UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended June 30, 1999

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

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

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

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

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

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

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

                                (Title of Class)

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

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

The aggregate  market value of the common equity held by  non-affiliates  of the
registrant was approximately $47,555,000 as of September 1, 1999.

The  number of  shares of Common  Stock,  $0.10  par  value,  outstanding  as of
September  1, 1999  according  to the  records  of  registrant's  registrar  and
transfer agent, was 10,227,430.

                      DOCUMENTS INCORPORATED BY REFERENCE

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



<PAGE>


                          ALLIANCE GAMING CORPORATION
                                   FORM 10-K

                           Year Ended June 30, 1999

                                    PART I

ITEM 1.  BUSINESS

Introduction

Alliance  is  a  diversified,   worldwide   gaming  company  that  (i)  designs,
manufactures and distributes gaming machines and computerized monitoring systems
for gaming  machines,  (ii) owns and  manages a  significant  installed  base of
gaming machines,  (iii) owns and operates two casinos and (iv) in Germany,  is a
full-service  supplier of  wall-mounted  gaming  machines and  amusement  games.
Alliance is among the market  leaders in each of its business  units.  Operating
under the name Bally  Gaming and Systems,  the Company is a worldwide  leader in
designing,  manufacturing and distributing gaming machines, having marketed over
80,000 gaming machines  during the past five years; it also designs,  integrates
and sells  highly  specialized  computerized  monitoring  systems  that  provide
casinos  with  networked  accounting  and  security  services  for their  gaming
machines with over 110,000 game monitoring units ("GMUs")  installed  worldwide.
The Company also owns,  operates  and  services an installed  base of over 8,300
slot and video gaming  machines that are located mostly in non-casino  venues in
Nevada  and  Louisiana  ("Route  Operations").  Alliance  is the  largest  route
operator  in  Nevada  and the  largest  route  operator  of gaming  machines  in
Louisiana.  Alliance also owns and operates what management believes is the most
profitable  dockside  casino in  Vicksburg,  Mississippi  and a locals casino in
Sparks,  Nevada,  which  together have 21 table games and 1,200 gaming  machines
(collectively,  "Casino  Operations").  In addition,  operating  under the Bally
Wulff name, the Company  believes that it is a leading  supplier of wall-mounted
gaming machines and amusement games in Germany.

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

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

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

      New Units by Market Segment         Percentage of New Gaming Units Sold
                                                   Years ended
                                                     June 30,
                                           1997       1998      1999
                                           ----       ----      ----
      Nevada and Atlantic City              47%        25%       22%
      International                         40         49        59
      Riverboats                             5         15         4
      Indian Gaming                          7         10        11
      Other domestic                         1          1         4
                                          ----       ----      ----
                                           100%       100%      100%
                                           ===        ===       ===

Markets  for  Bally  Gaming  and  Systems.  Within  the  United  States,  Nevada
represents the largest  installed base of gaming machines with an installed base
of  approximately  197,000  machines as of June 30, 1999. The Company  estimates
that  Atlantic  City,  the  second  largest  market,  had an  installed  base of
approximately  36,000  machines  as of  June  30,  1999.  Product  sales  of the
Company's  casino-style  gaming  equipment  in these  markets are  primarily  to
established  casino customers either to replace existing  machines or as part of
an  expansion or  refurbishment  of the casino.  Also,  because  gaming  machine
revenues have  increased at a higher rate than table game revenues over the past
decade, casino operators have tended to increase floor space dedicated to gaming
machines. In addition,  major casino openings in Nevada,  expansions of existing
casinos  and the  proliferation  of casinos in  emerging  markets  have  created
additional  floor space available for new gaming products and are anticipated to
further increase  competitive  pressures on casino operators to replace existing
equipment with new machines.

Riverboat and dockside casinos began operating in 1991 and, as of June 30, 1999,
riverboat  and dockside  casinos  were  operating  in Indiana,  Iowa,  Illinois,
Mississippi,  Missouri and  Louisiana.  The estimated  installed  base of gaming
machines on riverboats or dockside casinos is  approximately  94,000 machines as
of June 30, 1999.

Casino-style  gaming  continues  to  expand  on Native  American  lands.  Native
American  gaming is regulated  under the Indian  Gaming  Regulatory  Act of 1988
which permits specific types of gaming.  The Company's  machines are placed only
with Native  American  gaming  operators who have  negotiated a compact with the
state and received approval by the U.S. Department of the Interior.  The Company
sells  machines to casinos on Native  American  lands in  Arizona,  Connecticut,
Iowa, Michigan, Minnesota, Mississippi, Montana, New Mexico, North Dakota, South
Dakota,  Washington and  Wisconsin.  Compacts have also been approved in Oregon,
Colorado and  Louisiana,  although the Company has made no  deliveries  in these
jurisdictions.   In  addition  to  the  approved  states,   compacts  are  under
consideration  in  several  states,   including  Alabama,   California,   Maine,
Massachusetts,  Rhode  Island and Texas.  The  installed  estimated  base of all
Native  American gaming  machines as of June 30, 1999 was  approximately  81,000
units.

Currently  casino  gaming  also is legal  in  Colorado  and  South  Dakota.  The
estimated  installed  base of machines in these  markets as of June 30, 1999 was
approximately 16,000 machines.

In 1997, Michigan voters approved the establishment of three casinos in the city
of  Detroit.  The  first  temporary  casino  opened  in July  1999 and two other
temporary casinos are expected to open before January 2000.

In addition to the domestic  markets,  the gaming  industry is also expanding in
international  markets. The Company's primary  international markets are Europe,
Canada  and  Latin  America,  and,  to a  lesser  extent,  the Far  East and the
Caribbean.  The Company conducts its business in Canada through its staff in the
United States. The Company has begun, and plans to continue,  expansion into the
Australian  market,  and has an office in Sydney,  Australia.  In July 1998, the
Company's  Australian  subsidiary,  BGI Australia  Pty,  Ltd.,  was approved for
licensing  by the New South Wales  Liquor  Administration  Board which  licenses
gaming  operators  and  suppliers  in New South  Wales  and in  August  1999 the
Company's game platform and the first of its games were approved for sale in New
South Wales.  The New South Wales market is the second  largest  gaming  machine
market in the world with an estimated installed base of 87,000 units at June 30,
1999.  The Company  also  distributes  gaming  machines,  manufactured  by Bally
Gaming,   through   its  direct  and   indirect   subsidiaries,   Bally   Gaming
International,  GmbH  ("GmbH"),  from its  sales  office  in  Hannover,  Germany
principally to customers in Europe and Russia, through Bally Gaming Africa, Pty.
Ltd.,  from its sales  office in  Johannesburg,  South  Africa,  principally  to
customers  on  the  African  continent,  Bally  Gaming  de  Puerto  Rico,  Inc.,
principally  to  customers  in Puerto  Rico and Bally Games and  Systems,  SA in
Montevideo, Uruguay principally to customers in South America.


<PAGE>


The  percentage of the Company's  international  gaming units sold by geographic
area for the periods indicated are set forth below:

      New Units by Geographic Area   Percentage of New Gaming Units Sold
                                                 Years ended
                                                   June 30,
                                           1997      1998      1999
                                           ----      ----      ----
        Europe                              33%       37%       29%
        Canada                              26        35        43
        Latin America                       39        22        19
        Far East                             2         2         1
        Africa                             ---         4         7
        Australia                          ---       ---         1
                                         -----     -----     -----
                                           100%      100%      100%
                                           ===       ===       ===

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

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

    Product Line                                    Percentage of Revenues
                                                          Years ended
                                                            June 30,
                                                  1997       1998      1999
                                                  ----       ----      ----
      Slot machines                                46%        42%       41%
      Video gaming machines                        25         23        18
      Computerized monitoring systems              16         21        26
      Other (primarily used machines, recurring
        revenue products, parts and services)      13         14        15
                                                  ---        ---       ---
                                                  100%       100%      100%
                                                  ===        ===       ===

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

The ProSeries was the result of a comprehensive  product development effort. The
development  process included extensive testing of the new products in-house and
on casino  floors for  reliability  and player  appeal.  Revenues  from sales of
ProSeries  machines were  approximately  $66.6 million,  $45.8 million and $44.6
million for the years ended June 30, 1997, 1998 and 1999, respectively.

The GameMaker can offer up to 10 different video games within one gaming device.
The ten games can be selected by the casino  from a game  library  that has over
600 games. The games simulate various card games, keno and popular reel-spinning
games.  The GameMaker  machines  contain bill  acceptors and many other features
believed to be popular with casinos and their customers.  The GameMaker machines
are available in upright, bar top and slant top cabinets. Revenues from sales of
GameMaker  machines were  approximately  $34.9 million,  $22.7 million and $17.7
million for the years ended June 30, 1997, 1998 and 1999, respectively.

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

During  the past two  years,  the  Company  has moved to  become a full  service
provider of gaming products by adding to its product line wide-area  progressive
systems and second feature niche games,  which are gaming  machines that provide
bonus  features.  Many of these  gaming  machines are placed in casinos and earn
recurring  revenues  and cash flows for the Company  rather than being sold on a
one time basis.  These gaming machines  provide a higher level of  profitability
than the games which are sold  outright,  but they require the Company to invest
capital in the cost of manufacturing the gaming machines and in purchasing signs
and seating.  The Company  earned  approximately  $7.0  million  from  recurring
revenue  sources  during fiscal 1999 which was comprised of  approximately  $2.1
million in machine  rentals,  $1.4  million in  participation  revenue  and $3.5
million in hardware and software maintenance.

In November  1998,  the Company  received  regulatory  approval  from the Nevada
Gaming  Control  Board  of  its  wide-area   progressive  jackpot  system  named
"Thrillions(TM)".  The  Thrillions  system has been  designed  to allow  patrons
playing nickel,  quarter and dollar machines to compete for the same progressive
jackpot with the odds of winning the jackpot  based on the amount  wagered.  The
Thrillions  system  also  permits  the  casino  patron to play for more than one
jackpot meter with a single play of the machine.  The Thrillions system has been
designed to allow  casinos to use their own branding for the product.  The first
two products deployed on the Thrillions system are Betty Boop's Big Hit (TM) and
Pay Day, a  proprietary  product  for Park Place  Entertainment  in Nevada.  The
Company began  deployment of the Betty Boop's Big Hit product in Nevada in March
1999 and began a field trial in  Mississippi in July 1999. The Company has filed
the Thrillions  system with regulators in other gaming  jurisdictions  in fiscal
1999 and intends to deploy the product in those jurisdictions during fiscal 2000
once regulatory approval is received.

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

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

In February 1999, the Company received final regulatory approval from the Nevada
Gaming  Control Board for its Remote Access  Verification  Environment  ("RAVE")
technology,  an on-line game delivery system that provides regulators  assurance
that the on-line gaming activity originates from within their jurisdiction.  The
RAVE technology is provided through a proprietary  intranet whose dial-up access
is restricted to  subscribers  and is not available to  non-subscribers  such as
Internet users.  Incorporating  highly  sophisticated  call tracing and security
measures developed in conjunction with KPMG LLP and Bellcore,  RAVE provides the
foundation for  intra-state,  closed-loop,  subscriber-based  system.  The first
application  of the  technology  has been  designed  for use by  sportsbooks  in
Nevada, however it can be the foundation for other gaming oriented applications,
such  as  horse  racing  and  lotteries,  in  both  domestic  and  international
jurisdictions.  In December  1998,  the Company  signed an exclusive  seven-year
agreement to license  International  Sports Wagering,  Inc.  ("ISWI") to use the
RAVE technology in Nevada for sportswagering applications.  Once the ISWI system
is approved by the Nevada regulators, the Company will receive a monthly royalty
payment from ISWI based on the number of subscribers to the system.

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

In addition, the Company sells and services used gaming machines and sells parts
for existing  machines.  The Company  often  accepts used  machines as trade-ins
toward the  purchase of new gaming  equipment.  While a small  secondary  market
exists in the  United  States,  used  machines  are  typically  resold  into the
international  market. Some used equipment is reconditioned for direct sale, but
much is sold in container lots on an "as is" basis through independent  brokers.
Sales of used equipment were approximately  $5.4 million,  $3.6 million and $5.6
million for the years ended June 30, 1997, 1998 and 1999, respectively.

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

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

Product Development.  The Company believes that providing games and systems with
high  entertainment  value that are  preferred by the casino  patron is a key to
meeting the demands of casinos.  The Company  believes  that the use of existing
computer  technology is  accelerating  which can give newer gaming  machines and
systems that  incorporate  this  technology a competitive  advantage  over older
gaming machines and systems. In addition,  more of the value of a gaming machine
comes from the  entertainment  aspects of the  software  running the game rather
than the hardware  platform of the machine.  Total spending on product  research
and  development  by Bally Gaming and Systems was  approximately  $6.7  million,
$12.7 million and $13.9 million  during the years ended June 30, 1997,  1998 and
1999,  respectively.  The increase in research and  development  spending in the
year ended June 30,  1999  resulted  from  increasing  the number of new product
platforms  introduced,  product  development efforts and growth in the number of
products to support with ongoing development.

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

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

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

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

Product  development  for the SDS 6000 product is also divided into hardware and
software.  The  major  areas of  hardware  development  include  microcontroller
circuit board design and  programming as well as user interface  devices such as
card  readers,  keypads  and  displays.  Systems  has  developed  a modular  and
extendible  hardware and software  architecture  which allows  development to be
focused upon achieving greater  functionality,  product  reliability and ease of
maintenance for the casino operator and achieving greater visual appeal and ease
of use for the slot customer. In addition,  the architecture allows customers to
upgrade  existing   components  or  add  new  components  with  minimal  impact.
Development  cycles  for  hardware  can vary  between  a few  months  for  minor
revisions  to more than a year for major  design  changes or for changes made by
various slot  manufacturers  with which Systems' product must communicate and be
physically  integrated.  Software  development  results in (1) periodic  product
releases  that  include  new  features  which  extend and  enhance  the SDS 6000
product,  (2) periodic  maintenance  releases  which enable casino  operators to
correct  problems or improve the  usability of the system and (3)  documentation
needed to install and use the system.

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

Sales and Marketing.  Bally Gaming and Systems uses a direct sales force and, to
a lessor extent, an independent  distributor network to distribute its products.
Bally Gaming and Systems North America sales staff consists of  approximately 30
people and  operates  offices  in Nevada,  New  Jersey,  Mississippi,  Illinois,
Colorado and Florida.

