackpot systems andrevenues from gaming machines placed in casinos on a daily lease or rentalbasis. Revenue from these sources is recognized based on the contractual termsof the participation or rental agreements and is generally based on a share ofmoney wagered, a share of the net winnings, or on a fixed daily rental ratebasis.

In accordance withindustry practice, we recognize gaming revenues in our casino operations as thenet win from gaming machine operations, which is the difference between coinsand currency deposited into the machines and payments to customers.

*Capitalized RegulatoryApproval Costs*

In accordance with SFAS No. 86, *Accounting for the Costs of Computer Software to be Sold, Leased, orOtherwise Marketed,* internally generated software development costsassociated with new products and significant enhancements to existing softwareproducts are expensed as incurred until technological feasibility has beenestablished.

Bally Gaming and Systems incurs significant regulatoryapproval costs for its products. Such costs are capitalized once technologicalfeasibility has been established and are amortized generally over three yearsreflective of the estimated product life cycle. Product testing costs relatedto projects that are discontinued are expensed when such determination is made.Fees incurred for such regulatory approvals totaled approximately $8.9 millionand $8.5 million for the fiscal years ended June 30, 2005 and 2004,respectively. Of these amounts incurred, during the fiscal years ended June 30,2005 and 2004, the Company capitalized a total of $2.0 million and $4.8 millionrespectively that was directly attributable to products and amortizationexpense for previously capitalized amounts that totaled $0.9 million and $0.8million respectively. During fiscal year 2005, the Company modified itscapitalization policy, which previously had no minimum, to capitalizeindividual charges greater than $1,000.

The Company has a reviewprocess which includes a full review of the costs incurred and the nature andprospects of the related product. After costs are capitalized, they aremonitored to ensure that they are earning revenues through product sales. Futurewrite-offs are possible if such products do not produce adequate cash flows.

F-10

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*Promotionalallowances*

The Company accounts forpromotional allowances and other cash based incentives in accordance withEmerging Issues Task Force (“EITF”) Issue 00-22, “Accounting for ‘Points’and certain other Time-Based or Volume-Based Sales Incentive Offers, and OffersFor Free Products or Service to be Delivered in the Future.” EITF 00-22requires that sales incentives such as cash rewards provided to player clubmembers be recorded as a reduction of revenue rather than as an operatingexpense. These incentives totaled $3.2 million, $3.8 million and $3.7 millionfor the years ended June 30, 2005, 2004 and 2003, respectively.

*Allowances ForDoubtful Accounts*

Allowances for doubtfulaccounts are maintained at levels determined by the Company’s management toadequately provide for collection losses. In determining estimated losses, theCompany’s management considers economic conditions, the activity in gamingmarkets, the financial condition of customers, changes in technology and otherfactors which management believes are relevant.

*Advertising costs*

The Company expensesadvertising costs as incurred, which totaled $12.2 million, $11.3 million and$10.0 million for the fiscal years ended June 30, 2005, 2004 and 2003,respectively.

*Warranty expense*

Gaming devices are typically sold with a 90-dayparts and labor warranty. For system sales, the Company provides severalafter-sales, value-added services to customers including customer educationprograms, a 24-hour customer service telephone hot-line, an Internet website for technical support, field service support programs, and spare partsprograms. Historical warranty expense as a percentage of Gaming and Systemssegment revenues has been less than 1%, and is charged to cost of sales. Warrantyexpense is calculated using historical statistical data, and totaled $1.0million, $1.7 million and $0.9 million for the fiscal years ended June 30,2005, 2004 and 2003, respectively.

Theactivity in the accrued warranty account, which is included in accruedliabilities on the balance sheet, is as follows (in 000s):

| ** **                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Balances at  beginning of year     |       | $        | 508        |     | $          | 344 |   |
| Warranty costs  incurred           |       | (813     | )          | (2,319   | )          |
| Accrual for new  warranties issued |       | 719      |       | 2,483    |       |
| Balance at end of year             |       | $        | 414        |     | $          | 508 |   |

 

*Research anddevelopment*

Research and developmentcosts are charged to expense as incurred.

*Deferred Revenue*

Deferred revenue consists of amounts collected orbilled in excess of recognizable revenue (see Note 9).

F-11

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*Foreign currencytranslation*

The functional currency ofthe Company’s foreign subsidiaries is their local currency. Assets andliabilities of foreign operations are translated into U.S. dollars at the rateof exchange at the end of the period, and the income and expense accounts aretranslated at the average rate of exchange for the period. Translationadjustments are reflected as a separate component of stockholders’ equity.Gains and losses on foreign currency transactions are included in theaccompanying consolidated statements of operations.

*Fair value offinancial instruments*

The fair value of afinancial instrument is the amount at which the instrument could be exchangedin a current transaction between willing parties, other than in a forced saleor liquidation. The carrying amounts reflected in the accompanying consolidatedbalance sheets for cash equivalents, receivables, investment to fund jackpotliabilities, accounts payable, jackpot liabilities, accrued liabilities andvariable rate long-term debt approximate their respective fair values.

*Income taxes*

Income taxes are accountedfor under the asset and liability method. Deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in the period that includes the enactment date. Taxes on income ofthe Company’s foreign subsidiaries are provided at the tax rates applicable tothe tax jurisdictions in which they are located.

*Stock-basedcompensation*

The Company accounts for its stock-basedemployee compensation awards in accordance with Accounting Principles BoardOpinion No. 25, *Accounting for StockIssued to Employees* (“APB No .25”). Under APB No. 25, since theexercise price of the Company’s employee stock options equals or exceeds themarket price on date of grant, no compensation expense is recognized. TheCompany recognizes compensation expense for the amortization of certainrestricted stock units.

In accordance with SFAS No. 123, *Accounting for Stock-Based Compensation* (“SFASNo. 123”), the Company has continued to account for employee stock-basedcompensation under APB No. 25, and discloses historical pro-forma netincome (loss) and earnings (loss) per share that would have resulted from theuse of the fair value method.

F-12

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Underthe fair value method, compensation costs are measured using an options pricingmodel and are amortized over the estimated life of the option, which isgenerally three to five years, with option forfeitures accounted for at thetime of the forfeiture, and all amounts are reflected net of tax. The followingtable presents the Company’s reported historical net income (loss) whichincludes the amortization of restricted stock units (see Note 13), adjusted forthe pro forma effect assuming an after-tax charge for stock-basedcompensation  (in 000s, except per sharedata):

| ** **                                      | ** ** | **Year Ended June 30,** | ** **    |
|-------------------------------------------------|------------|----------------------------------------|---------------|
| ** **                                      | ** ** | **2005**                               | ** **    | **2004** | ** ** | **2003** | ** ** |
| Reported net  income (loss)                     |       | $                                      | (24,971  | ) | $ | 80,636  |   | $ | 10,474  |   |
| Reported  stock-based compensation, net of tax  |       | 1,568                                  |          | — |   | — |   |
| Pro forma  stock-based compensation, net of tax |       | (25,729                                | )             | (5,377 | ) | (3,384 | ) |
| Pro forma net income (loss)                     |       | $                                      | (49,132  | ) | $ | 75,259  |   | $ | 7, 090  |   |
| Earnings (loss)  per share:                     |       |                                   |          |   |   |   |   |
| Basic—as reported                          |       | $                                      | (0.49    | ) | $ | 1.61  |   | $ | 0.21  |   |
| Basic—pro forma                            |       | $                                      | (0.96    | ) | $ | 1.50  |   | $ | 0.14  |   |
| Diluted—as reported                        |       | $                                      | (0.49    | ) | $ | 1.58  |   | $ | 0.20  |   |
| Diluted—pro forma                          |       | $                                      | (0.96    | ) | $ | 1.47  |   | $ | 0.14  |   |

 

On June 13, 2005, the Company accelerated thevesting of unvested stock options held by the Company’s employees, officers anddirectors with an exercise price of $15.00 or higher. This accelerated vestingaffected options for approximately 2.4 million shares of the Company’s commonstock and resulted in a pro forma after tax effect of $13.6 million, which isreflected in the table above for fiscal year 2005. The Company imposed salesrestrictions on shares acquired upon exercise of these options that parallelthe vesting requirements of the original options.

The Company’s adoption ofSFAS No. 123R. SFAS No. 123R was effective beginning with the Company’squarter ended September 30, 2005, which will require all share-basedpayments to Company employees, including grants of employee stock options, to berecognized in the Company’s financial statements based on their fair values.

*Recently issuedaccounting pronouncements*

In March 2005, the SEC issued SAB No. 107, to provide interpretive guidance onSFAS No. 123R valuation methods, assumptions used in valuation models, andthe interaction of SFAS No. 123 with existing SEC guidance. SAB No. 107also requires the classification of stock compensation expense in the samefinancial statement line as cash compensation, and will therefore impact ourcost of gaming equipment and systems, casino operations (and related grossprofits and margins), research and development costs, and selling, general andadministrative expenses. The Company estimates that the expensing of stockoptions will reduce the net income for the fiscal year 2006 by approximately$4.1 million (or $0.08 per share) for the unvested options outstanding as of June 30,2005. This amount excludes the accelerated vesting of approximately 2.4 millionoptions in June 2005 (see Note 1 to the consolidated financialstatements).

In December 2004, the FASB issued FASB StaffPosition (“FSP”) No. 109-1, *Application of SFAS No. 109,Accounting for Income Taxes, to the Tax Deduction on Qualified ProductionActivities provided by the American Jobs Creation Act of 2004* (“FSP No. 109-1”).FSP No. 109-1 states that the qualified production activitiesdeduction should be accounted for as a special deduction in accordance withSFAS No. 109. This statement was effective upon issuance. The adoption ofthis statement had no material impact on the Company’s results of operations,financial position or cash flows.

F-13

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In December 2004, the FASB issued FSP No. 109-2,*Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004*(“FSP No. 109-2”). FSP No. 109-2 allows enterprises timebeyond the financial reporting period of enactment to evaluate the effect ofthe Act on its plan for reinvestment or repatriation of foreign earnings forpurposes of applying SFAS No. 109. This statement was effective uponissuance. The adoption of this statement had no material impact on the resultsof operations, financial position or cash flows.

In December 2004, the FASB issued SFAS No. 123Rthat focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions. Beginning withour quarterly period that begins August 1, 2005, we will be required toexpense the fair value of employee stock options and similar awards. Becausethe recording of non-cash stock option expense involves equity-basedcompensation transactions, the adoption of this statement will have no effecton the Company’s cash position.

In November 2004, the FASB issued SFAS No. 151revising Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, which clarifies theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, wasted material (spoilage). This statement is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. TheCompany does not believe this accounting pronouncement will have a materialimpact on its financial condition or results of operations.

In December 2004, theFASB issued SFAS No. 153, *Exchanges of Nonmonetary Assets* (“SFAS No. 153”),amending APB Opinion No. 29. APB No. 29 treated nonmonetary exchangesof similar productive assets as an exception from fair value measurement. SFAS No. 153replaces this exception with a general exception from fair value measurementfor exchanges of nonmonetary assets that do not have commercial substance.Nonmonetary exchanges have commercial substance if the future cash flows of anentity are expected to change significantly as a result of the exchange. Thisstatement is effective for nonmonetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005. The Company anticipates no materialimpact on the Company’s results of operations, financial position or cash flowsas a result of adopting this statement.

**2.   RESTATEMENTOF PREVIOUSLY ISSUED FINANCIAL STATEMENTS**

In connection with the year-end closing process for2005, the Company determined certain adjustments were required to be made forcorrections of errors in its previously issued financial statements.

The adjustments relateprimarily to revenue recognition, accounting for inventory costs and otheradjustments.

*Revenue Recognition*

The Company identified instances where the timing oramount of revenue recognized was not in accordance with SOP No. 97-2.The Company determined that certain requirements of SOP No. 97-2were not met in a number of instances and therefore, revenue with respect tocertain transactions was recognized prematurely. In accounting for thesetransactions, the Company has determined that it (1) should have deferredthe revenue and related cost of sales, (2) should have reflected certaingoods shipped as consigned inventory until later periods and (3) shouldnot have recognized certain accounts receivable until later periods.

The specific circumstanceswhich resulted in adjustments are as follows:

*Persuasive evidenceof an arrangement exists*

The Company identified onetransaction for which $5.7 million in revenue was recognized in the fiscalquarter ended December 31, 2004 at the time the games were shipped to acustomer based on a signed 

F-14

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sales-typelease agreement. Subsequently, the customer negotiated a fixed price paymentwith a cash discount and other concessions. These facts and circumstancescalled into question whether the original agreement provided adequate evidenceof an arrangement that was sufficiently definitive to support recognition ofrevenue in December 2004. The Company has concluded that there was notpersuasive evidence of an arrangement at that time, and therefore the revenueshould have been deferred until the cash was received in July 2005.