Bally  Gaming  and  Systems'  direct  sales  force,  other  than  those at GmbH,
Australia and South Africa generated  approximately 89%, 80% and 77% of new unit
machine sales for the years ended June 30, 1997, 1998 and 1999, respectively. On
a limited basis, Bally Gaming and Systems uses distributors for sales to certain
international  jurisdictions.  The agreements  with  distributors do not specify
minimum  purchases  but generally  provide that the Company may  terminate  such
agreements  if certain  performance  standards  are not met.  These  independent
distributors  generated  approximately  4%, 6% and 7% of new gaming machine unit
sales for the years  ended June 30,  1997,  1998 and 1999,  respectively.  GmbH,
Australia and South Africa generated approximately 7%, 14% and 16% of new gaming
machine  unit  sales  for  the  years  ended  June  30,  1997,  1998  and  1999,
respectively.

The  Company  has  over  110,000  game  monitoring  units  installed,  of  which
approximately 98,000 are in the United States. At June 30, 1999, the Company had
104 installed locations.  Bally Gaming and Systems' direct sales force generated
approximately 92%, 96% and 99% of game monitoring unit sales for the years ended
June 30, 1997, 1998 and 1999, respectively.

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

For the year ended June 30, 1999,  approximately  89% of the Company's  slot and
video gaming machine sales were on terms of 90 days or less.  Approximately  11%
of the Company's sales,  primarily in certain emerging markets such as riverboat
and Native American gaming casinos,  are financed over extended  periods as long
as 36 months and bear  interest at rates  ranging from 9% to 14%.  International
sales are generally  consummated on a cash basis or financed over three years or
less. In addition,  in certain  situations the Company has  participated  in the
financing of other gaming related equipment manufactured by third parties in the
emerging  markets.  For SDS 6000 sales,  the Company  offers  limited  financing
terms, normally less than one year, for sales to new installations.  Most sales,
however, are invoiced on a net 30-day basis.  Management believes that financing
of customer sales is an important factor in certain emerging markets.

For SDS 6000  sales,  the  Company  offers its  customers  the option of signing
separate hardware and software maintenance agreements at the time of sale. These
agreements are for periods of one year and automatically  renew unless otherwise
canceled in writing by the  customer or the Company.  After an initial  warranty
period,  typically  90 days,  the  customer is invoiced a monthly  hardware  and
software   maintenance   fee  which  provides   essentially  for  repair  and/or
replacement of malfunctioning hardware and software,  software version upgrades,
and on-call support for software.

Customers.  The  demand  for slot  machines  and video  gaming  machines  varies
depending on new  construction  and  renovation of casinos and other  facilities
with needs for new  equipment as well as the  replacement  of existing  machines
(which have an average replacement cycle of three to seven years). For the years
ended June 30, 1997,  1998 and 1999, the Company's  largest  customer for gaming
machines  accounted for approximately  11%, 7% and 21% respectively of the Bally
Gaming and Systems'  revenues,  while the  Company's 10 largest  gaming  machine
customers  accounted for approximately  45%, 48% and 46% of the Bally Gaming and
Systems' revenues during such periods, respectively.

The demand for  computerized  slot  monitoring  systems is driven by  regulatory
requirements in a given jurisdiction  and/or by a casino operator's  competitive
need to properly  track  machine and player  activity and  establish and compile
individual machine and player  profitability and other demographic  information,
all of which is of  particular  importance  to casinos in  developing  marketing
strategies.  Revenues  for  computerized  monitoring  systems are  derived  from
selling to new  installations  and to new or existing  customers  who either (a)
acquire casinos with a competitor's  system which is replaced with the Company's
system or (b) expand  their  casino  floors or upgrade  their  hardware to a new
product  release.  For the years  ended June 30,  1997,  1998 and 1999,  the ten
largest   computerized   monitoring  system  customers  (which  include  certain
multi-site  casino  operators  that have  corporate  agreements)  accounted  for
approximately  70%, 53% and 49% of game monitoring unit revenues,  respectively.
Due to the high initial costs of installing a  computerized  monitoring  system,
customers for such systems  generally  have tended not to change  suppliers once
they have installed such a system.

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

Assembly Operations.  Bally Gaming and Systems' Las Vegas facility was completed
in 1990  specifically  for the  design,  assembly  and  distribution  of  gaming
equipment.  The  150,000-square  foot facility was designed to meet  fluctuating
product design  demands and volume  requirements,  and  management  believes the
facility  enables  Bally  Gaming and  Systems  to  increase  production  without
significant  capital  expenditures.  Since  July 1,  1998 all  assembly  of game
monitoring unit products has been performed in the Las Vegas facility.

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

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

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

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

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

Wall Machines and Amusement Games

Industry Overview

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

Wall machine sales into the arcade market account for  approximately  30% of the
total  wall  machine  sales  in  Germany.   A  significant   number  of  arcades
(approximately 10%) are owned by the two largest competitors,  Gauselmann AG and
NSM AG.  Generally  these  competitors  do not purchase wall machines from Bally
Wulff for their arcades.  Management  believes Bally Wulff's share of the German
wall machine market was approximately  33%, 30% and 22% for the years ended June
30,  1997,  1998 and 1999,  respectively.  The  decrease in market share in 1999
resulted from  competitors'  wall machines being more popular than Bally Wulff's
wall machines. The German legislative  authorities regulate and monitor the wall
machine  industry  on an  ongoing  basis  to  ensure  conformance  with  certain
manufacturing  standards  and the  fairness of each  machine to users.  Existing
legislation covers prescribed licensing  procedures,  the use,  installation and
operation of wall machines and the taxation of wall machines.

Operations of Bally Wulff

Products. Bally Wulff's manufacturing operations were founded in Berlin in 1950.
Bally Wulff produces and  distributes a variety of models of wall machines under
the trade name "Bally Wulff" for operation in arcades,  hotels,  restaurants and
taverns  primarily in Germany.  These wall machines are  coin-operated,  armless
gaming devices similar to slot machines that award winnings for matching numbers
or symbols on three to five wheels or drums and differ  primarily in appearance,
graphic design,  theme,  pay-table and customer appeal. Each game costs up to 40
pfennigs  (approximately  $0.21 at the exchange rate of $1.00=DM 1.90 prevailing
as of June 30,  1999,  which rate is used  hereinafter)  to play,  although  the
player may deposit larger amounts to provide continuous play but not to increase
payoffs.  German  regulations limit the maximum payout to ten times the player's
stake (DM 4.00 or approximately $2.11 per game). Current models of wall machines
provide the player the  opportunity to win 100 special games on one play,  which
increases  the  potential  amount that can be won on the minimum  wager.  German
regulations  require a minimum  payback of 60% for wall machines,  although many
machines  are  generally  programmed  to pay back at  somewhat  higher  rates to
encourage  play.  Bally  Wulff has also  manufactured  non-payout  entertainment
machines for operation in arcades,  hotels,  restaurants  and taverns in Germany
and may continue to do so in the future on a selective basis.

During February 1999, Bally Wulff began selling a single-site progressive linked
jackpot system under the name Magic Jackpot.  Initially,  up to 10 wall machines
could be linked to one  system,  but Bally  Wulff  will soon begin  marketing  a
system that can link up to 26 wall machines.  The average  selling price for the
system is approximately DM 15,500 (approximately $8,800).

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

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

      Product Line                                       Percentage of Revenues
                                                               Years ended
                                                                 June 30,
                                                           1997    1998     1999
                                                           ----    ----     ----
        Sale of wall machines manufactured by Wulff         52%     44%      43%
        Leasing of wall machines manufactured by Wulff       6      10       10
        Entertainment and amusement machines and third
          party wall machines distributed                   25      26       25
        Other (primarily used machines, parts and
          service)                                          17      20       22
                                                           ---     ---      ---
                                                           100%    100%     100%
                                                           ===     ===      ===

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

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

Total  spending  on product  research  and  development  by Bally Wulff was $3.3
million,  $3.0  million and $3.2  million  during the years ended June 30, 1997,
1998 and 1999, respectively.

Sales and Marketing. Bally Wulff sells approximately 97% of its products through
its own sales force of approximately 60 individuals located in 21 regional sales
offices.  Independent German distributors account for approximately 3% of sales.
Approximately  99% of  Wulff's  sales of new  wall  machines  are in the  German
market.  The sales offices are operated as  independent  profit  centers and are
assigned  geographic  areas for which they are responsible for sales,  servicing
the  machines  and  assisting  in  collecting   customers'  accounts  receivable
balances.

Bally  Wulff  devotes  substantial  time,  money  and  effort to  marketing  and
promoting its products. Bally Wulff takes an active part in the annual Amusement
Game Fair in Germany,  at which Bally Wulff  introduces  new products.  The next
Amusement Game Fair will be held in January 2000.

The wall machines manufactured and sold by Bally Wulff generally sell for prices
ranging from DM 4,000 to DM 7,500 (approximately $2,300 to $4,300). Due to price
competition among the three largest manufacturers,  selling prices have declined
since 1997. Management believes that such declines in prices may continue in the
future.  For the year  ended  June 30,  1999  approximately  80% of Bally  Wulff
machine sales were on terms of 90 days or less.  Remaining sales of machines are
financed by Bally Wulff  generally over a 12-month  period,  with interest rates
between 12% and 24%. For this reason, Bally Wulff establishes an internal credit
rating and credit limit for each  customer.  Under Bally  Wulff's  conditions of
sale,  a security  interest  in a machine is  retained  by Bally Wulff until the
machine has been paid for in full. In addition,  Bally Wulff  requires  security
beyond  the wall  machine  itself.  Currently,  Bally  Wulff  provides  customer
financing  for  approximately  20% of its sales,  and  management  expects  this
practice to increase during fiscal 2000. Leasing machines to customers accounted
for 6%, 10% and 10% of total  revenues for the years ended June 30,  1997,  1998
and 1999,  respectively.  In  approximately  95% of its unit sales,  Bally Wulff
accepts wall machines as trade-ins toward the purchase of new wall machines.  To
the extent possible, the used machines are then resold.

Customers.  Each of Bally  Wulff's top 10 customers in 1999 has  maintained  its
relationship  with Bally Wulff for over five years. For the years ended June 30,
1997, 1998 and 1999 Bally Wulff's top ten customers  accounted for approximately
11%,  12% and 9% of  Bally  Wulff's  revenues,  respectively,  while  no  single
customer  accounted  for more than 3%, 3% and 2% of Bally  Wulff's  revenues for
such periods, respectively.

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

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

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

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

Route Operations

Nevada Operations

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

The following table sets forth certain  historical data concerning the Company's
Nevada route operations:

                                                     Years ended
                                                       June 30,

                                              1997      1998       1999
                                              ----      ----       ----

        Average number of gaming             5,660     6,460      7,300
        Average number of locations            562       624        680
        Average  win per  day per  gaming   $52.40    $53.70     $57.20


At June 30,  1999,  the Company  operated  approximately  7,600  machines on its
Nevada route.  The Company has increased the number of gaming machines owned and
operated  principally  through  contracting  with new locations as they open and
strategic takeover of contracts at locations operated by several mid-sized route
operators.  Such contract takeovers added  approximately 230, 580 and 200 gaming
machines  to the Nevada  route  during the years ended June 30,  1997,  1998 and
1999, respectively.

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

Revenue-sharing  arrangements  accounted for approximately  85%, 87%, and 88% of
revenues  and 77%,  77%,  and 76% of installed  machines,  respectively,  in the
Company's  Nevada route  operations for the years ended June 30, 1997, 1998, and
1999. At June 30, 1999,  the weighted  average  remaining  term of the Company's
revenue  sharing   arrangements  was  approximately   3.1  years.   Space  lease
arrangements  accounted for approximately 15%, 13%, and 12% of revenues and 23%,
23%, and 24% of installed machines,  respectively, in the Company's Nevada route
operations for the years ended June 30, 1997,  1998, and 1999. At June 30, 1999,
the weighted average remaining term of the Company's space leases was 2.0 years.

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

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

Since the launch of Gamblers Bonus, the gaming machines linked to Gamblers Bonus
have  experienced  an  increase in net win per day per  machine.  As of June 30,
1999, the Company had the Gamblers Bonus installed in over 2,600 gaming machines
at approximately  240 locations or 35% of the installed base of gaming machines.
The Company  believes  Gamblers Bonus will continue to improve both the revenues
and operating  efficiencies of its Nevada route operations and has the potential
to create additional opportunities in the route operations segment of the gaming
industry.  Additionally,  the Company has been  updating its  installed  base of
gaming machines with bill-acceptor  equipped electronic gaming machines that are
also expected to improve revenues and operating efficiencies.

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

Customers.  The Company has a  diversified  customer  base with no one  customer
accounting for more than 6%, 5% and 4% of the Company's  revenues generated from
Nevada route  operations  during the years ended June 30,  1997,  1998 and 1999,
although  approximately 13%, 11% and 10% of such revenues were generated through
an  affiliated  group of such  customers  for such  periods,  respectively.  The
affiliated  group  consists of eight  partnerships  each  having one  individual
partner  who is common to all such  partnerships.  For the years  ended June 30,
1997, 1998 and 1999, the ten largest customers  accounted for approximately 23%,
20% and 18% of the Nevada route operations revenues, respectively.

Assembly   Operations.   In  previous  years,  the  Company's  route  operations
manufactured  its own gaming  machines for use in its Nevada  route  operations.
These machines represent approximately 55% of the gaming machines currently used
in the Nevada  route  operations  at June 30,  1999.  In July 1998,  the Company
received  regulatory  approval to begin using the Bally  GameMaker  platform for
Gamblers Bonus gaming  machines  deployed on the Nevada route. At June 30, 1999,
approximately  8% of the installed  base of gaming  machines on the Nevada route
were manufactured by Bally Gaming

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

Louisiana Operations

Overview. On the basis of its Nevada route operations  expertise,  in March 1992
the Company  obtained a contract to operate  video poker gaming  machines in the
greater New Orleans,  Louisiana area through a subsidiary,  Video Services, Inc.
("VSI").  The Company entered into an operating agreement which runs through May
2002  with  Fair  Grounds  Corporation,  and  its  affiliates,  Jefferson  Downs
Corporation  and  Finish  Line  Management  Corporation   (collectively,   "Fair
Grounds"),  for the Company to be the exclusive operator of video poker machines
at the only racetrack and eight associated  off-track betting parlors (OTB's) in
the greater New Orleans area. This agreement contains a five-year option for the
Company to match any third party offer to operate the  machines  after May 2002.
The Company  operates the game rooms where the video poker  machines are located
for each of the nine facilities  owned by Fair Grounds,  for which it receives a
percentage  of the revenue  generated by the  machines.  As of June 30, 1999 the
Company had  approximately  750 video poker  machines in  Louisiana.  On July 1,
1999,  pursuant to a prior vote,  video poker became illegal in one parish where
the Company operated machines at two OTB's and thus these locations closed.  The
two  OTB's  in  this  parish   accounted   for  $2.4  million  of  revenues  and
approximately  $0.6  million of  operating  income for VSI during the year ended
June 30,  1999.  After June 30,  1999,  the Company  redeployed  the video poker
machines  from  these  two  closed  sites  to  other  existing  sites,   pending
appropriate   approvals.   The  Louisiana   legislature  has  considered   other
legislation  to  curtail  video  poker  in the  past  and may do so again in the
future.

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

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

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

Competition.  The Company is subject to extensive  competition  for contracts to
operate video poker machines and the Company's racetrack and OTB parlors compete
with  various   riverboats,   truckstops  and  locations  with  liquor  licenses
throughout the New Orleans area. Each truckstop is permitted to operate up to 50
video poker  machines  and each tavern is permitted to operate up to three video
poker machines.  Louisiana has riverboat  gaming  statewide and three riverboats
are  currently  operating  in the  greater  New  Orleans  area.  Riverboats  are
permitted to have live table games and an unlimited  number of gaming  machines,
including slot machines.  Louisiana has also  authorized one land-based  casino,
permitted to include live table games and an unlimited number of gaming machines
in New  Orleans,  which  opened in May 1995;  however,  its  operator  filed for
bankruptcy  reorganization and ceased operations in November 1995. At present it
is anticipated that the land-based casino will reopen in October 1999.

Casino Operations

Overview.

Rainbow Casino. On July 16, 1994, the Rainbow Hotel Casino located in Vicksburg,
Mississippi  permanently opened for business.  The facility includes the Rainbow
Casino,  which is a 24,000-square  foot casino owned and operated by the Company
which as of June 30, 1999,  operated  approximately  750 gaming  machines and 15
table games as well as a 245-seat restaurant.  The casino is in the final stages
of an expansion  project that when  completed in October 1999 will  increase the
floor space by 7,000 square feet and provide for up to 250 more gaming machines.
The  facility  also  includes  the  89-room  Rainbow  Hotel,  which is owned and
operated by a third  party.  Originally,  the facility  also  included a 10-acre
indoor and outdoor entertainment  complex called Funtricity  Entertainment Park,
which was developed by a subsidiary of Six Flags Corporation. In September 1998,
the Company  acquired  the  entertainment  park for $0.5  million.  The park was
closed in September 1998 and management is evaluating  options for permanent use
of the 20,000  square foot  facility.  Rainbow  Casino is marketed as a "locals"
casino  and draws its  customers  principally  from  within a 75-mile  radius of
Vicksburg. The Vicksburg casino market generated approximately $204.1 million in
gaming revenue in the twelve months ended June 30, 1999.

The  Company is the  general  partner of Rainbow  Casino  Vicksburg  Partnership
("RCVP")  the  partnership  that  operates  the  Rainbow  Casino.   Pursuant  to
transactions   consummated  in  March  1995,  Rainbow  Casino  Corporation,   an
independent company that was the former general partner of RCVP became a limited
partner  entitled  to receive  10% of the net  available  cash flows  after debt
service and other  items,  as defined  (which  amount  increases  to 20% of such
amount when revenues exceed $35.0 million but only on such incremental  amount),
for a period ending December 31, 2010. The Company holds the remaining  economic
interest in the  partnership.  As part of the  refinancing  completed  in August
1997, the Company purchased notes payable to HFS Gaming Corporation  ("HFS") and
National  Gaming  Mississippi,  Inc.("NGM")  and  acquired  the  casino  royalty
previously due to HFS.

Rail City  Casino.  In April  1990,  the  Company  purchased,  for an  aggregate
purchase price of $9.5 million, substantially all of the assets of the Rail City
Casino  (formerly the Plantation  Station Casino) located near the border of the
cities of Reno and Sparks in northern Nevada.  Rail City is a 20,000 square-foot
casino, which as of June 30, 1999 operated  approximately 490 gaming machines, 6
table  games,  and keno.  In  addition,  Rail City  Casino  includes  a 300-seat
restaurant,  which was fully  remodeled  in the year  ended June 30,  1998,  and
offers a race and sports book which is leased to an independent  race and sports
book operator. Rail City Casino is convenient to both Reno and Sparks and caters
to the local market.

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

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

Patents, Copyrights and Trade Secrets

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

Bally Gaming and Systems is obligated  under  several  patent  agreements to pay
royalties  ranging from  approximately $25 to $107 per applicable game depending
on the components in the gaming machines. Additionally, based on an amendment to
the trademark  licensing  agreement between the Company and Bally  Entertainment
Corporation ("BEC") dated May 10, 1996, Bally Gaming and Systems is obligated to
pay a royalty of $35 per  machine on new  machines  sold  beginning  on June 18,
1996,  with a minimum  annual  royalty  payment of $1.0  million for the initial
five-year term of the amended agreement,  which is subject to annual renewals by
the Company  thereafter.  In  addition,  the Company has  obtained the rights to
certain  game ideas and  intellectual  property  that  require  Bally Gaming and
Systems to pay royalties based on either fixed amounts or variable amounts based
upon game  performance.  Royalty  expense  for Bally  Gaming and Systems for the
years ended June 30, 1997, 1998 and 1999 was $3.0 million, $2.2 million and $1.9
million, respectively.

Employees and Labor Relations

As of June 30, 1999,  the Company and its  subsidiaries  employed  approximately
2,500 persons,  including  approximately  1,330 persons in Nevada, 90 persons in
Louisiana,  500 persons in  Mississippi,  70 persons in various other states and
500 persons in various other countries including 470 persons in Germany. None of
such employees is covered by a collective  bargaining  agreement.  Bally Wulff's
employees,  however, are covered by German regulations which apply industry-wide
and are developed,  to some extent, through negotiations between representatives
of the metal working  industry  employers and the trade union  representing  the
employees.  These  regulations  are  in  the  nature  of  collective  bargaining
agreements  and cover the general  terms and  conditions of such items as wages,
vacations and work hours. The regulations  codify what are considered the common
standards  of  employment  in the German  metal  working  industry.  The Company
believes its relationships with its employees are satisfactory.

Gaming Regulations and Licensing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Nevada Legislature has declared that some corporate  acquisitions opposed by
management,  repurchases  of voting  securities  and corporate  defense  tactics
affecting Nevada corporate gaming licensees and Registered Corporations that are
affiliated  with those  operations  may be  injurious  to stable and  productive
corporate  gaming.  The Nevada Commission has established a regulatory scheme to
ameliorate  the  potentially  adverse  affects of these  business  practices  on
Nevada's  gaming  industry  and to  promote  Nevada's  policy to: (i) assure the
financial  stability of corporate  gaming licensees and their  affiliates;  (ii)
preserve the beneficial  aspects of conducting  business in the corporate  form;
and (iii)  promote a neutral  environment  for orderly  governance  of corporate
affairs.  Approvals  are,  in certain  circumstances,  required  from the Nevada
Commission before a Registered  Corporation can make exceptional  repurchases of
voting  securities above the current market price (commonly called " greenmail")
and before a corporate acquisition opposed by management can be consummated. The
Nevada Act also requires prior approval of a plan of  recapitalization  proposed
by the Registered Corporation's board of directors in response to a tender offer
made directly to the Registered  Corporation's  stockholders  for the purpose of
acquiring control of the Registered Corporation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Spielverordnung (gaming ordinance) specifically governs wall machines. These
regulations  limit  game  payouts  to DM 4.00  (approximately  $2.11)  per game,
require a minimum payout percentage, detail where the machines may be installed,
how many may be installed and by whom, which games are prohibited, the technical
requirements of the machines and technical  review and approval.  Operators must
comply with  regulations  that  specify  how many  machines  may operate  within
defined  square foot areas (15 square meters per machine,  with a maximum of ten
machines  per  location).  In taverns,  restaurants,  hotels and  certain  other
establishments, no more than two gaming machines are permitted.

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

Subject to  certain  exceptions,  a  value-added  tax (VAT) of 16% is  generally
assessed on the sale or supply of any goods and  services in Germany.  Since the
total amount paid for particular goods or services is considered to be the gross
price in calculating such tax, the actual rate is 13.79%. The basis for taxation
is the cash  remaining  in the  machines.  The rule  requiring a minimum  payout
percentage  is applied to the amount  remaining in the cash box net of such VAT.
Depending on the municipality in which a machine is located,  operators may also
have to pay a monthly leisure tax on each machine of up to DM 600 (approximately
$316).  The  government  in the German state of North Rhine  Westfalia  recently
modified regulations to permit local municipalities to independently impose rate
increases on taxes on gaming machine operators beginning January 1, 1999.

During  fiscal 1999,  Bally Wulff  increased  the amount of tax reserves by $0.6
million  (to a total  reserve of $2.0  million) as a result of  developments  in
ongoing  quadrennial  audits of Wulff's tax  returns for the years 1988  through
1996. The German tax authorities have proposed  preliminary  adjustments of $2.0
million,  which has been accrued. The German tax authorities have not yet issued
the final assessment from their quadrennial audits.

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

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

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

ITEM 2.  PROPERTIES

The  following  table sets forth  information  regarding  the  Company's  leased
properties  (exclusive  of space  leases in  connection  with its gaming  device
routes) as of June 30, 1999,  all of which are fully utilized  unless  otherwise
noted:

                                                                         Annual
                                                            Building     Rental
Location          Use                                      Square Feet  Payments
                                                                       (In 000s)

Las Vegas, NV     Nevada route operations                   18,500         182
Las Vegas, NV     Research and development offices          20,000         286
Sparks, NV        Administrative offices and warehousing    38,300         329
Sparks, NV        Sales offices and warehousing             11,000         132
Absecon, NJ       Sales offices and warehousing             15,800         101
Biloxi, MS        Sales offices                              6,400          41
Golden, CO        Sales offices                              1,500          18
Westchester, IL   Sales offices                              4,900          42
Dania, FL         Sales offices                              3,400          44
Elko, NV          Sales office and route operations          4,200          29
Laughlin, NV      Sales offices                                600          10
Atlantic City, NJ Administrative offices                       750          10
San Juan, P R     Sales offices                              1,000          12
Alexandria,
  Australia       Sales offices and warehousing             19,100         252
Johannesburg,
  So. Africa      Sales offices                              1,600          28
Las Vegas, NV     Warehousing                              103,500         413
Berlin, Germany   Administrative offices and manufacturing 108,500         520
Hannover, Germany Administrative offices and warehousing    20,100         204
Sparks, NV        Route operations                          12,100          77
Carson City, NV   Route operations                           2,500           9
Winnemucca, NV    Route operations                           1,200           5
Pahrump, NV       Route operations                             800           6
Las Vegas, NV     Route location                             8,000         453
Las Vegas, NV (1) Ground lease                                 ---         330
Sparks, NV (2)    Ground lease                                 ---           5
Vicksburg, MS     Administrative offices                     2,700          19
Vicksburg, MS     Administrative offices                     1,200           9
New Orleans, LA   Louisiana route operations                 6,000          57
Covington, LA     OTB operation                              2,500          36
Metairie, LA      OTB operation                             11,000          54
New Orleans, LA   OTB operation                              5,100          27

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


<PAGE>



The following table sets forth  information  regarding  properties  owned by the
Company as of June 30, 1999,  all of which are fully utilized  unless  otherwise
noted:

                                                              Building
Location              Use                                    Square Feet

Las Vegas, NV         Administrative offices and
                       manufacturing   (a)                     150,000
Reno/Sparks, NV       Casino (a)                                35,000
Vicksburg, MS         Casino                                    24,000
Vicksburs, MS         Entertainment facility- Land              20,000
Vicksburg, MS         Administrative offices                     3,200
Vicksburg, MS         Vacant- Land                                 ---
Las Vegas, NV         Tavern- Land                               5,000
North Las Vegas, NV   Land/Parking                                 ---

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

In  addition,  the Company  leases 21 bar and tavern  properties  that have been
subleased to other operators in connection with its Nevada route operations. The
properties  range in size from  approximately  1,750 square feet to 7,700 square
feet.  The remaining  terms of the leases range from 2 months to 11 and one half
years with monthly payments ranging from approximately $1,700 to $11,000.

In addition to the principal facilities, the Company has 20 leased locations and
two owned  locations in Germany which are  primarily  used for sales and service
offices as well as for warehousing  purposes.  The properties range in size from
approximately 3,300 square feet to 14,200 square feet. The leased locations have
terms of  occupancy  varying  from six  months  to six and one half  years  with
monthly payments ranging from approximately $2,000 to $8,500.

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

ITEM 3.  LEGAL PROCEEDINGS

Litigation

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

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

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

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

Not applicable.

                                    PART II

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

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

                                             Price Range of
                                               Common Stock
                                               High     Low

      Fiscal Year Ended June 30, 1998
            1st Quarter                     $ 22.09  $ 12.71
            2nd Quarter                       22.54    14.00
            3rd Quarter                       20.79    16.63
            4th Quarter                       18.80    13.13

      Fiscal Year Ended June 30, 1999
            1st Quarter                      $14.66    $8.75
            2nd Quarter                       10.28     6.23
            3rd Quarter                        9.63     4.25
            4th Quarter                        5.63     3.75

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

As of September 1, 1999 the Company had approximately 1,600 holders of record of
its Common Stock.