*Delivery hasoccurred*

The Company also identified instances in which revenuewas recognized for sales at the time the product was shipped to customers whenthe shipping terms stated or implied that risk of loss and/or title did nottransfer until the goods were delivered to the customer’s location. In suchcircumstances, recognition of revenue should have been deferred until the timethe products reached the customer’s location and therefore the revenue that hadpreviously been recorded in connection with these transactions was adjusted tobe recorded in subsequent accounting periods when the delivery criteria was met.The net effect of these adjustments reduced revenue by $(12.1) million and$(0.4) million for the fiscal years ended June 30, 2004 and 2003,respectively

The Company identifiedinstances in the Systems division where certain standard sales agreementscontained contractual terms creating a non-perpetual software license ratherthan a perpetual license. The Company determined that in such circumstances,revenue for non-perpetual software licenses should not have been recognized asof the acceptance date, but rather should have been deferred and recognizedratably over the twelve-month period from the date of acceptance and thereforethe revenue that had previously been recorded in connection with thesetransactions was adjusted to be recorded in the appropriate period. The net effectof these adjustments to defer revenue and record it over a twelve-month periodfor such contracts reduced revenues by $(6.0) million and $(4.1) million forthe fiscal year ended June 30, 2004 and 2003, respectively.

*The vendors’ fee isfixed or determinable and collectibility is probable*

The use of extended payment terms in a softwarelicensing arrangement may indicate that the fee is not fixed or determinableand collectibility is not probable. TheCompany identified instances where revenue was recorded upon delivery of bothsystems and gaming products to customers under contracts that contained paymentterms in excess of 24 months. At the time the sales were recorded the Companydid not have sufficient historical evidence of collections made under extendedcontracts with terms beyond 24 months, as required under SOP No. 97-2,and therefore should not have concluded that collectibility was probable. TheCompany has concluded it should have deferred revenue on all contracts withextended payment terms in excess of 24 months, and recorded revenue uponreceipt of payment from the customer and therefore the revenue that hadpreviously been recorded in connection with these transactions was adjusted tobe recorded in subsequent accounting periods when payment was received. The neteffect of these adjustments increased (decreased) revenues by $15.0 million and$(19.8) million for the fiscal years ended June 30, 2004 and 2003,respectively.

In addition, the Companyidentified instances in which revenue was recognized at the time product wasshipped to customers who either were thinly capitalized or were new customersto the Company for which creditworthiness was not sufficiently established. Pursuantto SOP No. 97-2 collectibility must be determined to be “probable”at the time of delivery in order for revenue to be recognized, and therefore,in such circumstances recognition of revenue should have been deferred untilpayment from the customer was received. Therefore revenue that had previouslybeen recorded for these transactions was adjusted to be recorded in subsequentperiods when payment was received. The net effect of these adjustments reducedrevenue by $(6.6) million for the year ended June 30, 2004.

F-15

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*Inventory*

In certain circumstances,inventory was not accounted for at the lower of cost or market value. Standardversus actual raw material variances were recorded to cost of sales rather thanas adjustments to inventory and fixed assets. As a result, adjustments havebeen made to adjust the standard costs to actual costs, resulting incorrections to the carrying value of certain finished goods and fixed assetsand related cost of sales and depreciation expense. The net effect of theseadjustments increased cost of goods sold by $0.7 million and $0.6 million forthe fiscal years ended June 30, 2004 and 2003, respectively.

*Other Adjustments*

The Company identified additional net deferred taxassets totaling $9.3 million that were not recorded in the original purchaseaccounting for an acquisition completed in fiscal year 2004. In addition, theCompany determined that it should have established valuation allowances againstcertain deferred tax assets that were recorded in connection with acquisitionsin fiscal year 2004. The adjustments increased the Company’s net deferred taxassets as of June 30, 2004 by approximately $8.3 million, with acorresponding decrease in goodwill. The Company also recorded other purchaseaccounting adjustments, resulting in a net reduction in goodwill as of June 30,2004 of approximately $1.0 million.

The Company recorded an adjustment to change theclassification of certificates of deposit with maturities beyond 90 days whenpurchased from cash and cash equivalents to other current assets, totaling $3.1million as of June 30, 2004, and an adjustment to change theclassification of certain jackpot reserve cash accounts from cash and cashequivalents to restricted cash totaling $15.6 million as of June 30, 2004.

The Company also determined that it should havepresented the cash flows from discontinued operations within the respectivecategories of operating, investing and financing activities in its statementsof cash flows, rather than as one separate line item. The statements of thecash flows were also adjusted for the change in the classification of thejackpot reserve cash accounts to restricted cash.

The Company also determined that certain balance sheetaccount reconciliations were not performed timely and therefore necessaryadjustments were not identified or recorded timely. The Company has completedthe account reconciliations and made the corresponding corrections to thefinancial statements. The net pre-tax effect of such adjustments was less than$0.1 million in each of the fiscal years ended June 30, 2004 and 2003,respectively.

As aresult, the accompanying consolidated financial statements as of June 30,2004 and for the years ended June 30, 2004 and 2003 have been restatedfrom amounts previously reported. The following is a reconciliation of incomefrom continuing operations as previously reported, to the restated amounts, bycategory discussed above, net of tax (in 000s):

| ** **                                              | ** ** | **2004** | ** **   | **2003** | ** ** |
|---------------------------------------------------------|------------|----------|--------------|----------|------------|
| Income from  continuing operations, previously reported |       | $        | 43,625  |     | $          | 37,162  |   |
| Revenue recognition adjustments, net                    |       | (3,405   | )            | (8,624   | )          |
| Inventory adjustments, net                              |       | (441     | )            | (420     | )          |
| Other miscellaneous adjustments, net                    |       | (32      | )            | (6       | )          |
| Income from continuing  operations, as restated         |       | $        | 39,747  |     | $          | 28,112  |   |

 

F-16

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Thefollowing tables summarize the significant effects of the restatement: 

| ** **                                                                   | ** ** | **Year Ended June 30,**                        | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                                                      | ** ** | **2003** | ** ** |
| ** **                                                                   | ** ** | **As  Previously  Reported**                                  | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** |
| ** **                                                                   | ** ** | **(in 000s, except per share data)** | ** ** |
| *Statement of Operations*                                                    |       |                                                          |       |   |   |   |   |   |   |
| Revenue:                                                                     |       |                                                          |       |   |   |   |   |   |   |
| Gaming Equipment and Systems                                                 |       | $                                                             | 436,596    |   | $ | 428,128 |   | $ | 335,436 |   | $ | 312,267 |   |
| Casino Operations                                                            |       | 52,280                                                        |       | 52,280 |   | 50,945 |   | 50,945 |   |
| Total revenue                                                                |       | 488,876                                                       |       | 480,408 |   | 386,381 |   | 363,212 |   |
| Cost of Gaming  Equipment and Systems                                        |       | 177,586                                                       |       | 192,790 |   | 144,352 |   | 144,725 |   |
| Depreciation and  amortization(1)                                            |       | 31,565                                                        |       | 14,404 |   | 20,462 |   | 10,950 |   |
| Selling, general  and administrative expense                                 |       | 124,345                                                       |       | 124,419 |   | 95,432 |   | 94,710 |   |
| Operating income                                                             |       | 98,722                                                        |       | 92,137 |   | 84,972 |   | 71,664 |   |
| Income from  continuing operations before income taxes and minority interest |       | 70,227                                                        |       | 63,569 |   | 59,727 |   | 46,637 |   |
| Income tax  expense                                                          |       | 24,293                                                        |       | 21,513 |   | 20,556 |   | 16,516 |   |
| Income from  continuing operations                                           |       | 43,625                                                        |       | 39,747 |   | 37,162 |   | 28,112 |   |
| Net income                                                                   |       | 84,514                                                        |       | 80,636 |   | 19,523 |   | 10,474 |   |
| Basic earnings  per share from continuing operations                         |       | $                                                             | 0.87       |   | $ | 0.79 |   | $ | 0.76 |   | $ | 0.57 |   |
| Diluted earnings  per share from continuing operations                       |       | $                                                             | 0.85       |   | $ | 0.78 |   | $ | 0.74 |   | $ | 0.56 |   |
| Basic earnings  per share                                                    |       | $                                                             | 1.69       |   | $ | 1.61 |   | $ | 0.40 |   | $ | 0.21 |   |
| Diluted earnings per share                                                   |       | $                                                             | 1.65       |   | $ | 1.58 |   | $ | 0.39 |   | $ | 0.20 |   |

----

(1)          Depreciationfor leased gaming equipment has been reclassified to cost of gaming equipmentand systems (see Note 1).

| ** **                               | ** ** | **As of June 30, 2004** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **As Previously  Reported**       | ** ** | **As  Restated** | ** ** |
| ** **                               | ** ** | **(in 000s)**                     | ** ** |
| *Balance Sheet*                          |       |                                   |       |   |   |   |   |
| Cash and cash  equivalents               |       |                                   | $          | 172,726 |   |   | $ | 154,258 |   |
| Restricted cash                          |       |                                   | —     |   |   | 15,590 |   |
| Accounts and  notes receivable, net      |       |                                   | 129,779    |   |   | 128,317 |   |
| Inventories                              |       |                                   | 61,135     |   |   | 63,280 |   |
| Other current  assets                    |       |                                   | 12,420     |   |   | 28,955 |   |
| Current deferred  tax assets, net        |       |                                   | 20,054     |   |   | 19,602 |   |
| Total current  assets                    |       |                                   | 396,114    |   |   | 414,444 |   |
| Goodwill                                 |       |                                   | 136,989    |   |   | 127,672 |   |
| Long-term  deferred tax assets, net      |       |                                   | —     |   |   | 14,020 |   |
| Total assets                             |       |                                   | 750,654    |   |   | 768,431 |   |
| Accrued  liabilities                     |       |                                   | 49,145     |   |   | 48,415 |   |
| Income taxes  payable                    |       |                                   | 7,233      |   |   | 5,718 |   |
| Deferred revenue                         |       |                                   | 2,324      |   |   | 37,635 |   |
| Total current  liabilities               |       |                                   | 118,495    |   |   | 151,561 |   |
| Total liabilities                        |       |                                   | 549,851    |   |   | 580,742 |   |
| Retained earnings  (accumulated deficit) |       |                                   | 7,083      |   |   | (7,357 | ) |
| Total stockholders’  equity         |       |                                   | 200,803    |   |   | 186,363 |   |
|                                          |            |                                        |            |  |  |  |  |  |  |

 

F-17

----

 

| ** **                               | ** ** | **Year Ended June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **As  Previously  Reported**           | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** |
| ** **                               | ** ** | **(in 000s)**                     | ** ** |
| *Statement  of Cash Flows*               | * *   | * *                               | * *   | * * | * * | * * | * * | * * | * * |
| Cash flows from  operating activities    |       | $                                      | 110,261    |   | $ | 112,004 |   | $ | 38,148 |   | $ | 70,233 |   |
| Cash flows from investing  activities    |       | (32,819                                | )          | (51,965 | ) | (46,315 | ) | (66,483 | ) |
| Cash flows from  financing activities    |       | 73,826                                 |       | 69,639 |   | (2,179 | ) | (5,177 | ) |
| Cash flows from  discontinued operations |       | (17,600                                | )          | — |   | 17,144 |   | — |   |
|                                          |            |                                        |            |  |  |  |  |  |  |  |  |  |  |

 

The restatement alsoresulted in a reduction of retained earnings as of June 30, 2002 of $1.5million.

**3.   EARNINGS PER SHARE**

The Company calculates earnings per share inaccordance with SFAS No. 128, *Earnings Per Share*.Basic earnings per share are computed by dividing reported earnings by theweighted average number of common shares outstanding during the period. Dilutedearnings per share reflect the additional dilution from all potentiallydilutive securities such as stock options. For fiscal years 2004 and 2003, alloutstanding options with an exercise price lower than the market price at thetime of grant have been included in the calculation of diluted earnings pershare. For fiscal year 2005, no outstanding options were included in thecalculation of earnings per share as the effect would have been anti-dilutivedue to the net loss reported.

Certainsecurities do not have a dilutive effect because their exercise price exceedsthe fair market value of the underlying stock. Such securities are excludedfrom the diluted earnings per share calculation and consist of the following(in 000s):

| ** **    | ** ** | **Fiscal Years ended June 30,** | ** ** |
|---------------|------------|-----------------------------------------------------|------------|
| ** **    | ** ** | ** 2005 **                                | ** ** | ** 2004 ** | ** ** | ** 2003 ** | ** ** |
| Stock options |       | 4,738                                               |       | 1,498 |   |   | 862 |   |   |
| Warrants      |       | 100                                                 |       | 100 |   |   | — |   |   |
|          |       | 4,838                                               |       | 1,598 |   |   | 862 |   |   |

 

As of June 30, 2005, the Company has certainrestrictive stock units and debt outstanding which is potentially convertibleinto common stock, the potential dilution from which have not been included inthe diluted earnings per share computation due to the reported loss for fiscalyear 2005.

F-18

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Thefollowing computation of basic and diluted earnings (loss) per share fromcontinuing operations and discontinued operations and income (loss) applicableto common shares for all periods presented is as follows:

| ** **                                               | ** ** | **Fiscal Years ended June 30,**             | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                               | ** ** | **(in 000s except per share amounts)** | ** ** |
| Income (loss) from continuing operations                 |       | $                                                               | (20,317    | ) | $ | 39,747 |   | $ | 28,112 |   |
| Income (loss)  from discontinued operations              |       | (4,654                                                          | )          | 40,889 |   | (17,638 | ) |
| Net Income (loss)                                        |       | $                                                               | (24,971    | ) | $ | 80,636 |   | $ | 10,474 |   |
| Weighted average common shares outstanding               |       | 51,114                                                          |       | 50,113 |   | 49,153 |   |
| Effect of  dilutive securities                           |       | —                                                          |       | 1,135 |   | 986 |   |
| Weighted average  common and dilutive shares outstanding |       | 51,114                                                          |       | 51,248 |   | 50,139 |   |
| Earnings (loss)  per basic share:                        |       |                                                            |       |   | ** ** | ** ** | ** ** |
| Income (loss)  from continued operations                 |       | $                                                               | (0.40      | ) | $ | 0.79 |   | $ | 0.57 |   |
| Income (loss)  from discontinued operations              |       | (0.09                                                           | )          | 0.82 |   | (0.36 | ) |
|                                                     |       | $                                                               | (0.49      | ) | $ | 1.61 |   | $ | 0.21 |   |
| Earnings (loss)  per diluted share:                      |       |                                                            |       |   |   |   |   |
| Income (loss)  from continued operations                 |       | $                                                               | (0.40      | ) | $ | 0.78 |   | $ | 0.56 |   |
| Income (loss)  from discontinued operations              |       | (0.09                                                           | )          | 0.80 |   | (0.36 | ) |
|                                                     |       | $                                                               | (0.49      | ) | $ | 1.58 |   | $ | 0.20 |   |

 

**4.   BUSINESS COMBINATIONS**

Under the purchase methodof accounting, the total purchase price is allocated to the net tangible andintangible assets based upon their estimated fair market values as of the dateof the acquisitions. The allocation of the purchase price to goodwill andintangibles is based on final valuation of net assets (including inventory andproperty, plant and equipment) and is based upon management’s estimates,including independent third-party valuations when necessary.

***SIERRA DESIGN GROUP (“SDG”)***

On March 2, 2004, we purchased SDG, a supplier ofClass II and Class III gaming devices, systems and technology, foraggregate initial consideration of approximately $126.4 million. The initialpurchase price consisted of $108.6 million cash, 662,000 shares of common stockvalued at $11.9 million, the assumption of approximately $8 million of debt andcertain transaction fees and expenses. In addition, an earn out provisionprovided for the payment of up to $95.6 million in additional consideration uponcertain financial targets being achieved in the subsequent three-year period. InDecember 2004, the Company and the selling shareholders renegotiated theearn out for a fixed amount of $40 million, consisting of a one-time cashpayment of $12 million and the issuance of a subordinated note of $28 million. InJune 2005, the Company extinguished $14 million of the note and accruedinterest thereon, by issuing approximately 1.0 million shares of common stockto the note holders. The Company believes that the acquisition of SDG in March2004 will position the Company to take advantage of significant opportunitiesin both the domestic and international markets, from the technology advances intraditional casino style gaming to the Class II environments with centraldetermination features. (see Note 12).

F-19

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Thefollowing intangible assets of SDG are being amortized on a straight-line basisusing the following estimated lives:

| ** **      | ** ** | **Years** | ** ** |
|-----------------|------------|-----------|------------|
| Contracts       |       |      | 10         |   |   |
| Core technology |       |      | 8          |   |   |
| Trademark       |       |      | 5          |   |   |

 

Thefair values assigned to the SDG assets and liabilities acquired in fiscal year2004 (prior to the settlement of the earn out) were as follows (in 000s)

| Assets:                         |   |    |    |
|---------------------------------|--------|---------|---------|
| Cash                            |   | $       | 1,189   |   |
| Accounts receivable             |   | 6,949   |    |
| Inventories                     |   | 12,834  |    |
| Deposits                        |   | 1,576   |    |
| Other current assets            |   | 2,233   |    |
| Property, plant and equipment   |   | 22,071  |    |
| Other assets                    |   | 678     |    |
| Deferred tax assets             |   | 16,717  |    |
| Notes receivable                |   | 103     |    |
| Investment in sales-type leases |   | 8,241   |    |
| Contracts                       |   | 12,320  |    |
| Core technology                 |   | 5,445   |    |
| Trademark                       |   | 5,708   |    |
| Goodwill(a)                     |   | 55,674  |    |
| Total assets acquired           |   | 151,738 |    |
| Liabilities:                    |   |    |    |
| Customer deposits               |   | 4,973   |    |
| Accounts payable                |   | 6,110   |    |
| Accrued liabilities             |   | 10,558  |    |
| Notes payable                   |   | 3,704   |    |
|                            |   | 25,345  |    |
| Total Purchase Price            |   | $       | 126,393 |   |

----

(a)           Substantially all ofgoodwill is non-deductible for tax purposes.

F-20

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Thepurchase price paid for SDG consists of the following (in 000s):

| Cash paid to SDG  stockholders                                   |   | $      | 29,846   |   |
|------------------------------------------------------------------|--------|--------|---------------|--------|
| Fair value of  restricted common stock issued                    |   | 11,949 |          |
| Other  consideration payable                                     |   | 1,350  |          |
| Transaction fees  and expenses                                   |   | 4,740  |          |
| Subtotal                                                         |   | 47,885 |          |
| SDG debt owed to  third parties                                  |   | 5,688  |          |
| Pre-acquisition  loans from Alliance to SDG forgiven by Alliance |   | 72,820 |          |
| Acquisition cost                                                 |   | $      | 126,393  |   |

 

Thefollowing unaudited pro forma financial information is presented as if the SDGacquisition had been completed at the beginning of the periods presented below(in 000s, except per share information):

| ** **                                     | ** ** | **June 30,** | ** **    | **June 30,** | ** ** |
|------------------------------------------------|------------|-------------------|---------------|-------------------|------------|
| ** **                                     | ** ** | **2004**          | ** **    | **2003**          | ** ** |
| Total revenue                                  |       | $                 | 542,029  |              | $          | 469,344  |   |
| Operating income                               |       | 37,130            |          | 37,657            |       |
| Income from  continuing operations             |       | 24,017            |          | 21,864            |       |
| Earnings per  share from continuing operations |       |              |          |              |       |
| Basic                                          |       | $                 | 0.48     |              | $          | 0.44  |   |
| Diluted                                        |       | $                 | 0.46     |              | $          | 0.43  |   |

 

***MINDPLAY***

On February 19, 2004, the Company acquiredsubstantially all of the assets and liabilities of MindPlay LLC (“MindPlay”), aleading developer of advanced table game technologies, for aggregate initialconsideration of approximately $16.8 million. The initial purchase priceincluded $9 million cash, a $4 million note payable, the assumption ofapproximately $2 million of debt and the issuance of warrants to purchase100,000 shares of our common stock which were valued at approximately $0.9million. In addition, an earn out provision provided for the payment of 10% ofgross margin from the sale of MindPlay products in the first seven yearssubsequent to the acquisition, and 4.25% of gross margin for the next sixyears, subject to adjustments pursuant to the conditions contained in the saleagreement. The MindPlay technologies are designed to provide data andinformation to casino operators to improve customer service, to provideenhanced security and to increase profitability by lowering the cost ofoperation and enhancing the casino patron experience. As part of theacquisition, the Company acquired a number of patents acquired , which itbelieves will enable it to introduce a series of new table game products thatcan potentially redefine the market with the advances of automation and newgaming features to attract and retain table game players.

F-21

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Thefair values assigned to the MindPlay assets and liabilities acquired are asfollows (in 000s):

| Assets:                       |   |   |         |
|-------------------------------|--------|--------|--------------|
| Cash                          |   | $      | 22      |   |
| Accounts receivable           |   | 41     |         |
| Inventories                   |   | 110    |         |
| Property, plant and equipment |   | 143    |         |
| Other Assets                  |   | 43     |         |
| Patents                       |   | 9,470  |         |
| Other intangible assets       |   | 1,015  |         |
| Goodwill                      |   | 6,414  |         |
| Total assets acquired         |   | 17,258 |         |
| Liabilities:                  |   |   |         |
| Customer deposits             |   | 467    |         |
| Total Purchase Price          |   | $      | 16,791  |   |

 

Intangible assets arebeing amortized over their estimated remaining life ranging from 3 to 15 years.

***CROWN GAMING***

On December 31, 2003, Alliance acquired 100% ofthe assets of U.K.-based Crown Gaming from Crown Leisure Limited. Theacquisition, which includes Crown’s distributorship agreements for a widevariety of automated table games and video bingo machines, strategically buildson the Company’s focus towards future growth projected in England. The total cash consideration was $3.9million, including approximately $2.0 million was used to repay assumed notespayable.

Thefair values assigned to the Crown assets and liabilities are as follows (in000s):

| Tangible Assets:       |   |   |        |
|------------------------|--------|--------|-------------|
| Inventories            |   | $      | 2,064  |   |
| Other Assets           |   | 661    |        |
| Intangible assets      |   | 659    |        |
| Goodwill               |   | 335    |        |
| Total assets  acquired |   | 3,719  |        |
| Liabilities:           |   |   |        |
| Accounts payable       |   | 1,295  |        |
| Accrued liabilities    |   | 21     |        |
| Taxes payable          |   | 527    |        |
|                   |   | 1,843  |        |
| Total Purchase Price   |   | $      | 1,876  |   |

 

Intangible assets arebeing amortized over their estimated remaining life ranging from 3—15 years.

**5.   DISCONTINUED OPERATIONS**

On October 15, 2004, the Company completed thesale of its interest in Video Services, Inc. (“VSI”) to Churchill DownsIncorporated. The net proceeds received totaled approximately $2.0 million,resulting in a gain of $0.8 million, net of tax, and is included indiscontinued operations in the statement of operations in fiscal year 2005.

F-22

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On June 30, 2004, the Company completed the saleof United Coin Machine Co. (“United Coin”) to Century Gaming, Inc. andreceived approximately $100 million in cash and the assumption by CenturyGaming of approximately $5 million in debt. The Company reported a gain on thesale before income taxes of $15.3 million, or $9.1 million after tax. Duringfiscal year 2005, the gain on sale was adjusted for charges incurred for anadverse outcome in a patent infringement case (see Note 19) and the resolutionof certain sale related liabilities, the sum of which totaled $6.3 million netof tax.

On May 3, 2004, the Company completed the sale ofRail City Casino to The Sands Regent and subsequently received a total of $37.9million in cash. The Company reported a gain on the sale before income taxes of$23.1 million, or $14.3 million after tax.

On June 30, 2003, the Company entered into adefinitive agreement for the sale of Bally Wulff to a third party equityinvestor for $16.5 million in cash. The sale was consummated on July 18,2003. The Company recorded a charge in June 2003 totaling $25.4 million,net of tax, representing the write down of the net carrying value of the BallyWulff assets to the sales price, including the recognition of previouslyrecorded currency translation adjustments totaling $11.9 million. In June 2004,the Company was notified by the buyer of a claim made against the Companypursuant to an indemnity provision contained in the sale agreement. Subsequentto June 30, 2005, the Company has paid a claim totaling $1.7 million. Additionally,the Company has a remaining accrual of $1.2 million for potential taxassessments related to the pre-sale period, which the Company expects to beresolved by June 2006. Pursuant to the sale agreement, the Company isrequired to maintain a certificate of deposit as collateral for the tax claimdiscussed above which is included in other long-term assets, net. As of June 30,2005 and 2004 the amount of the deposit was approximately $1.2 million and $3.4million, respectively. For the year ended June 30, 2005, the Companyreduced the deposit by approximately $0.5 million and recognized a reduction intax expense related to discontinued operations.

All four business results are presented net ofapplicable income taxes within income from discontinued operations in theaccompanying consolidated statements of operations. The net assets of thebusinesses are classified as assets held for sale in the accompanyingconsolidated balance sheet as of June 30, 2004.

Summaryoperating results for the discontinued operations for United Coin, VSI, RailCity and Bally Wulff are as follows (in 000s):

| ** **                                  | ** ** | **Fiscal Year ended June 30,** | ** **   |
|---------------------------------------------|------------|----------------------------------------------------|--------------|
| ** **                                  | ** ** | **2005**                                           | ** **   | **2004** | ** ** | **2003** | ** ** |
| Net revenues                                |       | $                                                  | 4,514   |   | $ | 257,142  |   | $ | 298,739  |   |
| Asset impairment  charges                   |       | —                                             |         | — |   | 38,728 |   |
| Operating income  (loss)                    |       | 358                                                |         | 30,668 |   | (26,576 | ) |
| Income tax  expense (benefit)               |       | (3,350                                             | )            | 26,319 |   | (8,665 | )(a) |
| Income (loss) from  discontinued operations |       | $                                                  | (4,654  | )(b) | $ | 40,889  | (c) | $ | (17,638  | ) |

----

(a)           Includes a net deferredtax benefit totaling $13.4 million, which was recorded for the sale of BallyWulff.

(b)          Includes the $6.3million after tax charge referred to above related to the sale of United Coin,offset by the gain on sale of VSI.

(c)           Includes a gain on saleof Rail City of $23.1 million and a gain on the sale of United Coin of $15.3million.

F-23

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Thefollowing schedule reflects the net assets held for sale, included in theaccompanying consolidated balance sheets consisting of VSI as of June 30,**2004 (In 000s):

| Cash and cash  equivalents            |   | $     | 3,543  |   |
|---------------------------------------|--------|-------|-------------|--------|
| Accounts and  contracts receivable    |   | 89    |        |
| Other current assets                  |   | 66    |        |
| Property, plant  and equipment        |   | 696   |        |
| Other                                 |   | 48    |        |
| Total assets                          |   | 4,442 |        |
| Current liabilities                   |   | 4,321 |        |
| Long-term  liabilities                |   | 16    |        |
| Total liabilities                     |   | 4,337 |        |
| Net assets of  discontinued operation |   | $     | 105    |   |

 

**6.   RECEIVABLES**

The Gaming Equipment and Systems business unit grantscustomers payment terms under contracts of sale. These contracts are generallyfor terms of six months to five years, with interest at prevailing rates, andare generally collateralized by the related equipment sold, although the valueof such equipment, if repossessed, may be less than the receivable balanceoutstanding. Contracts with terms beyond 24 months are deferred and revenue isrecognized as the payments are received. The total receivables outstanding asof June 30, 2005, net of bad debt allowance totaled approximately $106.9million, substantially all of which is scheduled to be received within oneyear.