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

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


<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>

                                                                Fiscal Years Ended June 30,
                                                  1995(1)     1996(2)     1997(5)     1998        1999
                                                  ------      ------      ------     ------      ------
                                                           (In 000's, Except Per Share Amounts)
<S>                                             <C>         <C>         <C>         <C>         <C>
Statements of Operations Data
Revenues:
   Gaming equipment and systems                 $    ---    $ 10,575    $134,734    $109,597    $127,810
   Wall machines and amusement games                 ---       3,356     131,934      98,611      90,834
   Route operations                              106,854     109,938     127,028     148,507     175,854
   Casino operations                              25,134      48,509      51,450      60,657      63,682
                                                --------    --------    --------    --------    --------
                                                 131,988     172,378     445,146     417,372     458,180
                                                --------    --------    --------    --------    --------
Costs and expenses:
   Cost of gaming equipment and systems              ---       7,213      84,496      61,684      69,721
   Cost of wall machines and amusement games         ---       2,022      68,426      54,241      54,035
   Cost of route operations                       79,887      84,212      95,716     114,645     137,692
   Cost of casino operations                      14,231      22,046      22,269      25,930      27,011
   Selling, general and administrative            28,649      31,270      99,520      86,318     104,104
   Research and development                          ---         370       9,954      15,778      17,190
   Depreciation and amortization                   9,520      10,988      22,606      22,838      23,104
   Direct acquisition costs (3)                    1,669      55,843         ---         ---         ---
   Unusual items                                   2,293       5,498         700        (325)        ---
                                                  ------     -------     -------     -------     -------
                                                 136,249     219,462     403,687     381,109     432,857
                                                 -------     -------     -------     -------     -------
Operating income (loss)                           (4,261)    (47,084)     41,459      36,263      25,323

Other income (expense)
   Interest income                                 2,798       1,571       1,620         813         549
   Interest expense                               (8,133)     (8,897)    (23,626)    (28,600)    (31,385)
   Rainbow royalty (4)                              (810)     (4,070)     (4,722)       (587)        ---
   Rainbow Royalty Buyout (4)                        ---         ---         ---     (19,000)        ---
   Minority interest                                (397)       (963)     (1,092)     (2,002)     (2,053)
   Other, net                                        317         301         139       1,025        (431)
                                                    ----        ----       -----      ------      ------

Income (loss) before income taxes                (10,486)    (59,142)     13,778     (12,088)     (7,997)
Income tax provision                                (265)       (755)     (7,993)     (3,185)       (830)
Income (loss) before extraordinary item          (10,751)    (59,897)      5,785     (15,273)     (8,827)
Extraordinary loss without tax benefit               ---         ---         ---     (42,033)        ---
                                                --------    --------    --------    --------    --------
Net income (loss)                                (10,751)    (59,897)      5,785     (57,306)     (8,827)

Special stock dividends                              ---        (362)    (11,264)     (3,551)     (1,697)
Premium on repurchase/redemption of
   Series B Special Stock                            ---         ---        (710)    (16,553)        ---
                                                --------    --------    --------    --------    --------
Net loss applicable to common shares            $(10,751)   $(60,259)    $(6,189)   $(77,410)   $(10,524)
                                                ========    ========    ========     =======     =======
Basic net loss per common share (6)             $ (3.33)    $ (16.22    $ (0.68)     $ (8.47)    $ (1.09)
                                                ========    ========    ========     =======     =======

Other Data
Operating income (loss) before unusual
   items and direct acquisition costs            $  (299)   $ 14,257    $ 42,159    $ 35,938    $ 25,323
</TABLE>


ITEM 6.  SELECTED FINANCIAL DATA (continued)

<TABLE>
<CAPTION>
                                                                    As of June 30,
                                                  1995       1996(2)     1997(5)      1998        1999
                                                 ------      ------     -------      ------      ------
                                                                       (In 000's)
<S>                                              <C>         <C>         <C>         <C>         <C>
Balance Sheet Data
Cash and cash equivalents and
  securities available for sale                  $37,414     $48,057     $28,924     $23,487     $16,930
Working capital                                   31,476     111,009     110,795     119,480     108,661
Total assets                                     126,348     375,504     352,016     366,837     356,307
Total long term debt,
      including current maturities               101,397     191,344     173,839     325,953     318,706
Series B Special Stock                               ---      51,552      58,981         ---         ---
Total stockholders' equity (deficiency)            9,985      69,846      53,555     (23,748)    (30,408)
</TABLE>

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

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

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

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

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

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


<PAGE>


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

Liquidity and Capital Resources

In August  1997 the  Company  completed  a series  of  related  transactions  as
described below (the "Refinancing")  which consisted of the private placement of
$150.0 million of Senior Subordinated Notes and the closing of $230.0 million of
bank financing.  The bank financing provides for (i) term loans in the aggregate
amount of up to $140.0  million,  comprised of a $75.0 million  tranche with a 7
1/2-year  term (the  "Tranche B Term  Loan"),  a $40.0  million  tranche with an
8-year term (the  "Tranche C Term Loan") and a $25.0  million  tranche  with a 7
1/2-year term (the "Delayed Draw Term Facility," and together with the Tranche B
Term Loan and the Tranche C Term Loan, the "Term Loan  Facilities");  and (ii) a
$90.0  million  revolving  credit  facility  with a 6-year term (the  "Revolving
Credit Facility"). The borrowing base for the revolving credit facility consists
of eligible receivables and inventory, as defined in the credit agreement and at
June 30, 1999 totaled $75.3 million.

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

On a pro forma basis for the year ended June 30, 1998,  assuming the Refinancing
had  occurred  on July 1,  1997,  the  Company  would have  reported  net income
available to common  shares of $0.8 million and net income per share of $0.09 or
a $8.56  improvement  over  the  reported  net  loss  per  share  of  $8.47.  In
conjunction with the Refinancing,  the Company incurred charges of approximately
$77.6 million,  including the $27.7 million  premium on the repurchase of the 12
7/8% Notes,  $16.6 million for the difference between the carrying value and the
liquidation  value of the Series B  Preferred  Stock and $19.0  million  for the
Rainbow Casino royalty buyout.  On an ongoing basis the Company will continue to
be highly leveraged and will have significant  interest costs;  however,  in the
near term the  Company  will have lower  overall  fixed  costs and only  limited
principal payments required on its long-term indebtedness.

At June 30, 1999, the Company had $16.9 million in cash and cash equivalents and
$43.1 million in  unborrowed  availability  on its revolving  lines of credit in
accordance with borrowing base limitations in the credit agreement.  In addition
the Company had working capital of approximately  $108.7 million,  a decrease of
approximately  $10.8  million  from  June 30,  1998  which is  explained  below.
Consolidated  cash and cash equivalents at June 30, 1999 includes  approximately
$15.4 million of cash which is utilized in Casino and Route  Operations which is
held in vaults, cages or change banks.

The Credit  Agreement for the bank financing has both financial and  operational
covenants.  On August 31,  1998,  the Company  obtained a consent  from its bank
group which cured a technical  default under the Credit Agreement related to the
transfer  of assets  from a  non-domestic  subsidiary  to a domestic  subsidiary
related to the formation of a wholly-owned subsidiary,  Bally Gaming Africa Pty.
Ltd., as well as a consent to a change in the definition of Restricted  Payments
to allow for an unrestricted amount of up to $7.0 million of Restricted Payments
(as defined in the Credit  Agreement).  In the quarter ended  December 31, 1998,
the Company did not meet certain covenants in the credit agreement.  The Company
and the  banks  have  amended  the  current  and  future  financial  maintenance
covenants in the bank credit agreement effective December 31, 1998 such that the
Company is in compliance with such covenants. As of June 30, 1999 the Company is
in compliance with these  covenants.  The Company is also in compliance with the
operational  covenants  contained in the indenture  for the Senior  Subordinated
Notes.  The Company's  business  strategy is to  successfully  implement  gaming
machines  that earn  recurring  revenue and EBITDA  within the Bally  Gaming and
Systems  business  unit such that the  Company's  non-core  assets could then be
disposed of to pay dawn debt.

Management  believes  that cash flow from  operating  activities,  cash and cash
equivalents held and the $90.0 million Revolving Credit Facility,  as limited by
the borrowing base, will provide the Company with sufficient  capital  resources
and  liquidity.  At June 30,  1999,  the  Company  had  commitments  for capital
expenditures  for  approximately  $2.0 million  related to the completion of the
Rainbow Casino expansion project.

Working Capital

The following table presents the components of  consolidated  working capital at
June 30, 1998 and 1999:

                                                  Balances at June 30,
                                           1998         1999        Change
                                          ------       ------       ------
                                                    (In $000's)

Cash and cash equivalents                $ 23,487     $ 16,930     $(6,557)
Accounts and notes receivable, net         93,459       92,665        (794)
Inventories, net                           42,418       46,138       3,720
Other current assets                       11,711       11,423        (288)
   Total current assets                   171,075      167,156      (3,919)

Accounts payable                           10,477       17,372      (6,895)
Accrued liabilities                        39,122       39,196         (74)
Current maturities of long-term debt        1,996        1,927          69
   Total current liabilities               51,595       58,495      (6,900)
                                          -------      -------     -------
Net working capital                      $119,480     $108,661    $(10,819)
                                         ========     ========    ========

The primary  fluctuations  contributing to the increase in working capital were:
(i) an increase in accounts payable  resulting from timing of payments,  (ii) an
increase in inventory due to a larger number of product  platforms to support at
Bally Gaming and Systems,  (iii) a net decrease in accounts receivable resulting
from cash collections, partially offset by improved revenues, (iv) a decrease in
prepaid assets due to a decrease in prepaid insurance, (v) the impact of foreign
exchange  fluctuations  between the dollar and the  deutschemark  on all working
capital categories,  and (vi) the corresponding impact of the above listed items
on cash and cash equivalents.

Cash Flow

During the year ended June 30,  1999,  $8.6  million of cash was  provided  from
operating  activities  resulting  from an  increase  in  accounts  payable,  the
provision for doubtful receivables and depreciation and amortization,  offset by
a net loss, an increase in inventories primarily at Bally Gaming and Systems, an
increase in deferred taxes and a net increase in accounts receivable.

During the year ended June 30, 1999,  the Company used $12.1  million of cash in
investing   activities   resulting  primarily  from  $11.8  million  in  capital
expenditures,  $1.5  million  of  payments  made  in  acquiring  the  rights  to
manufacture and distribute several gaming products, and $2.6 million of payments
in  acquiring  gaming  rights  of route  locations,  partially  offset by a $5.2
million  sales-leaseback  transaction  for gaming  machines in the Nevada  Route
operations.

During the year ended June 30,  1999,  the Company  used $2.9 million of cash in
financing  activities  resulting  primarily from a net pay-down in the Company's
revolving  credit  facility of $2.1  million,  $5.1  million  used to reduce the
Company's  long-term  debt and $0.5 million  used to  repurchase  the  Company's
common stock for treasury,  partially  offset from $4.8 million of cash proceeds
from the exercise of certain warrants to purchase common stock.

Customer Financing

Management  believes  that customer  financing  terms and leasing have become an
increasingly  important  competitive factor for the Bally Gaming and Systems and
Wall Machine and  Amusement  Games  business  units,  respectively.  Competitive
conditions  sometimes require Bally Gaming and Systems to grant extended payment
terms on gaming  machines,  systems and other gaming  equipment,  especially for
sales in emerging markets. While these financings are normally collateralized by
such  equipment,  the resale value of the collateral in the event of default may
be less than the amount financed.  Accordingly, the Company has greater exposure
to the  financial  condition  of its  customers  in  emerging  markets  than had
historically been the case in established markets like Nevada and Atlantic City.
Bally Wulff provides  customer  financing for approximately 20% of its sales and
also provides lease  financing to its  customers.  Lease terms are generally for
six months, but are also available for terms up to 43 months.

Year 2000

The Year 2000 readiness issue,  which is common to most businesses,  arises from
the inability of information systems, and other time and date sensitive products
and systems, to properly recognize and process date-sensitive information on and
beyond  January 1, 2000. The result could create errors in information or system
failures. Assessments of the potential cost and effects of Year 2000 issues vary
significantly  among  businesses,  and it is extremely  difficult to predict the
actual impact. Recognizing this uncertainty, management has and is continuing to
actively  analyze,  assess  and plan for  various  Year 2000  issues  across its
businesses.

The Year 2000 issue has an impact on both information  technology ("IT") systems
and non-IT systems,  such as its manufacturing  systems and physical  facilities
including,  but  not  limited  to,  security  systems  and  utilities.  Although
management  believes  that a majority of the  Company's IT systems are Year 2000
ready,  certain  systems  still have to be tested for Year 2000  readiness.  The
Company  plans to  replace or  upgrade  those  systems  that are  identified  as
non-Year  2000 ready during the remainder of calendar  1999.  Certain IT systems
previously identified as non-Year 2000 compliant are being upgraded or replaced,
and this process  should be complete by October 31, 1999.  Non-IT  system issues
are more difficult to identify and resolve.  The Company is actively identifying
non-IT Year 2000 issues  concerning  its products and  services,  as well as its
physical  facility  locations.  All non-IT areas  identified are included in the
company's  formal  action  plans to ensure  minimal  disruption  to its business
processes.   Management  engaged  outside   consultants  to  assist  and  advise
management in its assessment process and has implemented their  recommendations.
A centralized  project management  organization has been established to lead the
Company  through its Year 2000 efforts.  This  organization  includes  dedicated
outside resources and internal  business  representatives.  Although  management
believes  that its efforts will be  successful  and the costs will be immaterial
(currently  estimated  between  $400,000  to  $500,000  of  which  approximately
$260,000  has  been  spent as of June 30,  1999) to its  consolidated  financial
position and results of operations, it also recognizes that any failure or delay
could  cause a  disruption  in its  business  and have a  significant  financial
impact. To minimize this potential impact,  the Company is actively planning and
designing a contingency plan to support critical business processes which should
be complete be October 1999.

The Company has also initiated  efforts to ensure the Year 2000 readiness of its
products  and  services.  As part of its  assessment  of  current  products  and
services,  the Company is  currently  upgrading  all current  Bally  Systems SDS
customers to version 7.0  software,  for which the Company has  developed a Year
2000 compliance "patch" which is currently being distributed.  The Company plans
to have all  customers  upgraded to version 7.0 with the patch by October  1999.
Version 7.1 of the software is Year 2000  compliant and is currently  authorized
for  installation.  Customers  are  also  being  advised  that  the  IBM or Unix
operating systems they are using must also be upgraded to versions that are Year
2000  compliant.  Bally Systems has obtained the operating  system upgrades from
the vendors and has  offered to assist  users in  installing  the  upgrade.  The
Company has also tested most of the current products  manufactured in the United
States and Germany in recent years to determine  compliance  with Year 2000. The
Company is  actively  evaluating  its  strategy  and legal  obligations  for any
communication to its customers.  The Gamblers Bonus system used in the Company's
Nevada route operations has been tested and found to be Year 2000 compliant.

Management  continues to  formulate  new plans and update  existing  plans as it
progresses  in its research and  investigation.  The Year 2000  readiness of its
customers  varies,  and the Company is encouraging its customers to evaluate and
prepare  their own  systems.  These  efforts by  customers  to address Year 2000
issues may affect the demand for certain  products and  services;  however,  the
impact on revenue or any change in revenue patterns is highly uncertain.

The Company has completed  efforts to assess the Year 2000  readiness of its key
suppliers and business partners.  The Company's  direction in this effort was to
ensure the adequacy of resources and supplies to minimize any potential business
interruptions.  As part of the Company's contingency plans, management has begun
to identify and solidify  relationships with and access to alternative suppliers
and resources to ensure the support and  continuation  of its critical  business
operations.

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

Euro Currency Conversion

The  Company's  Bally  Wulff  subsidiary  uses  the  German  deutschmark  as its
functional currency.  The new Euro currency will replace the deutschmark as well
as most other European  currencies after a phase in period,  which began January
1, 1999. As most of Bally Wulff's transactions are within Germany, the switch to
the Euro is not  expected  to have a material  impact on  revenues,  expenses or
income.  The Company's  products can be brought into Euro compliance by moving a
switch  inside the wall  machine.  The cost of the new front glass  showing Euro
denominations will be borne by the customers.