Thefollowing table represents the activity for each of the fiscal years ended June 30,2005, 2004 and 2003 for each of the valuation reserve and allowance accounts(in 000s):

| ** **                        | ** ** | **Balance at  Beginning of  Year** | ** ** | **Additions** | ** ** | **Net  Write-offs/  (Recoverables)** | ** ** | **Balance at  End of  Year** | ** **  |
|-----------------------------------|------------|----------------------------------------------|------------|---------------|------------|--------------------------------------|------------|----------------------------------------|-------------|
| Allowance for doubtful  accounts: |       |                                         |       |          |       |                                 |       |                                   |        |   |   |   |   |   |   |   |   |
| Year ended  June 30, 2005    |       |                                         | $          | 8,862    |       |                                 |       | $                                      | 5,134  |   |   |   | $ | 3,829  |   |   |   | $ | 10,167  |   |   |
| Year ended  June 30, 2004    |       |                                         | $          | 6,244    |       |                                 |       | $                                      | 2,207  |   |   |   | $ | (411  | ) |   |   | $ | 8,862  |   |   |
| Year ended June 30,  2003    |       |                                         | $          | 8,436    |       |                                 |       | $                                      | 825    |   |   |   | $ | 3,017  |   |   |   | $ | 6,244  |   |   |

 

**7.   GOODWILLAND OTHER INTANGIBLE ASSETS**

In accordance with its accounting policy, during thefourth quarter of fiscal 2005, the Company evaluated the carrying value ofgoodwill and other intangible assets and determined that no impairment existedas of that measurement date.

F-24

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Intangibleassets excluding discontinued operations consist of the following (In 000s):

| ** **                                  | ** ** | **Wt.  Avg.**             | ** ** | **June 30, 2005** | ** ** | **June 30, 2004**   | ** **   |
|---------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|-------------------------------|--------------|
| ** **                                  | ** ** | **Useful  Life  (Years)** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** **   | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Computer software                           |       |                      | 3          |                        |       | $                             | 9,021   |   |   | $ | (3,463  | ) |   | $ | 5,558  |   | $ | 8,963  |   |   | $ | (1,498  | ) |   | $ | 7,465  |   |
| Computer software  from acquisitions        |       |                      | 9          |                        |       | 11,700                        |         |   | (4,680 | ) |   | 7,020 |   | 11,700 |   |   | (3,380 | ) |   | 8,320 |   |
| License rights                              |       |                      | 3-5        |                        |       | 1,338                         |         |   | (506 | ) |   | 832 |   | 2,745 |   |   | (1,979 | ) |   | 766 |   |
| Capitalized  regulatory approval costs |       |                      | 3          |                        |       | 4,068                         |         |   | (1,703 | ) |   | 2,365 |   | 4,767 |   |   | (833 | ) |   | 3,934 |   |
| CRM software  systems                       |       |                      | 5          |                        |       | 3,300                         |         |   | (1,785 | ) |   | 1,515 |   | 3,039 |   |   | (1,046 | ) |   | 1,993 |   |
| PLM software systems                        |       |                      | 5          |                        |       | 1,843                         |         |   | (410 | ) |   | 1,433 |   | 1,585 |   |   | — |   |   | 1,585 |   |
| Trademarks                                  |       |                      | 5          |                        |       | 1,404                         |         |   | (574 | ) |   | 830 |   | 1,404 |   |   | (288 | ) |   | 1,116 |   |
| Trademarks  (indefinite life)               |       |                      | —     |                        |       | 5,284                         |         |   | — |   |   | 5,284 |   | 5,284 |   |   | — |   |   | 5,284 |   |
| Patents                                     |       |                      | 13         |                        |       | 9,470                         |         |   | (971 | ) |   | 8,499 |   | 9,470 |   |   | (243 | ) |   | 9,227 |   |
| Non-compete  agreements                     |       |                      | 6          |                        |       | 275                           |         |   | (61 | ) |   | 214 |   | 275 |   |   | (15 | ) |   | 260 |   |
| Customer  relationships                     |       |                      | 5          |                        |       | 740                           |         |   | (197 | ) |   | 543 |   | 740 |   |   | (49 | ) |   | 691 |   |
| Core technology                             |       |                      | 8          |                        |       | 5,445                         |         |   | (907 | ) |   | 4,538 |   | 5,445 |   |   | (227 | ) |   | 5,218 |   |
| Contracts                                   |       |                      | 10         |                        |       | 12,100                        |         |   | (1,621 | ) |   | 10,479 |   | 12,100 |   |   | (411 | ) |   | 11,689 |   |
| Other intangibles                           |       |                      | 7          |                        |       | 819                           |         |   | (478 | ) |   | 341 |   | 1,684 |   |   | (1,503 | ) |   | 181 |   |
| Total                                       |       |                      |       |                        |       | $                             | 66,807  |   |   | $ | (17,356  | ) |   | $ | 49,451  |   | $ | 69,201  |   |   | $ | (11,472  | ) |   | $ | 57,729  |   |

 

Amortization expense totaled $8.6 million, $5.8million and $3.2 million for the fiscal years ended June 30, 2005, 2004and 2003, respectively. Computer software amortization expense totaled $3.7million, $2.9 million and $1.8 million for the fiscal year ended June 30,2005, 2004 and 2003, respectively.

Futureamortization of intangible assets is scheduled as follows (in 000s):

| **Years ending June 30,** | ** ** | ** ** | ** **   | ** ** | ** ** |
|------------------------------------------|------------|------------|--------------|------------|------------|
| 2006                                     |       | $          | 9,056   |       |
| 2007                                     |       | 7,639      |         |
| 2008                                     |       | 5,401      |         |
| 2009                                     |       | 4,886      |         |
| 2010                                     |       | 4,673      |         |
| Thereafter                               |       | 12,512     |         |
| Total                                    |       | $          | 44,167  |       |

 

F-25

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*Goodwill*

Thechanges in the carrying amount of goodwill for the years ended June 30,2004 and 2005 are as follows (in 000s):

| ** **                                            | ** ** | **Total** | ** ** |
|-------------------------------------------------------|------------|-----------|------------|
| Balance as of  June 30, 2003                     |       | $         | 63,040     |   |
| Goodwill acquired during year                         |       | 62,424    |       |
| Adjustments to  goodwill from prior year acquisitions |       | 1,040     |       |
| Foreign currency  translation adjustment              |       | 1,168     |       |
| Balance as of  June 30, 2004                     |       | 127,672   |       |
| Buyout of the SDG earn out (see Note 4)               |       | 40,000    |       |
| Tax effect of the  buyout of the earn out             |       | (4,070    | )          |
| Adjustments to  goodwill from prior year acquisition  |       | (2,108    | )          |
| Foreign currency  translation adjustment              |       | (50       | )          |
| Balance as of  June 30, 2005                     |       | $         | 161,444    |   |

 

Adjustments to goodwillduring fiscal year 2004 primarily represent management’s final allocation andassessment based upon independent third-party valuations of the net assets ofacquired companies. Adjustments to goodwill in fiscal year 2005 relateprimarily to adjustments to certain acquisition-related deferred tax assets.

**8.   OTHER CURRENT AND LONG-TERM ASSETS**

Othercurrent assets as of June 30, 2005 and 2004 consist of the following (in000s):

| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred costs of  revenues                  |       | $        | 12,464     |     | $          | 13,855 |   |
| Prepaid expenses                             |       | 4,939    |       | 5,614    |       |
| Games placed on  trial at customer locations |       | 4,822    |       | 2,609    |       |
| Certificates of  deposits                    |       | 2,775    |       | 3,091    |       |
| Refundable  deposits                         |       | 1,358    |       | 3,021    |       |
| Other                                        |       | 1,081    |       | 765      |       |
| Total other  current assets                  |       | $        | 27,439     |     | $          | 28,955 |   |

 

Otherlong-term assets consist of the following as of June 30, 2005 and 2004 (In 000s):

| ** **                                                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Long-term  deposits                                                                       |       | $        | 8,289      |     | $          | 615 |   |
| Restricted cash                                                                           |       | 6,253    |       | 5,740    |       |
| Deferred debt  issuance costs (net of accumulated amortization of $2,332 and $1,017) |       | 5,067    |       | 5,893    |       |
| Total other  assets                                                                       |       | $        | 19,609     |     | $          | 12,248 |   |

 

Deferred costs of revenuerelate primarily to the cost of game and system sales which revenue is requiredto be deferred in accordance with SOP No. 97-2. Long-term depositsas of June 30, 2005 include a cash bond of $7.7 million related to a legaljudgment (see Note 19). Included in other assets as of June 30, 2005 and2004 is a 5.0 million Euro certificate of deposit required pursuant to the saleof Bally Wulff (see Note 5).

F-26

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**9.   DEFERRED REVENUE**

Deferred revenue relatesprimarily to revenue from games and system sales that is required to bedeferred in accordance with SOP No. 97-2. Deferred revenue totaled$31.3 million and $37.6 million, as of June 30, 2005 and 2004, respectively.The related deferred cost of such revenue isincluded in other current assets. (see Note 8).

**10.   ACCRUEDAND JACKPOT LIABILITIES**

Accruedliabilities and jackpot liabilities as of June 30, 2005 and 2004 consistof the following (in 000s):

| ** **                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Payroll and  related costs               |       | $        | 7,950      |     | $          | 11,874 |   |
| Interest                                 |       | 1,755    |       | 1,265    |       |
| Professional and  consulting fees        |       | 1,785    |       | 2,834    |       |
| Regulatory  approval cost accruals       |       | 944      |       | 652      |       |
| Royalties,  rebates, direct mail coupons |       | 4,693    |       | 6,867    |       |
| Customer deposits                        |       | 8,950    |       | 10,109   |       |
| Acquisition  related accruals            |       | 1,686    |       | 3,806    |       |
| Divestiture  related accruals            |       | 386      |       | 4,377    |       |
| Litigation  accruals (See Note 19)       |       | 7,360    |       | —   |       |
| Severance  accruals (See Note 16)        |       | 1,290    |       | —   |       |
| Other                                    |       | 6,440    |       | 6,631    |       |
| Subtotal                                 |       | 43,239   |       | 48,415   |       |
| Jackpots accrued  not yet awarded        |       | 13,025   |       | 12,075   |       |
| Total accrued  liabilities               |       | $        | 56,264     |     | $          | 60,490 |   |

 

The Company recognizes a liability for jackpot expensefor the cost to fund these jackpots in the future. Generally winners may electto receive a single lump sum payment or may opt to receive payments in equalinstallments over a specified period of time. The Company currently estimatesthat approximately 70% of winners will elect the single payment option.

The Company funds jackpotinstallment payments through qualifying U.S. government or agency securities.The present value of the outstanding progressive jackpot liabilities iscomputed based upon the payment stream discounted at the applicable discountrate.

**11.   LONG-TERM DEBT**

Long-termdebt at June 30, 2005 and 2004 consisted of the following (in 000s):

| ** **                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Term loan  facility                      |       | $        | 314,882    |     | $          | 350,000 |   |
| Revolving credit  facility               |       | —   |       | 70,000   |       |
| Related party  debt (see Note 12)        |       | 19,206   |       | 6,436    |       |
| Other, generally  unsecured              |       | 1,029    |       | 2,519    |       |
|                                     |       | 335,117  |       | 428,955  |       |
| Less current  maturities                 |       | 10,163   |       | 5,866    |       |
| Long-term debt,  less current maturities |       | $        | 324,954    |     | $          | 423,089 |   |

 

On September 5, 2003, the Company completed asenior bank debt refinancing transaction (the “Refinancing”) whereby theCompany entered into a new $275 million term loan facility and a $125 million 

F-27

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revolving credit facility.Proceeds from the financing were used to repay the existing bank term loanstotaling approximately $188 million, repay the Company’s 10% SeniorSubordinated Notes (“Subordinated Notes”), and to pay transaction fees andexpenses totaling $5.0 million which have been capitalized and are beingamortized over the remaining term of the loan. The term loan has a 1% per yearmandatory principal amortization after the first year, and a six-year maturity.The revolving credit facility commitment decreases ratably over its five-yearterm to a 60% balloon.

In December 2003, the Company increased the termloan by $75 million, to a total of $350 million outstanding. The proceeds wereused primarily to fund the acquisition of SDG. As a result, the Companyincurred an additional $1.6 million in debt issuance costs, which have beencapitalized and are amortized over the remaining term of the loan.

As a result of the Refinancing described above, theCompany recorded a pre-tax charge in fiscal year 2004 of $12.3 million, whichincluded a $5.0 million charge for the early extinguishment of the SubordinatedNotes, $7.0 million for the write off of deferred financing costs, and $0.3million in fees and expenses, which is classified as a loss on extinguishmentof debt in the accompanying statement of operations.

As a result of the sale of United Coin and Rail Cityapproximately 50% of the net proceeds (as defined in the loan agreement) wereused to reduce the term loan and revolver principal balances on a pro ratabasis. Accordingly, during fiscal year 2005, the Company used the sale proceedsto reduce the term loan by $31.6 million and used additional excess cash toreduce the balance of the revolver from $70 million to zero.

In December 2004, the Company sought and receivedconsents from a majority of the holders of its bank debt which allowed it tocomplete the buyout of the SDG earn out (including the issuance of a $28.0million note payable to former SDG shareowners), and to increase the maximumallowed leverage ratio to a maximum of 4.75 as of June 30, 2005, decliningto 4.50 as of September 30, 2005, 4.25 as of March 31, 2006, 4.00 asof September 30, 2006, 3.75 as of December 31, 2006 and 3.50 as of September 30,2004 through the term of the loan agreement. The Company agreed to increase theterm loan interest rate to LIBOR plus 3.00%, which can be adjusted to LIBORplus 3.00% based on certain criteria and to reduce the revolver commitment to$75 million. The fees incurred for the bank amendment totaled $1.0 million, andthe Company recorded a charge of $0.6 million to write off a portion of thepreviously capitalized fees, which is classified as a loss on extinguishment ofdebt. As of June 30, 2005, the Company had $314.9 million outstandingunder its term loan facility with an interest rate of 6.77%, and zerooutstanding under the revolving credit facility.

The bank facility is collateralized by substantiallyall domestic property and is guaranteed by each domestic subsidiary of theCompany, other than the entity that holds the Company’s interest in itsLouisiana and Mississippi operations, and is secured by a Pledge Agreement. Thebank facility contains a number of maintenance covenants and other significantcovenants that, among other things, restrict the ability of the Company and theability of certain of its subsidiaries to dispose of assets, incur additionalindebtedness and issue preferred stock, pay dividends or make otherdistributions, enter into certain acquisitions, repurchase equity interests orsubordinated indebtedness, issue or sell equity interests of the Company’ssubsidiaries, engage in mergers or acquisitions, or engage in certaintransactions with subsidiaries and affiliates, and that otherwise restrictcorporate activities. The Company was in compliance with these covenants as of June 30,2005.

The Company was also in compliance with its financialcovenants consisting of leverage ratio, fixed charges coverage ratio, andminimum EBITDA (as that term is defined in the Loan Agreement). The leverageratio is computed as total average debt outstanding during the quarter dividedby the trailing 12 months EBITDA excluding certain cash and non-cashcharges. The Company’s leverage ratio as of June 30, 2005 was 4.6 timesversus an amended covenant maximum of 4.75 times.

F-28

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As a result of the additional time required tocomplete the year end closing process, the Company failed to deliver the 2005audited financial statements and the September 30, 2005 interim unauditedinternal financial statements to the lenders in a timely manner, and thereforewas not in compliance with certain of its debt covenants. Pursuant to anagreement with the lenders, the default will be cured if the above referencedfinancial statements are delivered to the lenders by December 31, 2005. Immediatelyupon the filing of the Company’s Annual Report on Form 10-K, theCompany intends to deliver to the lenders its 2005 audited financial statementsand the unaudited interim financial statements for the September 2005quarter, which it believes will cure the default. During the default periodfrom November 8, 2005 to the delivery of the financial statements in December 2005,the Company incurred default interest of approximately $0.7 million.

Maturitiesof long-term debt, for each of the five fiscal years ending subsequent to June 30,2005, are as follows (in 000s):

| **Years ending June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                     |       | $          | 4,157      |       |
| 2007                                     |       | 3,872      |       |
| 2008                                     |       | 3,500      |       |
| 2009                                     |       | 3,500      |       |
| 2010                                     |       | 300,882    |       |
| Total                                    |       | $          | 315,911    |       |

 

**12.   RELATED PARTY TRANSACTIONS**

Asdiscussed in Note 4, the Company completed three acquisitions (MCC, MindPlayand SDG) in the fiscal year 2004. In each acquisition, a portion of theconsideration included subordinated debt owed to the former principals of eachbusiness. The former principals are now employees of the Company, and thereforesuch debt is considered owed to related parties. The interest rates on theoutstanding debt range from a variable rate of LIBOR plus 2% to a fixed rate of6%. See the tables below for outstanding debt and interest rates as of June 302005 and 2004, respectively and total interest expense for the years ended June 30,2005, 2004 and 2003, respectively.

| ** **                                         | ** **   | **As of June 30, 2005** | ** ** | **As of June 30, 2004** | ** ** |
|----------------------------------------------------|--------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** **   | **Interest  Rate**                          | ** ** | **Outstanding  Debt**                       | ** ** | **Interest  Rate** | ** ** | **Outstanding  Debt** | ** ** |
| ** **                                         | *** *** | **(in 000s)**                          | ** ** |
| SDG                                                |         |                                        | 4          | %                                           |       |   | $ | 14,000 | * * |   |   | — |   |   |   | $ | — | * * |   |
| MindPlay                                           |         |                                        | 6          | %                                           |       |   | 4,000 | * * |   |   | 6 | % |   |   | 4,000 | * * |   |
| MCC                                                |         |                                        | 6          | %                                           |       |   | 1,206 | * * |   |   | 4 | % |   |   | 2,436 | * * |   |
|                                               |         |                                        |       |                                        |       |   | 19,206 | * * |   |   |   |   |   |   | 6,436 | * * |   |
| Less current  maturities                           |         |                                        |       |                                        |       |   | 6,006 | * * |   |   |   |   |   |   | 1,218 | * * |   |
| Related party debt, less  current maturities  |         |                                        |       |                                        |       |   | $ | 13,200 | * * |   |   |   |   |   |   | $ | 5,218 | * * |   |
|                                                    |              |                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On June 28, 2005, the Company issuedapproximately 1.0 million shares of its common stock in connection with theconversion of $14.0 million of the subordinated debt and accrued interestthereon owed to the former principals of SDG.

F-29

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Theremaining note payable to the former SDG shareholders of $14.0 million ispayable in annual installments through 2009. At the Company’s discretion, thenote principal and accrued interest thereon can be paid in cash, or can beconverted into shares of the Company’s common stock using the average stockprice for the 20 business days prior to the delivery of such shares.

| ** ** | ** ** | **Total Interest Expense for the years ended** | ** ** |
|------------|------------|------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **June 30, 2005**                                                  | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
| ** ** | ** ** | **(in 000s)**                                                           | ** ** |
| SDG        |       |                                                                         | $          | 624 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| MindPlay   |       |                                                                         | 241        |   |   |   | 87 |   |   |   | — |   |   |
| MCC        |       |                                                                         | 95         |   |   |   | 35 |   |   |   | — |   |   |

 

Accrued interest totaled $0.3 million and $0.1 millionas of June 30, 2005 and 2004, respectively.

Maturitiesof related party debt, for each of the five fiscal years ending subsequent to June 30,2005, are as follows (in 000s):

| **Years ending June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                     |       | $          | 6,006      |       |
| 2007                                     |       | 2,800      |       |
| 2008                                     |       | 4,800      |       |
| 2009                                     |       | 2,800      |       |
| 2010                                     |       | 2,800      |       |
| Total                                    |       | $          | 19,206     |       |

 

Pursuant to an Advisory Agreement with KirklandInvestment Corporation (100% owned by Joel Kirschbaum who is a director ofAlliance, and therefore treated as a related-party) dated July 1, 2004,the Company agreed to pay Kirkland $600,000 annually for a period of 3.5 yearsfor advisory and related services.

The Company also leases awarehouse and office facility from an entity owned by Mr. Luciano. Rentalpayments for the fiscal years ended June 30, 2005 and 2004 totaled $412,000 and$103,000, respectively.

**13.**   STOCKHOLDERS’EQUITY, OPTIONS, WARRANTS AND RIGHTS

*Stock Option Plans*

In December 2001, the Company’s shareholdersapproved the 2001 Long-Term Incentive Plan, which has been amended severaltimes (the “2001 Plan”). The 2001 Plan provides for the issuance of up to10,000,000 shares (as amended in fiscal year 2005) of common stock to Companyemployees, directors and designated paid consultants and up to 600,000 sharesof restricted stock or restricted stock units (“RSUs”). Generally, options aregranted at the fair value of the Company’s common stock at the date of grantand are exercisable over five to ten years. The 2001 Plan also allows for theissuance of RSUs. A total of 377,030 RSUs were granted on June 30, 2004,and an additional 176,507 were issued during fiscal year 2005, as part of theemployment agreement of the Company’s Chief Executive Officer and 20,000 toanother Company officer.******The RSUsgranted were treated as deferred compensation, and accordingly deferredcompensation of $2.1 million and $6.5 million was recorded in the statement ofstockholders’ equity as of the grant dates for the years ended June 30,2005 and 2004, respectively. Amortization expense for the RSUs totaled $2.1million and zero for the fiscal years end June 30, 2005 and 2004,respectively and is included in selling, general and administration expense inthe accompanying statements of operations.

F-30

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Transactionsinvolving stock options and RSUs are summarized as follows:

| ** **                   | ** ** | **Options and RSUs Outstanding** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **Shares**                                      | ** ** | **   Weighted     Average  Exercise  Price** | ** ** |
| ** **                   | ** ** | **  (in millions)  **  | ** ** | ** ** | ** ** |
| Balance,  June 30, 2002 |       |                                            | 3.1        |   |   |   | $ | 5.93 |   |   |
| Granted                      |       |                                            | 1.1        |   |   |   | 16.32 |   |   |
| Exercised                    |       |                                            | (0.7       | ) |   |   | 3.70 |   |   |
| Canceled                     |       |                                            | (0.1       | ) |   |   | 11.40 |   |   |
| Balance,  June 30, 2003 |       |                                            | 3.4        |   |   |   | $ | 9.51 |   |   |
| Granted                      |       |                                            | 2.8        |   |   |   | 22.16 |   |   |
| RSUs granted                 |       |                                            | 0.4        |   |   |   | — |   |   |
| Exercised                    |       |                                            | (0.8       | ) |   |   | 8.74 |   |   |
| Canceled                     |       |                                            | (0.2       | ) |   |   | 18.00 |   |   |
| Balance,  June 30, 2004 |       |                                            | 5.6        |   |   |   | $ | 15.50 |   |   |
| Granted                      |       |                                            | 3.8        |   |   |   | 11.58 |   |   |
| RSUs granted                 |       |                                            | 0.2        |   |   |   | — |   |   |
| Exercised                    |       |                                            | (0.2       | ) |   |   | 5.53 |   |   |
| Canceled                     |       |                                            | (0.7       | ) |   |   | 17.34 |   |   |
| Balance,  June 30, 2005 |       |                                            | 8.7        |   |   |   | $ | 13.79 |   |   |

 

| ** **                        | ** ** | **Shares**             | ** ** | **Weighted  Average   Exercise  Price** |   |
|-----------------------------------|------------|------------------------|------------|----------------------------------------------|--------|
| ** **                        | ** ** | **(in millions)** | ** ** | ** **                                   |   |
| Options and RSUs  exercisable at: |       |                   |       |                                         |   |   |   |   |   |
| June 30, 2003                |       |                   | 2.0        |                                         |   |   | $ | 6.31 |   |   |
| June 30, 2004                |       |                   | 1.9        |                                         |   |   | $ | 8.31 |   |   |
| June 30,  2005               |       |                   | 5.2        |                                         |   |   | $ | 16.12 |   |   |
|                                   |            |                        |            |                                              |        |  |  |  |  |  |  |

 

At June 30,2005, the range of exercise prices for options outstanding was $0.53 to $33.17.The weighted average remaining contractual life, by range of exercise price,for options and RSUs outstanding and exercisable at June 30, 2005 is asfollows:

| ** ** | ** **                               | ** ** | ** ** | **Options Outstanding**                        | ** ** | **Options Exercisable**           | ** ** |
|------------|------------------------------------------|------------|------------|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** ** | **Range of Exercise   Prices** | ** ** | ** ** | **Weighted-Avg.  Remaining  Contractual Life** | ** ** | **Weighted-Avg.  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted-Avg.  Exercise Price** | ** ** | **Shares** | ** ** |
|       | $0.00 - $6.00                            |       |       | 4.8                                                 |       |                                   |       | $ | 1.61 |   |   |   | 0.8 |   |   |   | $ | 2.25 |   |   |   | 1.1 |   |   |
|       | $6.01 - $12.00                           |       |       | 9.4                                                 |       |                                   |       | 11.05 |   |   |   | 2.4 |   |   |   | 10.59 |   |   |   | 0.1 |   |   |
|       | $12.01 - $17.00                          |       |       | 8.3                                                 |       |                                   |       | 14.04 |   |   |   | 1.7 |   |   |   | 14.36 |   |   |   | 0.9 |   |   |
|       | $17.01 - $22.00                          |       |       | 8.2                                                 |       |                                   |       | 18.82 |   |   |   | 1.6 |   |   |   | 18.81 |   |   |   | 1.6 |   |   |
|       | $22.01 - $33.17                          |       |       | 6.5                                                 |       |                                   |       | 24.65 |   |   |   | 1.5 |   |   |   | 24.65 |   |   |   | 1.5 |   |   |
|       | All Options                              |       |       | 7.7                                                 |       |                                   |       | $ | 13.79 |   |   |   | 8.1 |   |   |   | $ | 16.12 |   |   |   | 5.2 |   |   |
|       | RSUs                                     |       |       | —                                              |       |                                   |       | — |   |   |   | 0.6 |   |   |   | — |   |   |   | — |   |   |
|       |                                     |       |       |                                                |       |                                   |       |   |   |   | 8.7 |   |   |   |   |   |   |   | 5.2 |   |   |
|            |                                          |            |            |                                                     |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-31

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On thedate of grant using the Black-Scholes option-pricing model, the followingassumptions were used to estimate the grant-date fair value of the options inthe periods indicated:

| ** **                                 | ** ** | **Fiscal Years ended June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-fee interest  rate (weighted average) |       | 3.5%                                                |       | 2.5% |   | 3.5% |   |
| Expected  volatility                       |       | 0.62                                                |       | 0.26 |   | 0.28 |   |
| Expected dividend  yield                   |       | 0%                                                  |       | 0% |   | 0% |   |
| Expected life                              |       | 6-7.5 years                                         |       | 3-10 years |   | 3-10 years |   |

 

The resulting fair valuesapplied to the options granted were $7.81, $8.86, and $6.19 per share for theyears ended June 30, 2005, 2004 and 2003, respectively.