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

Results of Operations

The following table presents the Company's  revenues,  earnings before interest,
taxes, depreciation and amortization ("EBITDA") and operating income by business
unit:
                                                 Years Ended June 30,
                                              1997      1998       1999
                                             ------    ------     ------
                                                     (In $000's)
     Revenues by business unit:
     Bally Gaming and Systems              $134,734   $109,597   $127,810
     Wall Machines and Amusement Games      131,934     98,611     90,834
     Route Operations                       127,028    148,507    175,854
     Casino Operations                       51,450     60,657     63,682
                                           --------    -------    -------
       Total Revenues                      $445,146   $417,372   $458,180
                                           ========   ========   ========

     EBITDA by business unit:
     Bally Gaming and Systems               $16,671    $10,808    $ 9,799
     Wall Machines and Amusement Games       29,719     18,661     10,150
     Route Operations                        20,200    24,577      24,860
     Casino Operations                       17,352     20,781     21,672
     Corporate expenses                     (19,177)   (16,051)   (18,054)
     Unusual item                              (700)       325        ---
                                           --------    -------    -------
       Total EBITDA                         $64,065    $59,101    $48,427
                                            =======    =======    =======


<PAGE>

                                                     Years Ended June 30,
                                              1997       1998       1999
                                             ------     ------     ------
                                                        (In $000's)

     Operating income by business unit:
     Bally Gaming and Systems               $10,616    $ 5,238    $ 5,779
     Wall Machines and Amusement Games       23,332     13,094      5,334
     Route Operations                        13,082     16,432     14,586
     Casino Operations                       15,407     18,736     19,348
     Corporate expenses                     (20,278)   (17,562)   (19,724)
     Unusual items                             (700)       325        ---
                                             ------     ------     ------
       Total Operating Income               $41,459    $36,263    $25,323
                                            =======    =======    =======

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

1999 Compared with 1998

Bally Gaming and Systems

For the year ended June 30, 1999, Bally Gaming and Systems reported  revenues of
$127.8 million, an increase of 17% compared to revenues of $109.6 million in the
prior year. The improvement was due primarily to a $9.4 million  increase in SDS
6000  game  monitoring  unit and  related  sales,  a $3.2  million  increase  in
recurring revenue sources and an increase in average selling price of new gaming
machines,  partially  offset by a decrease  in the number of units  sold.  Bally
Gaming and Systems  reported  shipments of new gaming machines of  approximately
12,300 units, an 8% decrease  compared to shipments of  approximately  13,400 in
the prior year. By market  segment,  Bally Gaming and Systems unit sales for the
current year consisted of  approximately  2,700 units to the Nevada and Atlantic
City  markets,   7,300  units  to  international  markets  and  2,300  units  to
riverboats, Native American and other domestic markets. Bally Gaming and Systems
reported  revenues  from the sale of new gaming  machines of $70.4  million,  an
increase  of 2%  compared  to  $68.9  million  in the  prior  year due to an 11%
increase in the average selling price of new machines, partially offset by lower
unit  volume.  Bally  Gaming and Systems  reported  revenues  from SDS 6000 game
monitoring  units of $31.4  million,  an increase of 42% compared to revenues of
$22.0 million in the prior year period,  primarily from shipments related to new
casino openings and to casinos acquired by Harrah's and Park Place Entertainment
that previously used competitors' systems. In addition,  revenues from recurring
revenue  sources were $7.0  million,  an increase of 82% compared to revenues of
$3.8 million in the prior year period.

For the year ended June 30, 1999,  gross profit margins improved to 45% from 44%
in the prior year  period.  The  improvement  was due  primarily  to a change in
product mix to higher margin gaming  machines,  an increase in higher margin SDS
6000 game  monitoring  unit  revenues and higher  revenues  from  machines  that
provide recurring revenues, partially offset by an increase in the provision for
inventory  obsolescence in the current year.  Bally Gaming and Systems  reported
operating  income of $5.8  million,  an  increase of 10%  compared to  operating
income of $5.2  million in the prior  year.  The  increase in  operating  income
resulted  primarily from higher revenues and improved  margins and a decrease in
depreciation  as certain  intangible  assets related to the acquisition of Bally
Gaming  International,  Inc. were fully  amortized in the prior year,  partially
offset by higher selling, general and administrative expenses,  primarily higher
marketing  costs  related to new product  launches and the  implementation  of a
product management organization focus, an increase in the provision for doubtful
receivables,  and an increase in research and  development  costs.  Research and
development costs totaled $13.9 million, an increase of 10% over the prior year,
resulting  from the  Company's  ongoing  efforts to expand its new and  existing
product offerings.


<PAGE>


Wall Machines and Amusement Games

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

The Wall  Machines and  Amusement  Games  business  unit  continued  its leasing
program whereby new wall machines are leased to customers  pursuant to operating
leases  which  provide a stream of revenues  and cash flows over the term of the
leases  which range from six months to three and one half years.  As of June 30,
1999, a total of 5,000 machines were deployed in the leasing program compared to
5,700  at June  30,  1998,  a  decrease  of 13%.  This  decrease  was due to the
completion  of a large lease  program in  September  1998  quarter  that was not
renewed by Bally Wulff.

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

Route Operations

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

For the year ended June 30, 1999, cost of revenues for Route Operations  totaled
$137.7  million,  an increase of 20% compared to costs of $114.6  million in the
prior year. As a percentage of revenues, costs of revenues increased to 78% from
77% in the  prior  year.  Cost of  revenues  for  the  Nevada  route  operations
increased,  as a percent of related revenues, to 80% from 79% in the prior year.
The increase was due  primarily  to lower  margins on new and renewed  locations
(due to competitive pressures), an increase in rental and participation payments
on gaming machines and higher direct payroll costs.  Costs of revenues for route
operations in Louisiana increased, as a percent of related revenues, to 66% from
64% in the prior year.  The increase was due  primarily to an increase in direct
costs,  principally  health  insurance  costs.  Cost of route revenues for Route
Operations   includes   rents  under  both  space  lease  and  revenue   sharing
arrangements,  gaming  taxes  and  direct  labor  including  payroll  taxes  and
benefits.

For the fiscal year ended June 30,  1999,  the Route  Operations  business  unit
reported  operating  income of $14.6  million,  a decrease  of 11%  compared  to
operating  income of $16.4 million in the prior year.  The decrease in operating
income  resulted  from  the  aforementioned  increase  in  operating  costs as a
percentage  of revenues,  an increase in selling,  general,  and  administrative
expenses as a percentage of revenues,  principally marketing and promotion costs
at the Nevada route operations,  a higher provision for doubtful receivables for
the Nevada route  operations,  and an increase in  depreciation as the result of
the  increased  number of gaming  machines  deployed and  amortization  of costs
incurred in taking over contracts in the prior fiscal year,  partially offset by
the aforementioned increase in revenues.

Casino Operations

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

For the year ended June 30,  1999,  the cost of revenues  for Casino  Operations
increased 4% to $27.0 million  compared to $25.9 million in the prior year. As a
percentage of revenues, the cost of revenues improved to 42% compared to 43% for
the prior  year.  As a percent of related  revenues,  cost of  revenues  for the
Rainbow Casino  remained  relatively flat at 37% between periods as the increase
in costs were in line with the  increase in  revenues.  Cost of revenues for the
Rail City Casino, as a percent of related revenues,  improved to 59% from 62% in
the prior year due primarily to the  achievement  of higher  revenues  without a
corresponding  increase in direct gaming costs. Cost of casino revenues includes
cost of goods sold,  gaming taxes, rent and direct labor including payroll taxes
and benefits.

For the year ended June 30, 1999, the Casino  Operations  business unit reported
operating  income of $19.3  million,  an increase  of 3%  compared to  operating
income of $18.7 million in the prior year. The operating  income  improvement is
due primarily to the aforementioned  increase in revenues and the improvement in
operating costs as a percentage of revenues,  partially offset by an increase in
selling,   general  and  administrative  costs  as  a  percentage  of  revenues,
principally  gaming  machine  rent  and  an  increase  in  depreciation  due  to
remodeling  projects at both  casinos  and the  increase in the number of gaming
machines.

Unusual Items

During the year ended June 30, 1998, the Company recorded the following unusual
items:
The  Company  settled a dispute  with Alpha  Hospitality  and  General  Electric
     Credit  Corporation  concerning  certain customer notes receivable on which
     the Company had certain recourse obligations.  The Company contributed $2.5
     million to the final  settlement with the holder of the notes, and reversed
     $6.0  million  of  reserves  previously   established  for  these  recourse
     obligations.  In addition, as part of the settlement the Company became the
     sole owner of  approximately  566,000  shares of Alpha  Hospitality  common
     stock  which  trades  on the  NASDAQ  Small  Cap  market.  Pursuant  to the
     limitations provided for in the settlement agreement,  the Company has sold
     440,000 shares of Alpha Hospitality through June 30, 1999.
As   a  result  of  settling  a  dispute  over  the  exclusive  use  of  certain
     technologies and changes in gaming  regulations,  the Company evaluated the
     cash flow of certain  of its  technology  assets,  in  accordance  with the
     provisions  of Financial  Accounting  Standards  Board  Statement  No. 121,
     "Accounting for the Impairment of Long-Lived  Assets and Long-Lived  Assets
     to be Disposed  of," and  determined  certain  items met the  definition of
     having  become  impaired.  During the year ended June 30,  1998 the Company
     recorded write-downs totaling $2.8 million for these items.
The  Company accrued $0.7 million for the present value of contractual  payments
     due to a former member of the board of directors who was not  re-elected to
     the board at the December 1997 annual shareholders meeting.
The Company  accrued $0.6 million as  restructuring  charges for Bally Gaming
     and Systems.
The Company  recorded a $1.6 million  charge for final  settlement of litigation
    related to the acquisition of BGII.

Consolidated

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

Cost of  revenues  for the year ended June 30,  1999 were  approximately  $288.5
million,  an  increase of 12%  compared to costs of $256.5  million in the prior
year.  The  increase is due  primarily  to the  increases  in costs at the Bally
Gaming and Systems,  Route  Operations  and Casino  Operations  business  units,
partially  offset by the decrease in costs at the Wall  Machines  and  Amusement
Games  business  unit.  Cost of  revenues  as a  percentage  of  total  revenues
increased slightly to 63% from 62% in the prior year period.

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

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

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

Interest Income and Expense and Income Taxes

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

The Company  recorded an income tax  provision of $0.8 million in the year ended
June 30, 1999,  compared to a provision  of $3.2 million in the prior year.  The
current year provision is due primarily to  establishing  a valuation  allowance
against deferred tax assets for the Wall Machine and Amusement business unit and
domestic  state income  taxes.  At June 30, 1999,  the Company had net operating
loss carry  forwards  for federal  income tax  purposes of  approximately  $50.5
million which are available to offset future  federal  taxable  income,  if any,
expiring  in the years 2007  through  2014.  At June 30,  1999 the  Company  had
foreign tax credit carry forwards of approximately  $7.5 million and alternative
minimum tax credit (AMT) carry forwards of approximately  $1.7 million.  Foreign
tax credits have  expiration  dates  ranging  from 2000 to 2004 unless  utilized
prior to such time. AMT credits are available to be carried forward indefinitely
and may be utilized against regular U.S. corporate tax to the extent it does not
exceed computed AMT calculations.  In addition,  approximately  $6.7 million and
$2.0 million of the net operating  loss  carryforwards  cannot be utilized until
fiscal year 2000 and 2001, respectively, pursuant to Section 382 of the Internal
Revenue Code.

1998 Compared with 1997

Bally Gaming and Systems

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

For the year ended June 30, 1998,  gross profit margins improved to 44% from 37%
in the prior year period. The gross margin improvement resulted primarily from a
greater  proportion  of higher  margin SDS 6000 game  monitoring  unit sales and
lower  provisions for inventory  obsolescence in the current year period.  Bally
Gaming and Systems reported operating income of $5.2 million, a decrease of 51%,
compared to  operating  income of $10.6  million in the prior year  period.  The
operating  income  decrease  resulted  primarily  from lower revenues and higher
selling,  general  and  administrative  expenses,  principally  a  $6.0  million
increase in  research  and  development,  partially  offset by the gross  margin
improvement.

Wall Machines and Amusement Games

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

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

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


<PAGE>

Route Operations

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

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

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

Casino Operations

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

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

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

Unusual Items

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

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

Consolidated

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

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

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

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

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

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

Interest Income and Expense and Income Taxes

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

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

Risk Factors

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

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

High Leverage; Ability to Service Debt, Liquidity

After  the  completion  of the  Refinancing,  the  Company  has a  substantially
increased amount of indebtedness.  As of June 30, 1999 the aggregate outstanding
principal  amount of the  Company's  long-term  indebtedness  including  current
maturities was $318.7 million.  The Company also has available to it up to $43.1
million in unborrowed capacity under the Revolving Credit Facility.  The Company
had a net capital deficiency at June 30, 1999 of $30.4 million.

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

Due to the low amount of consolidated  EBITDA (as defined) earned by the Company
in the December 1998 quarter,  the Company did not meet the financial  covenants
in the bank credit  facility.  The Company and the banks amended the current and
future  financial  maintenance  covenants in the bank credit facility  effective
December 31, 1998. The Company is in compliance with such amended covenants, but
no  assurance  can be given that the Company  will  continue to meet the amended
covenants in the future.

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

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

Operating History--Recent Losses

The Company  incurred net losses of $57.3  million  (including  $61.0 million of
costs  related to the  Refinancing)  for the fiscal year ended June 30, 1998 and
$8.8  million for the year ended June 30, 1999.  There can be no assurance  that
the  Company  will be  profitable,  and  that  it  will  not  incur  unusual  or
non-recurring charges, in the future.

Competition

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

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

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

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

Route Operations.  The competition for obtaining and renewing route contracts in
Nevada is high and  continues to  intensify.  Such  competition  has, over time,
reduced the Company's  gross profit  margins for such  operations.  In addition,
such  competition  has required the Company to provide  financial  incentives to
retain or obtain certain route  locations.  Such  incentives  include  long-term
lease   commitments,   guarantees   of  leases  in  favor  of  owners  of  local
establishments,   substantial   promotional  allowances  and  advance  deposits,
payments   of  lease   rentals  in   advance   and  loans  for   buildings   and
tenant-improvement  costs.  Notwithstanding  the Company's  business strategy of
emphasizing  profitability  rather than market share,  the future success of the
Company's  Route  Operations will continue to be dependent to some extent on its
ability and  willingness  to provide such  financial  inducements.  Although the
Company has historically  generated sufficient new route contracts to offset the
loss  of old  route  contracts,  due to  increased  competition,  the  increased
sophistication  and bargaining power of customers and possibly other factors not
yet known, there can be no assurance that the Company will be able to obtain new
route contracts or renew or extend its route contracts upon their  expiration or
termination,  or that, if renewed or extended, the terms will be as favorable to
the Company.  In Louisiana,  the Company's Route Operations at the racetrack and
OTBs  compete  with  various  truck stops and  locations  with  liquor  licenses
throughout the New Orleans area, as well as riverboat  gaming and one land-based
casino which is scheduled to re-open in New Orleans in October 1999.