*Warrants*

In February 2004, theCompany completed the acquisition of substantially all of the assets ofMindPlay. A portion of the consideration consisted of 100,000 stock purchasewarrants with a strike price of $24.69, and a term of 7 years. The warrantswere valued at $886,000, and were included as part of the purchase price.

*Share RepurchasePlan*

In January 1999, theCompany’s Board of Directors approved a share repurchase plan for up to 4.6million shares of its common stock. Under the plan, subject to price and marketconditions, purchases of shares can be made from time to time in the openmarket or in privately negotiated transactions using available cash. During thefiscal years ended June 30, 2005 and 2004, the Company repurchased 13,000shares and zero shares of common stock, respectively.

*Shares Reserved*

Thefollowing shares are reserved for options issued and available for issue underthe Company’s stock plans (in millions):

| Stock options and  restricted stock units issued and currently outstanding |   | 8.7  |   |
|----------------------------------------------------------------------------|--------|------|--------|
| Stock options  available for future issuance                               |   | 2.0  |   |
| Warrants                                                                   |   | 0.1  |   |
| Total                                                                      |   | 10.8 |   |

 

*Stockholder RightsPlan*

In February 1998, theCompany’s Board of Directors adopted a Stockholder Rights Plan (“Plan”). ThePlan is designed to preserve the long-term value of the shareholders’investment in the Company. Pursuant to the Plan, each shareholder received adistribution of one Right for each share of the Company’s outstanding commonstock 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 shareof a Series F Special Stock for $87.50. Initially the Rights arerepresented by the Company’s common stock certificates and are not exercisable.The Rights become exercisable only after a person or group acquires beneficialownership of 10% or more of the Company’s common stock (or 15% if the acquireris an institutional investor) or publicly announces its intention to commence atender offer that would result in that beneficial ownership level. Undercertain circumstances involving a buyer’s acquisition of 10% of the Company’scommon stock (or 15% in the case of an institutional investor), all Rightsholders except the buyer will be entitled to purchase common stock at halfprice. If the Company is acquired through a merger, after such an 

F-32

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acquisition,all Rights holders except the buyer will be entitled to purchase stock in thebuyer at half price. The Company may redeem the rights at $0.0035 at any timebefore a buyer acquires 10% (or 15% in the case of an institutional investor)of the Company’s common stock.

*Special Stock*

The Company’s Articles of Incorporation authorize theissuance 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: theInitial Series, the Series B, the Series E and the Series F. SpecialStock consists of non-voting stock where no holder of the Special Stock shallbe entitled to vote at any meeting of stockholders or otherwise, except as maybe specifically provided by law or as approved by the Board of Directors incertain limited circumstances at the time of the stock issuance. The SpecialStock may be issued from time to time in one or more series, each series havingsuch designations, preferences and relative, participating, optional or otherspecial rights, qualifications, limitations or restrictions as shall be statedand expressed in the resolution providing for the issuance of Special Stock orany series thereof adopted by the Board of Directors.

In June 1996, theCompany issued shares of Series E Special Stock to certain holders of theCompany’s 71⁄2% Convertible Subordinated Debentures (which were retired in 1996)who elected to receive such stock in lieu of receiving common stock. Theholders of shares of Series E Special Stock have no voting rights exceptas required by law. A total of 115 shares of Series E Special Stock remainoutstanding.

**14.   INCOME TAXES**

Thecomponents of the Company’s income tax expense (benefit) from continuingoperations for the years ended June 30, 2005, 2004 and 2003 are as follows(in 000s):

| ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current tax  expense (benefit):             |       |     |       |     |       |     |       |
| Federal                                     |       | $        | 611        |     | $          | (192     | )          | $ | (418 | ) |
| Foreign                                     |       | 999      |       | 683      |       | 1,644    |       |
| State                                       |       | (727     | )          | 1,303    |       | 982      |       |
|                                        |       | 883      |       | 1,794    |       | 2,208    |       |
| Deferred tax  expense (benefit):            |       |     |       |     |       |     |       |
| Federal                                     |       | (7,270   | )          | 16,319   |       | 13,924   |       |
| Foreign                                     |       | 229      |       | —   |       | 17       |       |
| State                                       |       | (352     | )          | 3,400    |       | 367      |       |
|                                        |       | (7,393   | )          | 19,719   |       | 14,308   |       |
| Total provision  for (benefit) income taxes |       | $        | (6,510     | )        | $          | 21,513   |       | $ | 16,516 |   |

 

F-33

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Areconciliation of the Company’s income tax provision as compared to the taxprovision for continuing operations calculated by applying the statutoryfederal tax rate (35%) to the income (loss) from continuing operations before incometaxes for the years ended June 30, 2005, 2004 and 2003 are as follows (in000s):

| ** **                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed expected  income tax (benefit) expense at 35%   |       | $        | (7,904     | )        | $          | 22,249   |       | $ | 16,323 |   |
| Partnership  income attributable to minority interest    |       | (1,486   | )          | (808     | )          | (703     | )          |
| Foreign earnings  subject to US tax                      |       | 572      |       | 463      |       | 258      |       |
| Change in  valuation allowance                           |       | 2,149    |       | (1,809   | )          | (943     | )          |
| Net increase in  accrual for potential tax contingencies |       | 3,049    |       | 564      |       | 540      |       |
| State income  taxes, net of federal benefit              |       | (162     | )          | 2,991    |       | 1,007    |       |
| Tax credits                                              |       | (3,018   | )          | (3,120   | )          | —   |       |
| Other, net                                               |       | 290      |       | 983      |       | 34       |       |
|                                                     |       | $        | (6,510     | )        | $          | 21,513   |       | $ | 16,516 |   |

 

Themajor components of the deferred tax assets and liabilities as of June 30,2005 and 2004 are as follows (in 000s):

| ** **                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                              |       |     |       |     |       |
| Net operating loss carryforwards                   |       | $        | 23,980     |     | $          | 19,481 |   |
| Capital loss carryforwards                         |       | 9,025    |       | 8,155    |       |
| Foreign tax credit carryforwards                   |       | 231      |       | —   |       |
| Other tax credits                                  |       | 11,811   |       | 8,457    |       |
| Deferred revenue, net of cost of goods sold        |       | 6,903    |       | 7,725    |       |
| Inventory obsolescence reserves                    |       | 4,050    |       | 2,023    |       |
| Deferred compensation for tax purposes             |       | 4,780    |       | 1,268    |       |
| Financing lease assets                             |       | 1,827    |       | 708      |       |
| Bad debt reserves                                  |       | 4,227    |       | 2,621    |       |
| Accruals not currently deductible for tax purposes |       | 13,471   |       | 12,913   |       |
| Other                                              |       | 2,231    |       | 2,834    |       |
| Total gross  deferred tax assets                   |       | 82,536   |       | 66,185   |       |
| Less: Valuation  allowance                         |       | (11,174  | )          | (8,343   | )          |
| Deferred tax  assets                               |       | $        | 71,362     |     | $          | 57,842 |   |
| Deferred tax liabilities:                          |       |     |       |     |       |
| Property and equipment                             |       | $        | 6,600      |     | $          | 12,725 |   |
| Intangible assets                                  |       | 10,811   |       | 6,638    |       |
| Deferred lease revenue                             |       | 5,130    |       | 3,237    |       |
| Other                                              |       | 3,007    |       | 1,620    |       |
| Total gross  deferred tax liabilities              |       | 25,548   |       | 24,220   |       |
| Net deferred tax assets                            |       | $        | 45,814     |     | $          | 33,622 |   |

 

The Company has not provided income taxes onapproximately $3.0 million of undistributed earnings from certain foreignsubsidiaries. The Company plans to invest the earnings in the foreignsubsidiaries and therefore has not recorded a deferred tax liability associatedwith the undistributed earnings.

In connection with the acquisition of SDG in fiscalyear 2004, the Company recorded net deferred tax assets of $16.7 million and acorresponding decrease to goodwill (see Note 4).

F-34

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At June 30, 2005, theCompany had net operating loss carryforwards for U.S. federal income taxpurposes of approximately $61.2 million subject to limitations underSection 382 of the Internal Revenue Code (“Section 382”).Section 382 limits the amount of losses available per year for use againstfuture taxable income. Based on the Company’s projections of taxable income,the Company expects to utilize 100% of its net operating loss carryforwards.The Company’s net operating loss carryforwards will begin to expire in 2022. AtJune 30, 2005, the Company had $0.2 million in foreign tax creditcarryforwards, alternative minimum tax (“AMT”) credit carryforwards ofapproximately $3.9 million, and a research and development tax credit carryforward of approximately $7.7 million. Foreign tax credits have a 100%valuation allowance as the Company does not expect to be able to utilize thesecredits before their expiration. AMT credits are available to be carriedforward indefinitely and may be utilized against regular U.S. corporate tax tothe extent it does not exceed computed AMT calculations. Research anddevelopmental credits have a carry forward period of 20 years. The Companyexpects to utilize all of its AMT and research and development tax credits.

**15.**   SUPPLEMENTALCASH FLOW INFORMATION

Thefollowing supplemental information is related to the consolidated statements ofcash flows (in 000s).

| ** **                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash paid for  interest                                                                              |       | $        | 17,509     |     | $          | 23,967   |       | $ | 25,449 |   |
| Cash paid for  income taxes                                                                          |       | 1,901    |       | 4,954    |       | 2,751    |       |
| Non-cash investing and  financing transactions:                                                      |       |     |       |     |       |     |       |
| Reclassify  property, plant and equipment to inventory                                               |       | 9,923    |       | 7,732    |       | 3,765    |       |
| Notes payable issued in acquisitions                                                                 |       | 28,000   |       | 4,000    |       | 8,073    |       |
| Value of  restricted stock issued in partial satisfaction of subordinated debt and  accrued interest |       | 14,312   |       | —   |       | —   |       |
| Value of  restricted stock issued in SDG acquisition                                                 |       | —   |       | 11,949   |       | —   |       |
| Value of  restricted stock issued to employees                                                       |       | 2,126    |       | 6,500    |       | —   |       |
| Value of warrants  issued in MindPlay acquisition                                                    |       | —   |       | 886      |       | —   |       |
| Consolidation of  variable interest entities                                                         |       | 6,044    |       | —   |       | —   |       |
| Deferred taxes/goodwill  adjustments related to SDG acquisition                                      |       | 6,124    |       | —   |       | —   |       |
|                                                                                                      |            |          |            |          |            |          |            |  |  |  |

 

**16.   SEVERANCE CHARGES**

Duringfiscal year 2005, the Company undertook an extensive review of its operationsand reduced its workforce during the September 2004 quarter and the March 2005quarter. As a result of these reductions in workforce, the Company incurredcharges totaling $3.7 million for the year ended June 30, 2005,respectively, which is primarily related to the Gaming and Systems segment. Thebalance of the accrued liability for unpaid severance costs is as follows:

| Beginning balance  at June 30, 2004 |   | $     | — |   |
|------------------------------------------|--------|-------|--------|--------|
| Additions to the  accrual                |   | 3,654 |   |
| Amounts paid                             |   | 2,364 |   |
| Ending balance at  June 30, 2005    |   | $     | 1,290  |   |

 

The workforce reductioncompleted in the March 2005 quarter included a change in the Company’sEuropean distribution operations. The Company has accrued a tax liability of$1.4 million (included in tax expense in the accompanying consolidatedstatement of operations) for the estimated tax obligation resulting from thisrestructuring.

F-35

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**17.   IMPAIRMENT CHARGES**

The Company entered into an agreement during fiscalyear 2004 to provide a development loan to a Native American tribe to furthertheir pursuit of developing a gaming facility. The amounts advanced under theterms of the loan totaled $1.5 million, and the Company was not obligated forany additional advances. During the quarter ended March 31, 2005, thetribe received an adverse court ruling which the Company believes materiallyimpairs the tribe’s ability to repay the loan. Therefore the Company recordedan impairment charge for the full amount of the loan.

During the quarter ended March 31, 2005, theCompany performed a review of its intellectual property rights for variousvideo games used on certain legacy platforms. This review was triggered by thedeclining sales of these legacy games during fiscal 2005. The Company evaluatedthe carrying value of certain intellectual property assets and determined thatseveral were no longer recoverable and were therefore deemed to be impaired. Theimpairment charge totaled $1.3 million.