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

Product Development

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

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

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

Sales to Non-Traditional Gaming Markets

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

Management  believes  that customer  financing  terms and leasing have become an
increasingly  important  competitive factor for the Bally Gaming and Systems and
Wall Machine and  Amusement  Games  business  units,  respectively.  Competitive
conditions  sometimes require Bally Gaming and Systems to grant extended payment
terms on gaming  machines,  systems and other gaming  equipment,  especially for
sales in emerging markets. While these financings are normally collateralized by
such  equipment,  the resale value of the collateral in the event of default may
be less than the amount financed.  Accordingly, the Company has greater exposure
to the  financial  condition  of its  customers  in  emerging  markets  than had
historically been the case in established markets like Nevada and Atlantic City.
Bally Wulff provides  customer  financing for approximately 20% of its sales and
also provides lease  financing to its  customers.  Lease terms are generally for
six months, but are also available for terms up to 43 months.

Foreign Operations

The Company's  business in foreign  markets is subject to the risks  customarily
associated  with such  activities.  These risks include  fluctuations in foreign
currency exchange rates and controls,  expropriation,  nationalization and other
economic,  tax and regulatory  policies of local governments as well as the laws
and policies of the United States affecting foreign trade and investment.  Bally
Gaming and Systems has $24.7 million of receivables  from  countries  outside of
the United States most of which are  denominated  in U.S.  dollars.  The Company
does not generally enter into foreign  exchange  contracts to hedge its exposure
to foreign exchange rate fluctuations.

Dependence on Key Personnel

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

Strict Regulation by Gaming Authorities

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

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

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

The Company currently has an agreement with Fair Grounds Corporation,  Jefferson
Downs  Corporation  and Finish Line  Management  Corporation to be the exclusive
operator of video poker machines at the only  racetrack and ten associated  OTBs
in the  greater  New Orleans  area.  On  November  5, 1996  voters in  Louisiana
approved a proposition to eliminate  video poker in one of the seven parishes in
which the Company  operates  gaming  machines in OTBs in the greater New Orleans
area. These  operations also depend on the financial  viability of the racetrack
and the OTBs, which is beyond the control of the Company. See  "Business--Gaming
Regulations and Licensing".

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

Gaming Taxes and Value Added Taxes

Gaming operators are typically subject to significant taxes and fees in addition
to  corporate  and state  income  taxes,  and such taxes and fees are subject to
increase at any time. Any material  increase in these taxes or fees, which could
occur prospectively or retroactively,  would adversely affect the Company. Sales
of Bally Wulff's products in Germany are generally  subject to value added taxes
("V.A.T."). During fiscal 1999, Bally Wulff increased the amount of tax reserves
by $0.6 million (to a total reserve of $2.0 million) as a result of developments
in ongoing  quadrennial audits of Wulff's tax returns for the years 1988 through
1996. The German tax authorities have proposed  preliminary  adjustments of $2.0
million,  which has been accrued. The German tax authorities have not yet issued
the final assessment from their quadrennial audits. The government in the German
State of North  Rhine  Westphalia  modified  its  regulations  to  permit  local
municipalities  to  independently  impose  additional  taxes on  gaming  machine
operators  beginning  January 1, 1999. In the past,  the  imposition of tax rate
increases has adversely  affected Bally Wulff's sales. There can be no assurance
that  municipalities  will not impose new taxes or raise  existing  taxes in the
future.

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

Change of Control

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

Currency Rate Fluctuations

The  company  derives  revenues  from its  non-U.S.  subsidiaries,  all of which
revenues  are  denominated  in their  local  currencies,  and their  results are
affected by changes in the relative  values of non-U.S.  currencies and the U.S.
dollar.  Most of the  currencies  in  countries in which the Company has foreign
operations  weakened versus the U.S. dollar in 1998 and 1999,  which resulted in
assets and liabilities  denominated in local  currencies  being  translated into
fewer  dollars.  The average  currency  rate changes for the year ended June 30,
1998 resulted in an unfavorable impact on consolidated revenues of approximately
$12.2 million or 3% and on operating income of $1.6 million or 4%. However,  the
average  currency  rate  changes for the year ended June 30, 1999  resulted in a
favorable impact on consolidated  revenues of approximately  $2.1 million and on
operating income of $0.1 million. The Company does not currently utilize hedging
instruments.

Market risks

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

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

The results of the sensitivity analysis at June 30, 1999, are as follows:

Interest Rate Risk:

The  Company  had total  debt as of June 30,  1999 of $318.7  million,  of which
$137.7 million of borrowings under the Term Loan Facilities and $12.9 million of
borrowings  on the  Revolving  Credit  Facility are at a floating  rate based on
LIBOR and $19.3 million of German  borrowings on revolving credit facilities are
at a floating rate based on the Eurodeutschmark borrowing rate. If the LIBOR and
Eurodeutschmark  rates were each to increase  or  decrease by 100 basis  points,
with all other factors remaining  constant,  earnings would decrease or increase
by approximately  $1.7 million on a pre-tax basis,  all other factors  remaining
constant.

Foreign Currency Exchange Rate Risk:

The Company has subsidiaries with the following  functional  currencies:  German
Deutschemark,  Australian  Dollar  and South  African  Rand,  although  the only
subsidiaries currently with material amounts of assets, liabilities and revenues
are in Germany. If the German deutschemark declined 10% against the U.S. dollar,
there would be a corresponding decrease in earnings reported in the consolidated
group, when compared to the equivalent level of German deutschemark earnings, of
approximately  $0.2  million.  Such a change in the  German  deutschemark  would
result  in an  immaterial  transaction  loss,  but  would  result in a charge to
accumulated  other  comprhensive  loss,  which is a component  of  stockholder's
equity, of approximately $6.0 million, all other factors remaining constant.

Estimates

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

ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

Not applicable.

                                          PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


<PAGE>



                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   Documents filed as part of this report:                            Page

1.    Financial Statements:

      Independent Auditors' Report                                        F-1

      Consolidated Balance Sheets as of June 30, 1998 and 1999            F-2

      Consolidated Statements of Operations for the Years Ended
        June 30, 1997, 1998 and 1999                                      F-3

      Consolidated  Statements of Stockholders' Equity (Deficiency)
        for the Years Ended June 30, 1997, 1998 and 1999                  F-4

      Consolidated  Statements  of Cash Flows for the Years Ended
        June 30, 1997, 1998 and 1999                                      F-5

      Notes to Consolidated Financial Statements                          F-6

2.    Consolidated Supplemental Schedules:

      Not applicable.

3.    Exhibits:

Exhibit
Number     Description

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

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

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

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

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

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

Exhibit
Number     Description

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.55      1991 Incentive Plan of Bally Gaming International, Inc. (incorporated
           herein  by  reference  to  exhibit  10(iii)(a)   included  in  BGII's
           Registration Statement No.33-42227 on Form S-1, effective November 8,
           1991).*

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.80      Employment  Agreement,  dated July 1, 1997  between  the  Company and
           Robert  L.  Miodunski.  (incorporated  by  reference  to  the Company
           quarterly report on Form 10-Q for March 31, 1998).*

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

21         Subsidiaries of the Registrant.

23.1       Consent of KPMG LLP

27.1       Financial Data Schedule

27.2       Restated Financial Data Schedule

*     Management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K:

      There were no reports  filed on Form 8-K for the three  months  ended June
30, 1999.

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

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


<PAGE>




                                  SIGNATURES

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

ALLIANCE GAMING CORPORATION                       DATED:   September  27, 1999


By    /s/ Morris Goldstein
      --------------------
      Morris Goldstein,
      Director, President and Chief
      Executive Officer



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

 Name                      Title                         Date


/s/ Morris Goldstein       Director, President and Chief      September 27, 1999
--------------------       ExecutiveOfficer (Principal
Morris Goldstein           Executive Officer)



/s/ Scott D. Schweinfurth  Sr. Vice  President, Treasurer     September 27, 1999
-------------------------  and Chief  Financial Officer
Scott D. Schweinfurth      (Principal Financial and
                           Accounting Officer)



/s/ Jacques Andre          Director                           September 27, 1999
-----------------
Jacques Andre


/s/ Anthony DiCesare       Director                           September 27, 1999
--------------------
Anthony DiCesare


/s/ Michael Hirschfeld     Director                           September 27, 1999
----------------------
Michael Hirschfeld


/s/ Joel Kirschbaum        Director                           September 27, 1999
-------------------
Joel Kirschbaum


/s/ David Robbins          Director and Chairman of the       September 27, 1999
-----------------          Board
David Robbins



<PAGE>


                                INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Alliance Gaming Corporation:

We have audited the accompanying  consolidated balance sheets of Alliance Gaming
Corporation  and  Subsidiaries  as of June 30,  1998  and  1999 and the  related
consolidated  statements of operations,  stockholders'  equity  (deficiency) and
cash flows for each of the years in the  three-year  period ended June 30, 1999.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Alliance  Gaming
Corporation  and  Subsidiaries  as of June 30, 1998 and 1999, and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended June 30, 1999, in conformity  with  generally  accepted  accounting
principles.




                                                      KPMG LLP





Las Vegas, Nevada
August 11, 1999





<PAGE>


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

                                           ASSETS
                                                       June 30,       June 30,
                                                         1998           1999
                                                        ------         ------
Current assets:
  Cash and cash equivalents                             $23,487       $16,930
   Accounts and notes receivable, net of allowance
     for doubtful accounts of $11,932 and $12,705        93,459        92,665
   Inventories, net of reserves of $6,797 and $7,077     42,418        46,138
   Other current assets                                  11,711        11,423
                                                        -------       -------
      Total current assets                              171,075       167,156
                                                        -------       -------

Long-term notes receivable, net of allowance for
  doubtful accounts of  $1,109 and $991                   7,931         5,782
Leased gaming equipment, net of accumulated
  depreciation of $4,020 and $5,111                       7,325        10,981
Property, plant and equipment, net of accumulated
  depreciation and amortization of $46,090 and $51,68    77,905        74,159
Excess of costs over net assets of acquired
  businesses, net of accumulated amortization of
  $3,199 and $4,604                                      59,952        57,593
Intangible assets, net of accumulated amortization
  of $13,358 and $18,351                                 26,732        26,854
Deferred tax assets, net of valuation allowance          11,467         8,982
Other assets, net of reserves of $3,488 and $3,468        4,450         4,800
                                                        -------       -------
                                                       $366,837      $356,307

                          LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
  Accounts payable                                      $10,477       $17,372
  Accrued liabilities                                    39,122        39,196
  Current maturities of long term debt                    1,996         1,927
                                                         ------        ------
      Total current liabilities                          51,595        58,495
                                                        -------       -------
Term loan facilities                                    137,800       134,096
Senior Subordinated Notes due 2007, net                 149,245       149,298
Other long term debt, less current maturities            36,912        33,385
Other liabilities                                        12,718         9,458
                                                        -------        ------
      Total liabilities                                 388,270       384,732
                                                        -------       -------

Minority interest                                         2,315         1,983

Commitments and contingencies
Stockholders' deficiency:
  Special Stock, 10,000,000 shares authorized:
     Series E, $100 liquidation value; 137,317 shares
     and 153,802 shares issued and outstanding           13,732        15,380
  Common Stock, $.10 par value; 50,000,000 shares
     authorized, 9,178,000 shares and 9,791,000 shares
     issued                                               3,212           979
  Treasury stock, at cost, 85,300 shares                      -          (522)
  Additional paid-in capital                            122,980       129,991
  Accumulated other comprehensive loss                  (13,946)      (15,986)
  Accumulated deficit                                  (149,726)     (160,250)
                                                       --------      --------
      Total stockholders' deficiency                    (23,748)      (30,408)
                                                       ---------     --------
                                                        $366,837     $356,307
                                                        ========     ========

                See accompanying notes to consolidated financial statements.


<PAGE>



                        ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF OPERATIONS

                            (In 000's, except per share amounts)

                                                     Years Ended June 30,
                                                 1997        1998        1999
                                                ------      ------      ------
Revenues:
    Gaming equipment and systems              $134,734    $109,597    $127,810
    Wall machines and amusement games          131,934      98,611      90,834
    Route operations                           127,028     148,507     175,854
    Casino operations                           51,450      60,657      63,682
                                               -------     -------     -------
                                               445,146     417,372     458,180
                                               -------     -------     -------
Costs and expenses:
      Cost of gaming equipment and systems      84,496      61,684      69,721
      Cost of wall machines and amusement games 68,426      54,241      54,035
      Cost of route operations                  95,716     114,645     137,692
      Cost of casino operations                 22,269      25,930      27,011
      Selling, general and administrative       99,520      86,318     104,104
      Research and development costs             9,954      15,778      17,190
  Depreciation and amortization                 22,606      22,838      23,104
  Unusual items                                    700        (325)          -
                                                ------     --------  ---------
                                               403,687     381,109     432,857
                                               -------     -------     -------

Operating income                                41,459      36,263      25,323

Other income (expense):
    Interest income                              1,620         813         549
    Interest expense                           (23,626)    (28,600)    (31,385)
    Rainbow royalty                             (4,722)       (587)          -
    Rainbow royalty buyout                           -     (19,000)          -
    Minority interest                           (1,092)     (2,002)     (2,053)
    Other, net                                     139       1,025        (431)
                                                 -----     -------      -------

Income (loss) before income taxes               13,778     (12,088)     (7,997)
Income tax provision                            (7,993)     (3,185)       (830)
                                               --------    --------     -------

Net income (loss) before extraordinary item      5,785     (15,273)     (8,827)
Extraordinary loss, without tax benefit             -      (42,033)            -
                                              --------     --------    ---------
Net income (loss)                                5,785     (57,306)     (8,827)

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

Basic and diluted loss per share:
  Loss before extraordinary item                $(0.68)     $(3.87)     $(1.09)
  Extraordinary loss                                -        (4.60)         -
                                                 -----       -----       -----
   Net loss                                     $(0.68)     $(8.47)     $(1.09)
                                                ======      ======      ======


Basic and diluted weighted average common
  shares outstanding                             9,092       9,142       9,665
                                                 =====       =====       =====



                See accompanying notes to consolidated financial statements.