During the quarter ended March 31,2005, the Company evaluated the useful lives and salvage values for its leasedgaming equipment. Based on recent historical data indicating a shortening ofthe average length such games were deployed, the Company reduced thedepreciable life for certain video products to 2 years. The change in theuseful life resulted in an impairment charge of $0.8 million to write-off theundepreciated portion of the game values (down to salvage value) for games atthe end of their 2-year life.

**18.   INVENTORY IMPAIRMENT CHARGES**

**The decision to move to the new video platform, thetargeting of used equipment for non-domestic markets, and the previouslydisclosed consolidation of certain warehouses all led to accelerated disposalsof legacy products. This process required updating of estimates for the netrealizable value of inventories due to the subjectivity involved in projectingsales volumes, used game sales values, refurbishment costs, and customer demandin non-domestic jurisdictions. As a result of its ongoing analysis of inventoryvaluations, the Company recognized inventory write downs totaling $26.4 millionduring the year ended June 30, 2005, which are included in cost of gamingequipment and systems in the accompanying consolidated statements ofoperations.**

**19.   COMMITMENTS AND CONTINGENCIES**

The Company is obligated under several agreements topay certain royalties ranging from approximately $100 to $2,300 per applicablegame depending on the components in the gaming machines. Total royalty expensefor the Company for the years ended June 30, 2005, 2004 and 2003 was $16.7million, $9.4 million and $4.2 million, respectively, and is includedin the cost of Gaming Equipment and Systems in the accompanying consolidatedstatements of operations. In addition, the Company has obtained the rights tocertain game themes and intellectual property that call for payment ofroyalties based on either fixed amounts or variable amounts based on gameperformance. The Company also pays $0.5 million annually for the use of theBally trademark.

TheCompany leases certain office space, equipment, warehouse and repair facilitiesand other property locations under non-cancelable operating leases which aregenerally included in the selling, general and administrative expense. Operatingrental expense for years ended June 30, 2005, 2004 and 2003 was as follows(in 000s):

| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Continuing Operations:            |       |     |       |     |       |     |       |
| Equipment and office space leases |       | $        | 6,257      |     | $          | 4,953    |       | $ | 4,047 |   |
| Sublease rental income            |       | —   |       | —   |       | (332     | )          |
| ** **                        |       | $        | 6,257      |     | $          | 4,953    |       | $ | 3,715 |   |

 

F-36

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| ** **                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Discontinued Operations:          |       |     |       |     |       |
| Contingent route location leases  |       | $        | 147,062    |     | $          | 132,062 |   |
| Fixed route location leases       |       | 17,326   |       | 18,786   |       |
| Equipment and office space leases |       | 1,170    |       | 2,852    |       |
|                              |       | 165,558  |       | 153,700  |       |
| Sublease rental income            |       | —   |       | (1,812   | )          |
| ** **                        |       | $        | 165,558    |     | $          | 151,888 |   |

 

During fiscal years 2004 and 2003, the Company hadlocations where the Company operated gaming devices (“Route Location Leases”),which were included in the cost of route operations. Such leases provided forsharing of the net gaming win between the Company and the location owner andwere cancelable at any time by either party. Such leases were part of the netassets sold as part of the disposition of the Company’s Nevada and Louisianaroute operations.

Thecontractual lease commitments for each of the five fiscal years subsequent to June 30,2005 are as flows (in 000s):

| **Fiscal year ending June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                                |       | $          | 2,641      |       |
| 2007                                                |       | 2,278      |       |
| 2008                                                |       | 1,512      |       |
| 2009                                                |       | 1,114      |       |
| 2010                                                |       | 407        |       |
| Total                                               |       | $          | 7,952      |       |

 

Liabilities for loss contingencies arising fromclaims, assessments, litigation, fines and penalties, or other sources arerecorded when it is probable that a liability has been incurred and the amountof the liability can be reasonably estimated.

On September 25, 1995, Bally Gaming International, Inc.,a wholly-owned subsidiary of the Company, was named as a defendant in a classaction lawsuit filed in the United States District Court for the District ofNevada. The plaintiffs filed suit against BGII and approximately 45 otherdefendants. Each defendant is involved in the gaming business as a gamingmachine manufacturer, distributor or casino operator. The class action lawsuitarises out of alleged fraudulent marketing and operation of casino video poker machinesand electronic slot machines. The plaintiffs allege that the defendants haveengaged in a course of fraudulent and misleading conduct intended to inducepeople into playing their gaming machines based on a false belief concerninghow those machines actually operate as well as the extent to which there isactually an opportunity to win on any given play. The plaintiffs allege thatthe defendants’ actions constitute violations of the Racketeer Influenced andCorrupt Organizations Act (RICO) and give rise to claims of common law fraudand unjust enrichment. The plaintiffs are seeking monetary damages in excess of$1.0 billion. In July 2002 the federal district court denied theplaintiffs’ request for class action certification. In August 2004, theUnited States Court of Appeals for the Ninth Circuit affirmed the districtcourt’s denial of class action certification, and the plaintiffs did notappeal. Subsequently, two of the four named plaintiffs elected to continuetheir cases as individual, non-class actions. However, in September 2005,the court granted defendants’ motions for summary judgment, resolving allclaims in defendants’ favor without a trial. In October 2005, theplaintiffs appealed the District Court’s granting of summary judgment in favor ofthe defendants to the Ninth Circuit. Management believes the plaintiffs’lawsuit to be without merit. The Company will continue to pursue all availablelegal defenses.

F-37

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In June 2004, putative class actions were filedagainst Alliance Gaming Corporation and its officers, Robert Miodunski, RobertSaxton, Mark Lerner, and Steven Des Champs, in the United States District Courtfor the District of Nevada. The nearly identical complaints alleged violationsof the Exchange Act stemming from revised earnings guidance, declines in thestock price, and sales of stock by insiders, and sought damages in unspecifiedamounts. The federal district court granted the plaintiffs’ unopposed motionsto consolidate the cases and to appoint a lead counsel and a lead plaintiff, andthe plaintiffs filed a consolidated complaint. Alliance and the otherdefendants have moved for summary judgment, and the motion is being briefed.Alliance believes the lawsuits are without merit and intends to vigorouslydefend itself and its officers. In addition, in July 2004 two derivativelawsuits were filed in Nevada state court against the members of the Board ofDirectors and the officers listed above. The Company is named as a nominaldefendant in the derivative lawsuits as the claims are purportedly asserted forthe benefit of Alliance. These lawsuits assert claims for breach of fiduciaryduty and waste of corporate assets arising out of the same events as thosegiving rise to the class actions described above and seek injunctive relief anddamages in unspecified amounts. These two cases were consolidated, and Allianceand the other defendants moved to dismiss the case. In February 2005, thestate district court granted the defendants’ motion and dismissed the case, andthe plaintiffs have appealed the case the Nevada Supreme Court, where thematter is pending. Management believes the plaintiffs’ lawsuit to be withoutmerit. The Company will continue to pursue all available legal defenses.

In August 2004, Shuffle Master, Inc. suedthe Company in the United States District Court for the District of Nevada,alleging infringement of various patents in connection with the Company’sMindPlay product line and seeking injunctive relief and damages in unspecifiedamounts. In June 2005, it was announced that IGT had acquired an interestin the patents at issue in the case, and thereafter IGT joined the case as aplaintiff. The Company is vigorously defending against the lawsuit, which is inthe discovery phase. Management believes the plaintiffs’ lawsuit to be withoutmerit. The Company will continue to pursue all available legal defenses.

In September 2004, a federal district court juryin the District of Nevada entered a $7.4 million verdict against the Company ina suit filed by Action Gaming, Inc., and IGT. The suit alleged that themulti-hand video poker game deployed by the Company’s former subsidiary, UnitedCoin, infringed the plaintiffs’ patents. The district court ruled on summaryjudgment that the game does not infringe the patents. However, the court leftto the jury the question whether the use of “autohold,” a specific, optionalfeature of the game, caused it to infringe under the “doctrine of equivalents,”a doctrine of patent law. After a two-week trial, the jury determinedthat the game with the autohold option enabled did infringe under the doctrineof equivalents and awarded damages accordingly. The feature has been disabledon all affected games in the field, and the decision permits continueddeployment of the game as long as the autohold feature is not included. TheCompany is pursuing various remedies and has posted a cash bond totaling $7.6million to stay payment of the judgment and accrued interest pending appeal.The cash bond is included in other non-current assets and the accrued liabilityis included in accrued liabilities in the accompanying balance sheet. Thisamount has been accrued and the expense for this charge is included indiscontinued operations in the accompanying statement of operations in fiscalyear 2005.

On December 7, 2004, IGT filed a patentinfringement lawsuit against Alliance Gaming Corporation in the United StatesDistrict Court for the District of Nevada. The complaint asserts that Alliance’swheel-based games, such as Monte Carlo and Cash For Life, and its iViewproducts infringe patents held by IGT, and seeks injunctive relief and damagesin unspecified amounts. Alliance believes IGT’s claims are without merit and isvigorously defending itself against the lawsuit. As part of its defense,Alliance has asserted counterclaims against IGT, including claims that IGT’spatents are invalid as well as several claims that IGT has engaged inanti-competitive conduct in violation of state and federal antitrust laws. Byits counterclaims, Alliance is seeking damages and other relief from IGT. Thelitigation is in the discovery phase and no trial date has been set.

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In February 2005, the SEC initiated an informalinquiry and requested documents and information regarding matters related tothe allegations in the class actions and similar matters. In August 2005,the SEC notified the Company that its investigation had entered a formal phase,and has requested additional information from the Company covering the samegeneral areas that were addressed in the informal inquiry. Management iscooperating fully with the SEC in this matter.

The Company is also a party to various lawsuitsrelating to routine matters incidental to its business. Management does notbelieve that the outcome of such litigation, including the matters above, inthe aggregate, will have a material adverse effect on the Company.

At June 30, 2005, theCompany had no significant material purchase commitments for capitalexpenditures.

*Federal, State andLocal Taxes*

The Company is subject to sales, use, income and othertax audits and administrative proceedings in various federal, state, and localjurisdictions. While the Company believes it has properly recorded its taxliabilities and expenses in each jurisdiction, there is no assurance thattaxing authorities will not propose adjustments that will increase the Company’stax liabilities and expense.

In addition, a degree ofjudgment is required in determining the Company’s effective tax rate and in theevaluation of certain tax positions taken by the Company. The Companyestablishes reserves when, despite support for the Company’s filing position, abelief exists that these positions may be challenged by the respective taxjurisdiction. The reserves are adjusted upon the occurrence of external,identifiable events. A change in the Company’s tax reserves could have asignificant impact on its effective tax rate and operating results.

**20.**   SEGMENTAND GEOGRAPHICAL INFORMATION

The Company currently operates in two businesssegments: (i) Bally Gaming and Systems which designs, manufactures anddistributes gaming machines and computerized monitoring systems for gamingmachines, and (ii) Casino Operations which owns and operates one regionalcasino. The accounting policies of these segments are consistent with Company’spolicies for the consolidated financial statements.

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Thetable below presents information as to the Company’s revenues, operating income(loss), identifiable assets, capital expenditures and depreciation andamortization by segment (in 000s):

| ** **                          | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                           |       |                                   |       |   |   |   |   |
| Gaming Equipment and  Systems       |       | $                                      | 431,993    |   | $ | 428,128 |   | $ | 312,267 |   |
| Casino Operations                   |       | 52,037                                 |       | 52,280 |   | 50,945 |   |
| Total revenues                      |       | $                                      | 484,030    |   | $ | 480,408 |   | $ | 363,212 |   |
| Inter-segment revenues:             |       |                                   |       |   |   |   |   |
| Gaming Equipment and  Systems       |       | $                                      | 518        |   | $ | 578 |   | $ | 1,164 |   |
| Casino Operations                   |       | —                                 |       | — |   | — |   |
| Total inter-segment  revenues       |       | $                                      | 518        |   | $ | 578 |   | $ | 1,164 |   |
| Gross Profit:                       |       |                                   |       |   |   |   |   |
| Gaming Equipment and  Systems       |       | $                                      | 188,263    |   | $ | 235,338 |   | $ | 167,542 |   |
| Casino Operations                   |       | 33,310                                 |       | 32,237 |   | 29,737 |   |
| Total gross profit                  |       | $                                      | 221,573    |   | $ | 267,575 |   | $ | 197,279 |   |
| Operating income (loss):            |       |                                   |       |   |   |   |   |
| Gaming Equipment and  Systems       |       | $                                      | (3,947     | ) | $ | 89,449 |   | $ | 69,571 |   |
| Casino Operations                   |       | 16,775                                 |       | 16,942 |   | 15,306 |   |
| Corporate/other                     |       | (18,550                                | )          | (14,254 | ) | (13,213 | ) |
| Total operating (loss)  income      |       | $                                      | (5,722     | ) | $ | 92,137 |   | $ | 71,664 |   |
| Identifiable assets:                |       |                                   |       |   |   |   |   |
| Gaming Equipment and  Systems       |       | $                                      | 545,164    |   | $ | 540,398 |   | $ | 320,487 |   |
| Casino Operations                   |       | 43,094                                 |       | 41,790 |   | 43,399 |   |
| Corporate/other                     |       | 59,836                                 |       | 181,801 |   | 60,304 |   |
| Total identifiable  assets          |       | $                                      | 648,094    |   | $ | 763,989 |   | $ | 424,190 |   |
| Goodwill:                           |       |                                   |       |   |   |   |   |
| Gaming Equipment and  Systems       |       | $                                      | 161,444    |   | $ | 127,672 |   | $ | 63,040 |   |
| Casino Operations                   |       | —                                 |       | — |   | — |   |
| Corporate/other                     |       | —                                 |       | — |   | — |   |
| Total goodwill                      |       | $                                      | 161,444    |   | $ | 127,672 |   | $ | 63,040 |   |
| Capital expenditures:               |       |                                   |       |   |   |   |   |
| Gaming Equipment and  Systems       |       | $                                      | 6,942      |   | $ | 8,396 |   | $ | 3,589 |   |
| Casino Operations                   |       | 4,325                                  |       | 2,716 |   | 6,068 |   |
| Corporate/other                     |       | 1,163                                  |       | 728 |   | 102 |   |
| Total capital  expenditures         |       | $                                      | 12,430     |   | $ | 11,840 |   | $ | 9,759 |   |
| Depreciation and amortization:      |       |                                   |       |   |   |   |   |
| Gaming Equipment and  Systems       |       | $                                      | 15,932     |   | $ | 10,099 |   | $ | 6,491 |   |
| Casino Operations                   |       | 3,296                                  |       | 2,780 |   | 2,174 |   |
| Corporate/other                     |       | 1,342                                  |       | 1,525 |   | 2,285 |   |
| Total depreciation and amortization |       | $                                      | 20,570     |   | $ | 14,404 |   | $ | 10,950 |   |

 

The Company has operations based primarily in theUnited States with a significant sales and distribution office based in Europe.