<PAGE>


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

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

                                                                                                                         Total
                                                                                                Accumulated              Stock-
                                                                                    Additional     Other                holders'
                                        Common Stock        Series E     Treasury    Paid-in   Comprehensive  Accum.     Equity
                                     Shares     Dollars   Special Stock   Stock      Capital      Income     Deficit  (Deficiency)
                                     ------     -------   ----------      -----     -------      ------    ---------   ---------
<S>                                  <C>      <C>         <C>                       <C>            <C>    <C>         <C>
Balances at June 30, 1996            31,763   $   3,176   $  11,316        --       139,031        (287)  $ (83,390)  $  69,846

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

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

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

Net loss                               --          --          --          --          --          --        (8,827)     (8,827)
1-for-3.5 reverse common stock
   split                            (22,916)     (2,291)       --          --         2,291        --          --          --
Shares issued upon exercise of
   options and warrants                 585          58        --          --         4,720        --          --         4,778
Special Stock dividends                --          --         1,648        --          --          --        (1,697)        (49)
Repurchases of common stock for
  treasury                             --          --          --          (522)       --          --          --          (522)
Foreign currency translation
  adjustment                           --          --          --          --          --        (2,040)       --        (2,040)
                                     ------      ------    --------       -----     -------      ------     -------     -------
Balances at June 30, 1999             9,791   $     979   $  15,380   $    (522)  $ 129,991   $ (15,986)  $(160,250)  $ (30,408)
                                     ======     ========  =========     =======   =========    ========    ========    ========
</TABLE>


                See accompanying notes to consolidated financial statements.




<PAGE>


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

                                                       Years Ended June 30,
                                                  1997        1998        1999
                                                 ------      ------      ------
Cash flows from operating activities:
  Net income (loss)                             $ 5,785    $(57,306)   $ (8,827)
   Adjustments to reconcile net income (loss)
    to net cash provided by (used in) operating
    activities:
    Depreciation and amortization                22,606      22,838      23,104
    Amortization of debt discounts                  807          44          52
    Extraordinary item                                -      42,033           -
    Write down of other assets                    1,075       2,329         828
    Loss on sale of assets                        1,233         133         225
    Provision for losses on (recovery of)
     receivables                                  9,059      (7,194)      3,174
    Other                                          (651)        (51)     (1,171)
  Change in  operating  assets and  liabilities,
   net of  effects of  businesses acquired:
    Accounts and notes receivable                (4,601)      1,946      (1,553)
    Inventories                                  (6,898)     (9,221)    (13,649)
    Other current assets                         (1,549)     (3,012)       (429)
    Accounts payable                             (1,970)     (3,793)      6,940
    Accrued liabilities                            (760)      2,594        (139)
                                                  -----      ------      ------
     Net cash provided by (used in) operating
      activities                                 24,136      (8,660)      8,555
                                                -------      ------      ------

Cash flows from investing activities:
  Additions to property, plant and equipment    (13,257)    (15,541)    (11,755)
  Proceeds from disposal of property, plant
    and equipment                                   254          55         356
  Proceeds from sale/leaseback transaction            -           -       5,240
  Additions to other long-term assets            (8,574)     (9,633)     (5,943)
     Net cash used in investing activities      (21,577)    (25,119)    (12,102)
                                                -------     -------     -------

Cash flows from financing activities:
  Conversion/refinancing fees and expenses            -     (32,752)          -
  Capitalized debt issuance costs                     -     (11,456)          -
  Proceeds from long-term debt                        -     303,734           -
  Reduction of long-term debt                    (6,774)   (179,747)     (5,089)
  Net change in credit lines                    (11,578)     25,398      (2,077)
  Repurchase/redemption of Series B Special
    Stock                                        (3,879)    (77,568)          -
  Purchase of common stock for treasury               -           -        (522)
  Proceeds from exercise of stock options and
    warrants                                        767         855       4,778
                                                  -----       -----      ------
     Net cash provided by (used in) financing
       activities                               (21,464)     28,464      (2,910)
                                                -------     -------      ------

  Effect of exchange rate changes on cash          (228)       (122)       (100)
                                                 ------      ------      ------
  Cash and cash equivalents:
     Decrease for year                          (19,133)     (5,437)     (6,557)
     Balance, beginning of year                  48,057      28,924      23,487
                                                 ------      ------      ------
     Balance, end of year                       $28,924     $23,487     $16,930
                                                =======     =======     =======


                See accompanying notes to consolidated financial statements.


<PAGE>



                        ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          Years Ended June 30, 1997, 1998 and 1999

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS

      Description of business

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

      Principles of consolidation

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

      Cash and cash equivalents

      Cash equivalents consist of highly liquid debt instruments  purchased with
      an original  maturity of three  months or less at the date of purchase and
      are carried at cost, which approximates market value. Also, includes $14.4
      million $15.4 and million  at June 31, 1998 and 1999 which is utilized in
      Casino and Route Operations which is held in vaults, cages or change
      banks. The Company maintains restricted amounts to ensure  availability of
      funds to pay progressive jackpot liabilities which at June 30, 1999
      totaled approximately $0.3 million.

      Inventories

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

      Inventories,  net of reserves,  consist of the  following at June 30, 1998
      and 1999:

                                                 1998        1999
                                                ------      ------
                                                     (In 000's)
            Raw materials                      $12,075     $16,676
            Work-in-process                      2,668       2,057
            Finished goods                      27,675      27,405
                                                ------      ------
              Total inventories                $42,418     $46,138
                                               =======     =======

      Property, plant and equipment and leased gaming equipment

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

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

      Property,  plant and equipment  consists of the following at June 30, 1998
      and 1999:

                                                          1998        1999
                                                         ------      ------
                                                             (In 000's)
      Land and land improvements                        $21,058     $21,195
      Buildings and leasehold improvements               29,926      31,537
      Gaming equipment                                   50,341      47,751
      Furniture, fixtures and equipment                  22,670      25,362
      Less accumulated depreciation and amortization    (46,090)    (51,686)
                                                        -------     -------
        Total property, plant and equipment, net        $77,905     $74,159
                                                        =======     =======

      Excess of costs over net assets of acquired businesses

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

      Intangible assets

      Intangible   assets  consist   primarily  of  costs  associated  with  the
      acquisition of location  leases which are  capitalized  and amortized over
      the expected  life of the leases,  ranging  from one to 24 years,  with an
      average life of  approximately  6 years,  and deferred  issuance costs for
      financings which are amortized over the life of the related financing.

      Accrued liabilities

      Accrued liabilities consists of the following at June 30, 1998 and 1999:

                                                 1998        1999
                                                ------      ------
                                                      (In 000's)
            Payroll and related costs          $ 9,150     $11,887
            Interest                             8,782       8,352
            Professional and consulting fees     3,569       2,476
            Sales, use and income taxes          3,380       4,098
            Deferred revenues                    1,654       2,194
            Litigation settlement                2,000           -
            Other                               10,587      10,189
                                                ------      ------
               Total accrued liabilities       $39,122     $39,196
                                               =======     =======

      Estimates

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

      Revenue recognition

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

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

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

      Unusual items

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

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

      The Company settled a dispute with Alpha  Hospitality and General Electric
          Credit  Corporation  concerning  certain  customer notes receivable on
          which the  Company  had  certain  recourse  obligations.  The  Company
          contributed  $2.5 million to the final  settlement  with the holder of
          the  notes,   and  reversed   $6.0  million  of  reserves   previously
          established for these recourse  obligations.  In addition,  as part of
          the  settlement  the  Company  became the sole owner of  approximately
          566,000 shares of Alpha  Hospitality  common stock which trades on the
          NASDAQ Small Cap market.  Pursuant to the limitations  provided for in
          the settlement agreement, the Company has sold 440,000 shares of Alpha
          Hospitality through June 30, 1999.
      As  a result of  settling  a dispute  over the  exclusive  use of  certain
          technologies and changes in gaming regulations,  the Company evaluated
          the cash flow of certain of its technology  assets, in accordance with
          the provisions of Financial  Accounting  Standards Board Statement No.
          121,   "Accounting  for  the  Impairment  of  Long-Lived   Assets  and
          Long-Lived Assets to be Disposed of," and determined certain items met
          the definition of having become  impaired.  During the year ended June
          30, 1998 the Company  recorded  write-downs  totaling $2.8 million for
          these items.
      The Company  accrued  $0.7  million for the present  value of  contractual
          payments due to a former  member of the board of directors who was not
          re-elected  to the  board at the  December  1997  annual  shareholders
          meeting.
      The Company accrued $0.6 million as restructuring charges for Bally Gaming
          and Systems.
      The Company  recorded  a $1.6  million  charge  for  final  settlement  of
          litigation related to the acquisition of BGII.

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

      Foreign currency translation

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

      Income taxes

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

      Loss per share of common stock

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

      Under FAS No. 128, basic and diluted earnings per share are computed based
      on the weighted average number of shares of Common Stock outstanding.  The
      following  computation of basic and diluted loss per share from continuing
      operations,  extraordinary loss and loss applicable to common shares is as
      follows:

                                                  Fiscal Year ended June 30,
                                                            1997 (a)
                                                   Net
                                                 Income     Average
                                                 (Loss)      Shares      EPS
                                                 ------      ------     -----
                                                 (In 000's except share data)
         Basic EPS
         Net income before extraordinary item    $ 5,785
         Preferred stock dividend                (11,264)
         Premium on repurchase/redemption
             of  Series B Special Stock             (710)
                                                   -----      -----     ------
         Loss before extraordinary item           (6,189)     9,092     $(0.68)
         Extraordinary loss                           --         --         --
                                                   -----      -----     ------
         Loss applicable to common shares        $(6,189)     9,092     $(0.68)
         Effect of dilutive securities                          --         --
                                                              -----     ------
         Diluted EPS                             $(6,189)     9,092     $(0.68)
                                                 =======      =====     =======

      (a) The restatement of the Basic and Dilutive EPS for this period resulted
      in no change to the amounts previously reported.



<PAGE>


                                                   Fiscal Year ended June 30,
                                                            1998
                                                    Net    Average
                                                   Loss    Shares        EPS
                                                  ------   ------       -----
                                                  (In 000's except share data)
         Basic EPS
         Net loss before extraordinary item     $(15,273)
         Preferred stock dividend                 (3,551)
         Premium on repurchase/redemption
             of  Series B Special Stock          (16,553)
                                                  ------     -----      ------
         Loss before extraordinary item          (35,377)    9,142      $(3.87)
         Extraordinary loss                      (42,033)    9,142       (4.60)
                                                 -------     -----       -----
         Loss applicable to common shares       $(77,410)    9,142      $(8.47)
         Effect of dilutive securities                          --          --
                                                             -----      ------
         Diluted EPS                            $(77,410)    9,142      $(8.47)
                                                ========     =====      ======

                                                     Fiscal Year ended June 30,
                                                               1999
                                                    Net     Average
                                                   Loss     Shares        EPS
                                                  ------    ------       -----
                                                   (In 000's except share data)
         Basic EPS
         Net loss before extraordinary item      $(8,827)
         Preferred stock dividend                 (1,697)
         Premium on repurchase/redemption
             of Series B Special Stock                --
         Loss before extraordinary item          (10,524)    9,665      $(1.09)
                                                 -------     -----      ------
         Extraordinary loss                           --        --          --
                                                 -------     -----      ------
         Loss applicable to common shares       $(10,524)    9,665      $(1.09)
         Effect of dilutive securities                          --          --
                                                             -----      ------
         Diluted EPS                            $(10,524)    9,665      $(1.09)
                                                ========     =====      ======

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

                                              Fiscal Years ended June 30,
                                          1997           1998           1999
                                         ------         ------         ------
                                                       (in 000's)
      Stock options                       1,328          1,553          1,483
      Warrants                            2,891          2,891          2,294
      Convertible preferred stock           583            667            747
                                          -----          -----          -----
                                          4,802          5,111          4,524
                                          =====          =====          =====
      Adjusted for application of the
        treasury stock method               170            579             -
                                          =====          =====           ====

      Fair value of financial instruments

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



2.    RECEIVABLES

      The Gaming  Equipment and Systems and Wall  Machines and  Amusement  Games
      business  units grant  customers  payment  terms under  contracts of sale.
      These  contracts  are  generally  for  terms of one to three  years,  with
      interest at  prevailing  rates,  and are generally  collateralized  by the
      related  equipment  sold,  although  the  value  of  such  equipment,   if
      repossessed,  may be less than the  receivable  balance  outstanding.  See
      "Concentration of Credit Risk". The Company's Nevada route operations from
      time to time makes  loans to location  operators  for  build-outs,  tenant
      improvements and initial operating  expenses,  which are generally secured
      by the personal guarantees of the operators and the locations' assets. The
      majority  of the loans  bear  interest  rates  between 8% to 10.5% and are
      expected  to be repaid over a period of time not to exceed the life of the
      revenue sharing arrangement and have due dates ranging from September 1999
      to September 2008.

      The following table represents, at June 30, 1999, scheduled collections of
      accounts and notes receivable (net of allowances for doubtful accounts) by
      fiscal year:

                                Years ending June 30,
                                     (In 000's)
             2000     2001     2002     2003     2004  Thereafter  Total
             ----     ----     ----     ----     ----  ----------  -----
            $92,665  $3,856   $1,174    $253     $196     $303    $98,447
            =============================================================


3.    DEBT, LINES OF CREDIT AND REFINANCING TRANSACTION

      Long-term debt and lines of credit at June 30, 1998 and 1999  consisted of
           the following:

                                                           1998         1999
                                                          ------       ------
                                                               (In 000's)
      10 % Senior Subordinated Notes due 2007, net of
         unamortized discount of  $755 and $702          $149,245     $149,298
      Term loan facilities:
         Tranche B Term Loan                               74,438       72,380
         Tranche C Term Loan                               39,700       38,744
         Delayed Draw Term Facility                        25,000       24,372
      Revolving credit facility                            34,971       32,200
      Other, secured by related equipment                   2,599        1,712
                                                          -------      -------
                                                          325,953      318,706
      Less current maturities                               1,996        1,927
                                                          -------      -------
      Long-term debt, less current maturities            $323,957     $316,779
                                                         ========     ========

      In August 1997 the Company effected a series of related  transactions (the
      "Refinancing").  The  Refinancing  consisted  of the private  placement of
      $150.0  million  of Senior  Subordinated  Notes and the  closing of $230.0
      million of bank financing.  The bank financing provides for (i) term loans
      in the  aggregate  amount of up to $140.0  million,  comprised  of a $75.0
      million  tranche with a 7 1/2-year  term (the  "Tranche B Term  Loan"),  a
      $40.0 million tranche with an 8-year term (the "Tranche C Term Loan"), and
      a $25.0  million  tranche with a 7 1/2-year  term (the  "Delayed Draw Term
      Facility" and together with the Tranche B Term Loan and the Tranche C Term
      Loan,  the "Term Loan  Facilities");  and (ii) a $90.0  million  revolving
      credit facility (the "Revolving Credit Facility") with a 6-year term. Each
      of these credit facilities is a variable rate borrowing in accordance with
      a credit grid.  The interest rates at the highest level of the credit grid
      and maturity dates are as follows:


                                           Initial            Maturity
                                            Rate                Date
                                           ------              ------
            Tranche B Term Loan          LIBOR + 3.25%    January 31, 2005
            Tranche C Term Loan          LIBOR + 3.50%       July 31, 2005
            Delayed Draw Term Facility   LIBOR + 3.25%    January 31, 2005
            Revolving Credit Facility    LIBOR + 2.75%       July 31, 2003

      The  Revolving  Credit  Facility  also  allows  for  German   Deutschemark
      borrowings  at the  Eurodeutschemark  rate plus 2.75% (or 5.4% at June 30,
      1999).