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Thetable below presents information as to the Company’s revenues, operating income(loss), identifiable assets capital expenditures and depreciation andamortization by geographic region determined based upon the location of thecustomer (in 000s):

| ** **                          | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                           |       |                                   |       |   |   |   |   |
| United States                       |       | $                                      | 456,947    |   | $ | 448,817 |   | $ | 319,647 |   |
| Europe                              |       | 13,212                                 |       | 24,817 |   | 32,617 |   |
| Other foreign                       |       | 13,871                                 |       | 6,774 |   | 10,948 |   |
| Total revenues                      |       | $                                      | 484,030    |   | $ | 480,408 |   | $ | 363,212 |   |
| Gross Margin:                       |       |                                   |       |   |   |   |   |
| United States                       |       | $                                      | 212,958    |   | $ | 254,654 |   | $ | 183,729 |   |
| Europe                              |       | 4,147                                  |       | 10,976 |   | 10,425 |   |
| Other foreign                       |       | 4,468                                  |       | 1,945 |   | 3,125 |   |
| Total gross margin                  |       | $                                      | 221,573    |   | $ | 267,575 |   | $ | 197,279 |   |
| Operating income (loss):            |       |                                   |       |   |   |   |   |
| United States                       |       | $                                      | (1,170     | ) | $ | 90,768 |   | $ | 66,065 |   |
| Europe                              |       | (6,965                                 | )          | 1,687 |   | 4,816 |   |
| Other foreign                       |       | 2,413                                  |       | (318 | ) | 783 |   |
| Total operating income  (loss)      |       | $                                      | (5,722     | ) | $ | 92,137 |   | $ | 71,664 |   |
| Identifiable assets:                |       |                                   |       |   |   |   |   |
| United States                       |       | $                                      | 597,613    |   | $ | 708,723 |   | $ | 371,226 |   |
| Europe                              |       | 33,336                                 |       | 43,661 |   | 41,798 |   |
| Other foreign                       |       | 17,145                                 |       | 11,605 |   | 11,166 |   |
| Total identifiable  assets          |       | $                                      | 648,094    |   | $ | 763,989 |   | $ | 424,190 |   |
| Goodwill:                           |       |                                   |       |   |   |   |   |
| United States                       |       | $                                      | 143,491    |   | $ | 109,498 |   | $ | 47,393 |   |
| Europe                              |       | 17,953                                 |       | 18,174 |   | 15,647 |   |
| Other Foreign                       |       | —                                 |       | — |   | — |   |
| Total goodwill                      |       | $                                      | 161,444    |   | $ | 127,672 |   | $ | 63,040 |   |
| Capital expenditures:               |       |                                   |       |   |   |   |   |
| United States                       |       | $                                      | 11,283     |   | $ | 11,145 |   | 9,664 |   |
| Europe                              |       | 1,140                                  |       | 684 |   | 90 |   |
| Other foreign                       |       | 7                                      |       | 11 |   | 5 |   |
| Total capital  expenditures         |       | $                                      | 12,430     |   | $ | 11,840 |   | $ | 9,759 |   |
| Depreciation and amortization:      |       |                                   |       |   |   |   |   |
| United States                       |       | $                                      | 19,217     |   | $ | 13,574 |   | $ | 10,604 |   |
| Europe                              |       | 737                                    |       | 636 |   | 339 |   |
| Other Foreign                       |       | 616                                    |       | 194 |   | 7 |   |
| Total depreciation and amortization |       | $                                      | 20,570     |   | $ | 14,404 |   | $ | 10,950 |   |

 

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**21.  **401(k) PLAN

The Company is the sponsor of the Alliance GamingCorporation 401(k) Savings Plan (the “401(k) Plan”). The401(k) Plan was adopted for domestic employees of Alliance Gaming and allits domestic subsidiaries. Employees may enroll in the plan after meetingcertain age and length of employment criteria, and plan participants may deferup to 25% of their compensation, up to certain IRS imposed limitations,currently $14,000.

The Company matches 50% of any participants’contributions, up to the first 6% of their compensation (as the term“compensation” is defined in the 401(k) plan document). Company matchingcontributions totaled approximately $1.5 million, $0.8 million and $1.0 millionfor the fiscal years ended June 30, 2005, 2004 and 2003, respectively.

For participants hiredthrough December 31, 2000, employee and employer matching contributionswere 100% vested immediately. For employees hired on or after January 1,2001, vesting of the employer match is on a 20%, 5-year vesting schedule.Employer profit sharing contributions are 100% after the completion of 3 yearsof service.

**22.**   SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables set forth unaudited quarterlyfinancial information for the years ended June 30, 2005 and 2004.

Asdiscussed in Note 2, the unaudited quarterly information for the first threequarters of the year ended June 30, 2005 and the four quarters of the yearended June 30, 2004 have been restated. A comparison of previouslyreported and restated unaudited quarterly financial information is presentedwithin the tables below:

| ** **                                                                          | ** ** | **Fiscal Year 2005 Quarterly Results** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **September 30**                                      | ** ** | **December 31** | ** ** | **March 31** | ** ** | ** ** | ** ** |
| ** **                                                                          | ** ** | **As  Previously  Reported**                               | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** | **June 30** | ** ** |
| Statement of Operations  Data:                                                      |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                            |       |                                                       | $          | 116,913 |   |   | $ | 110,801 |   |   | $ | 113,702 |   |   | $ | 125,550 |   |   | $ | 125,412 |   |   | $ | 127,001 |   | $ | 120,678 |   |
| Cost of gaming  equipment, systems and  casino operations                      |       |                                                       | 55,638     |   |   | 57,134 |   |   | 57,926 |   |   | 71,312 |   |   | 62,310 |   |   | 70,532 |   | 63,479 |   |
| Selling, general  and administrative                                                |       |                                                       | 45,090     |   |   | 45,105 |   |   | 41,051 |   |   | 40,951 |   |   | 38,729 |   |   | 38,738 |   | 34,966 |   |
| Income (loss) from  continuing operations before income taxes and minority interest |       |                                                       | (9,757     | ) |   | (10,799 | ) |   | (11,274 | ) |   | (5,702 | ) |   | (7,022 | ) |   | (6,410 | ) | 329 |   |
| Income tax  (benefit) expense                                                       |       |                                                       | (3,851     | ) |   | (4,054 | ) |   | (4,879 | ) |   | (3,090 | ) |   | (1,480 | ) |   | 958 |   | (324 | ) |
| Loss from  continuing operations                                               |       |                                                       | (6,405     | ) |   | (7,244 | ) |   | (7,540 | ) |   | (3,757 | ) |   | (6,449 | ) |   | (8,275 | ) | (1,042 | ) |
| Income (loss) from  discontinued operations                                    |       |                                                       | (4,391     | ) |   | (4,391 | ) |   | 15 |   |   | 15 |   |   | (395 | ) |   | (395 | ) | 117 |   |
| Net loss                                                                            |       |                                                       | (10,796    | ) |   | (11,635 | ) |   | (7,525 | ) |   | (3,742 | ) |   | (6,844 | ) |   | (8,670 | ) | (925 | ) |
| Basic loss per  share from continuing operations                                    |       |                                                       | $          | (0.13 | ) |   | $ | (0.14 | ) |   | $ | (0.15 | ) |   | $ | (0.07 | ) |   | $ | (0.13 | ) |   | $ | (0.16 | ) | $ | (0.02 | ) |
| Diluted loss per share  from continuing operations                                  |       |                                                       | $          | (0.13 | ) |   | $ | (0.14 | ) |   | $ | (0.15 | ) |   | $ | (0.07 | ) |   | $ | (0.13 | ) |   | $ | (0.16 | ) | $ | (0.02 | ) |

 

F-42

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| ** **                                                                   | ** ** | **Fiscal Year 2004 Quarterly Results** | ** ** |                 |
|------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------|
| ** **                                                                   | ** ** | **September 30**                                      | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |   |
| ** **                                                                   | ** ** | **As  Previously  Reported**                               | ** ** | **As  Restated**     | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** |   |
| Statement of Operations  Data:                                               |       |                                                       |       |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                     |       |                                                       | $          | 101,223              |   |   |   | $ | 96,339 |   |   |   | $ | 108,631 |   |   | $ | 120,399 |   |   | $ | 116,239 |   |   | $ | 111,762 |   |   | $ | 162,783 |   |   | $ | 151,908 |   |
| Cost of gaming equipment,  systems and casino operations                |       |                                                       | 38,240     |                 |   |   | 39,307 |   |   |   | 43,664 |   |   | 52,903 |   |   | 46,702 |   |   | 49,707 |   |   | 69,023 |   |   | 70,916 |   |
| Selling, general and  administrative                                         |       |                                                       | 29,065     |                 |   |   | 29,065 |   |   |   | 21,548 |   |   | 21,757 |   |   | 30,198 |   |   | 30,234 |   |   | 43,534 |   |   | 43,363 |   |
| Income from continuing  operations before income taxes and minority interest |       |                                                       | 3,600      |                 |   |   | 798 |   |   |   | 23,203 |   |   | 29,000 |   |   | 19,197 |   |   | 15,830 |   |   | 24,227 |   |   | 17,941 |   |
| Income tax expense                                                           |       |                                                       | 1,266      |                 |   |   | 285 |   |   |   | 8,444 |   |   | 10,473 |   |   | 6,234 |   |   | 5,054 |   |   | 8,349 |   |   | 5,701 |   |
| Income from continuing  operations                                           |       |                                                       | 1,848      |                 |   |   | 27 |   |   |   | 14,218 |   |   | 17,986 |   |   | 12,241 |   |   | 10,054 |   |   | 15,319 |   |   | 11,680 |   |
| Income from discontinued  operations                                         |       |                                                       | 4,180      |                 |   |   | 4,180 |   |   |   | 4,526 |   |   | 4,526 |   |   | 1,593 |   |   | 1,593 |   |   | 30,590 |   |   | 30,590 |   |
| Net income                                                                   |       |                                                       | 6,028      |                 |   |   | 4,207 |   |   |   | 18,744 |   |   | 22,512 |   |   | 13,834 |   |   | 11,647 |   |   | 45,908 |   |   | 42,270 |   |
| Basic income per share  from continuing operations                           |       |                                                       | $          | 0.04                 |   |   |   | $ | 0.00 |   |   |   | $ | 0.29 |   |   | $ | 0.35 |   |   | $ | 0.25 |   |   | $ | 0.20 |   |   | $ | 0.30 |   |   | $ | 0.23 |   |
| Diluted income per share from continuing operations                          |       |                                                       | $          | 0.04                 |   |   |   | $ | 0.00 |   |   |   | $ | 0.28 |   |   | $ | 0.35 |   |   | $ | 0.24 |   |   | $ | 0.20 |   |   | $ | 0.30 |   |   | $ | 0.23 |   |

 

**23.  **SUBSEQUENT EVENTS

In August 2005, a hurricane hit the gulf coast ofMississippi and Louisiana causing substantial damage to the Gulfport andBiloxi, Mississippi area, as well as New Orleans, Louisiana. In September 2005,Louisiana was again impacted by a hurricane that caused additional flooding inNew Orleans as well as other locations in Louisiana.

The Company earns revenue in both Louisiana andMississippi from machine rentals and participations in various casinos thatwere damaged by the hurricanes. In some instances, the machines have beendamaged or destroyed; in other cases, the machines are undamaged, but thecasino is currently closed.

The Company carries both property and businessinterruption insurance which will serve to offset some of the losses indicatedabove. At this time the Company is actively working with its insuranceproviders to assess losses and associated recoveries, but anticipate the fullclaim cycle will cover an extended period of time. Therefore, the Companycannot reasonably estimate the net proceeds to be recovered in connection withthese losses.

The effect of the hurricanes, net of eventualinsurance recoveries, is not expected to have a material impact on thefinancial position of the Company; however it may affect the Company’squarterly results of operations depending on the timing of the insurancerecoveries and the pace at which properties are rebuilt.

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