      As part of the  Refinancing,  the Company  used the proceeds of the Senior
      Subordinated  Note offering,  together with borrowings under the Revolving
      Credit Facility, the Term Loan Facilities and cash on hand to fund (a) the
      repurchase  at a premium of  substantially  all of the  Company's  12 7/8%
      Senior  Secured  Notes plus  accrued  interest to August 8, 1997  totaling
      $183.7  million,  (b) the  redemption at  liquidation  value of all of the
      Company's  Series B Special  Stock on  September  8, 1997  totaling  $77.6
      million, (c) the purchase from HFS Gaming Corporation ("HFS") of the right
      to receive  royalty  payments  based on revenues of the Rainbow Casino for
      $19.0 million (the "Rainbow Royalty Buyout"), (d) the repayment of related
      debt owed to an HFS affiliate,  National Gaming Mississippi, Inc. ("NGM"),
      on August  12,  1997  totaling  $7.3  million,  (e)  repayment  of amounts
      outstanding  under the domestic and foreign  revolving lines of credit and
      (f) the payment of transaction  fees and expenses  totaling $16.5 million.
      At June 30, 1999,  borrowings  under the $90.0  million  Revolving  Credit
      Facility  totaled  $32.2  million,  of which  $19.3  million  were  German
      Deutschemark  borrowings.  Based  on the  terms  of the  Revolving  Credit
      Facility,  the Company would have been able to borrow an additional  $43.1
      million as of June 30, 1999. The borrowing  base for the revolving  credit
      facility includes eligible receivables and inventory (as defined).

      The bank facility is collateralized by substantially all domestic property
      and is  guaranteed by each  domestic  subsidiary of the U.S.  Borrower and
      German  Subsidiaries (both as defined),  other than the entity which holds
      the Company's interest in its Louisiana  operations and other non-material
      subsidiaries  (as  defined),  and secured by both a U.S. and German Pledge
      Agreement  (both as  defined).  The bank  facility  contains  a number  of
      maintenance  covenants  and it and the  indenture  have other  significant
      covenants  that,  among other things,  restrict the ability of the Company
      and certain of its  subsidiaries  to dispose of assets,  incur  additional
      indebtedness  and issue  preferred  stock,  pay  dividends  or make  other
      distributions,   enter  into  certain   acquisitions,   repurchase  equity
      interests (as defined) or subordinated indebtedness,  issue or sell equity
      interests of the Company's subsidiaries (as defined), engage in mergers or
      acquisitions,  or engage in certain  transactions  with  subsidiaries  and
      affiliates,  and that  otherwise  restrict  corporate  activities.  In the
      quarter  ended  December  31,  1998,  the  Company  did not  meet  certain
      covenants in the credit agreement.  The Company and the banks have amended
      the current and future financial  maintenance covenants in the bank
      facilty  effective  December  31,  1998  such  that  the  Company  is in
      compliance  with such  covenants.  As of June 30,  1999 the  Company is in
      compliance  with these  covenants.  The Company is also in compliance with
      the  operational  covenants  contained  in the  indenture  for the  Senior
      Subordinated Notes.

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

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

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

      Maturities  of  long-term  debt,  for each of the five fiscal years ending
      subsequent to June 30, 1999 are as follows:

                               Years ending June 30,
                                     (In 000's)
             2000     2001     2002     2003     2004  Thereafter  Total
             ----     ----     ----     ----     ----  ----------  -----
            $1,927   $1,927   $2,114   $14,156  $56,138 $242,444 $318,706
            =============================================================


4.    STOCKHOLDERS' EQUITY, OPTIONS,  WARRANTS AND RIGHTS

      Special Stock

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

      In June 1996,  the Company  completed an offering of 200,000 shares of its
      15% Non-Voting Senior Pay-in-Kind  Special Stock,  Series B (the "Series B
      Special Stock"). The Series B Special Stock was also issued as part of the
      consideration in the BGII acquisition. During fiscal year 1997 the Company
      repurchased  a total of  18,000  shares  of  Series B  Special  Stock at a
      premium to their carrying  value of $0.7 million.  As discussed in Note 3,
      on September 8, 1997 the Company redeemed all of the outstanding shares of
      Series B Special Stock at their  liquidation price of $100 per share, plus
      accrued dividends.  The Company recorded non-cash dividends in the form of
      additional shares of Series B Special Stock totaling $2.0 million for year
      ended June 30, 1998.

      In June 1996,  the Company issued 113,160 shares of Series E Special Stock
      to  certain  holders  of the  Company's  7 1/2%  Convertible  Subordinated
      Debentures  who elected to receive such stock in lieu of receiving  common
      stock.  The  holders  of shares of Series E Special  Stock  have no voting
      rights  except as  required by law.  Each share of Series E Special  Stock
      accrued  cumulative  dividends  until June 18,  1999 at an annual  rate of
      111/2%,  payable  quarterly  in  cash  or,  at the  Company's  option,  in
      additional  shares of Series E Special Stock.  The Company elected to make
      all  dividend  payments in  additional  shares of Series E Special  Stock.
      After July 1, 1999,  the last dividend  payment date,  the total shares of
      Series  E  Special  Stock   outstanding   was  158,224, convertible   into
      approximately  769,000 shares of common stock.  The Series E Special Stock
      is convertible into common stock at a conversion price of $20.58 per share
      (equivalent to a conversion rate of  approximately  4.859 shares of common
      stock per share of Series E Special  Stock),  subject to adjustment  under
      certain  circumstances,  and has a $100 liquidation  preference per share.
      During July 1999, 106,053 shares of Series E Special Stock were converted
      into approximately 520,000 shares of common stock.

      Stock Option Plans

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

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

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

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

      Transactions involving stock options are summarized as follows:

                                    Options Outstanding
                                                                Weighted-Average
                                                  Shares         Exercise Price
                                                 --------        --------------
        Balance, June 30, 1996                    767,381           $19.36
        ----------------------
              Granted                           1,064,662            12.25
              Exercised                          (26,239)             5.78
              Canceled                          (486,857)            20.90
                                                ---------            -----
        Balance, June 30, 1997                  1,318,947            13.44
        ----------------------
              Granted                             419,115            15.30
              Exercised                          (71,453)            13.30
              Canceled                          (114,095)            24.33
                                                ---------            -----
        Balance, June 30, 1998                  1,552,514            13.20
        ----------------------
              Granted                             228,914             7.67
              Exercised                          (13,596)            15.76
              Canceled                          (284,944)            12.30
        Balance, June 30, 1999                  1,482,888           $12.50
        ----------------------                  =========           ======

        Exercisable at June 30, 1999            1,126,940           $12.64
                                                =========           ======



<PAGE>



      At June 30, 1999, the range of exercise prices for options outstanding was
      $3.94 to $22.31. The weighted average remaining contractual life, by range
      of exercise  price,  for options  outstanding  and exercisable at June 30,
      1999 is as follows:

                           Options Outstanding          Options Exercisable
                           -------------------          -------------------
                      Weighted-Avg.                     Weighted-Avg.
        Range of       Remaining        Outstanding     Remaining    Outstanding
   Exercise Prices   Contractual Life      Shares   Contractual Life    Shares
   ---------------   ----------------      ------   ----------------    ------
   $3.94 - $5.00        4.87               61,644          4.88        23,402
   $5.01 - $10.00        3.74              177,622          3.16        81,482
  $10.01 - $15.00        3.68            1,014,218          3.65       864,467
      over $15.01        2.62              229,404          2.16       157,589
                                          --------                    --------
              All        3.57            1,482,888          3.43     1,126,940
                                         =========                   =========

      The Company accounts for its stock-based  employee  compensation awards in
      accordance with Accounting  Principles  Board Opinion No. 25,  "Accounting
      for Stock  Issued to  Employees"  ("APB  25").  Under APB 25,  because the
      exercise  price of the Company's  employee stock options equals or exceeds
      the market price on date of grant, no compensation  expense is recognized.
      Had the Company  determined  compensation  cost based on the fair value at
      the grant date for its stock options under SFAS No. 123,  "Accounting  for
      Stock Based  Compensation,"  the Company's  net loss  applicable to common
      shares  would have  increased  from a loss of $6.2  million  (or $0.68 per
      share) to $8.3  million  (or $0.91 per share) on a pro forma basis for the
      year  ended  June 30,  1997,  from a loss of $77.4  million  (or $8.47 per
      share) to $79.3  million (or $8.67 per share) on a pro forma basis for the
      year ended June 30,  1998 and from a loss of $10.5  million  (or $1.09 per
      share) to $12.4  million (or $1.29 per share) on a pro forma basis for the
      year ended June 30,  1999.  The pro forma net loss  reflects  only options
      granted in 1997, 1998 and 1999. Therefore,  the full impact of calculating
      compensation cost for stock options under SFAS No. 123 is not reflected in
      the pro forma net income amounts presented above because compensation cost
      is reflected over the options' vesting period,  generally three years, and
      compensation  cost  for  options  granted  prior  to July  1,  1995 is not
      considered.

      The per share  weighted-average fair value of stock options granted during
      1997, 1998 and 1999 was $1.43, $1.71 and $2.74  respectively,  on the date
      of grant using the Black-Scholes  option-pricing  model with the following
      weighted-average  assumptions for 1997, 1998 and 1999:  expected  dividend
      yield of 0%,  risk  free  interest  rates  ranging  from  3.9% to 6.5%,  a
      volatility   factor  of  .51,  .69  and  .62  for  1997,  1998  and  1999,
      respectively, and expected lives varying from 3 to 10 years.

      Warrants

      Upon closing of a private  placement  of debt and a $5.0 million  equity
      investment by Kirkland-Ft. Worth Investment Partners, L.P. ("Kirkland") on
      September 21, 1993, the Company issued  warrants to purchase up to 785,714
      shares  of  Common  Stock at $5.25  per  share to  Kirkland  which  expire
      September 21, 1999.  Under the same terms,  the Company issued warrants to
      purchase  357,143  and  8,571  shares of  Common  Stock to Gaming  Systems
      Advisors,  L.P.  ("GSA")  and  L.H.  Friend,  Weinress  &  Frankson,  Inc.
      ("Friend"),  respectively. Under certain circumstances the expiration date
      on a portion of the above warrants may be extended. Pursuant to employment
      agreements,  the  holders of  approximately  400,000 of the  warrants  can
      extend the expiration date of their warrants until June 30, 2002 by paying
      an aggregate  of  approximately  $1.1  million in cash or  foregoing  cash
      bonuses of an equal  amount  prior to  September  21,  1999.  All of these
      warrants  became  exercisable  one year after the grant  dates and vest in
      three equal  increments  only after the market  price of the Common  Stock
      reaches  $38.50,  $45.50 and $52.50.  The Company also issued  warrants to
      purchase 142,857 and 71,429 shares of Common Stock at $28.875 per share to
      the initial purchasers of the private placement debt; Donaldson,  Lufkin &
      Jenrette  Securities  Corporation  ("DLJ")  and  Oppenheimer  & Co.,  Inc.
      ("Oppenheimer"), respectively, each of which expire on September 21, 1999.
      During the year ended June 30, 1996, in connection  with the  commencement
      of  employment  with  the  Company,  the  then  Board  Chairman  and  then
      Vice-Chairman  were each  granted  warrants to purchase  71,429  shares of
      common stock on the same terms as the Kirkland  warrants  described  above
      except that such warrants  expire on September 21, 2000. At the completion
      of the BGII acquisition,  GSA was issued an additional 714,286 warrants on
      the same  terms as the  original  warrants  issued to  Kirkland  described
      above,  except  with an  expiration  date of June  18,  2002.  During  the
      financing  stage of the  BGII  acquisition,  Cerberus  Partners  L.P.  and
      certain  affiliates  of Canyon  Partners,  Inc.  were  issued  warrants to
      purchase 71,429 shares of Common Stock at $17.50 per share which expire on
      August 31, 2002. None of the warrants  granted to Kirkland,  GSA,  Friend,
      and the former Board members were exercisable at June 30, 1999.

      Share Repurchase Plan

      In  January  1999  the  Company's  Board  of  Directors  approved  a share
      repurchase  plan for up to 1.18 million shares of its Common Stock.  Under
      the plan, subject to price and market conditions, purchases of shares will
      be made from time to time  during  calendar  1999 in the open market or in
      privately  negotiated  transactions using available cash financing.  As of
      June 30, 1999, the Company had  repurchased  85,300 shares of common stock
      at a cost of  $522,500.  The Company  intends to use the  acquired  common
      stock to satisfy  obligations  pursuant to the  exercise of stock  options
      under the Company's stock option plan.

      At   June 30, 1999, shares of the Company's Common Stock were reserved for
           future issuance as follows:

         Shares underlying stock options issued or
            issuable under the 1984 Plan                          28,000
         Shares underlying stock options issued or
            issuable under the 1991 Plan                         835,000
         Shares underlying stock options issued or
            issuable under the 1996 Plan                         854,000
         Shares  underlying all warrants issued (a)            2,294,000
         Shares  underlying Series E Special Stock issued (b)    769,000
                                                               ---------
               Total                                           4,780,000
                                                               =========

        (a) Approximately  1,366,000 of these warrants expired  unexercised on
            September 21, 1999.
        (b) Approximately  520,000 shares of common stock were issued in July
            1999 upon conversion of Series E Special Stock.

      Reverse Stock Split

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

      Stockholder Rights Plan

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

5.    INCOME TAXES

      The  components  of the  Company's  income tax expense for the years ended
      June 30, 1997, 1998 and 1999 are as follows:
                                                  1997     1998      1999
                                                  ----     ----      ----
                                                         (In 000s)
            Current tax expense:
                U. S. Federal                   $  225    $    -     $   -
                Foreign                          7,701     2,743        64
                State                              750       568       510
                                                  ----     -----      ----
                                                 8,676     3,311       574
                                                 -----     -----      ----
            Deferred tax expense
                U. S. Federal                        -         -         -
                Foreign                           (683)     (126)      256
                State                                -         -         -
                                                ------    ------    ------
            Total provision for income taxes    $7,993    $3,185    $  830
                                                ======    ======    ======

      A reconciliation  of the Company's income tax provision as compared to the
      tax provision  calculated by applying the statutory federal tax rate (35%)
      to the income  (loss)  before  income  taxes for the years  ended June 30,
      1997, 1998 and 1999 are as follows:
                                                    1997       1998       1999
                                                    ----       ----       ----
                                                            (In 000's)
      Computed expected income tax expense
        (benefit) at 35%                           $4,826   $(18,942)   $(2,799)
      Permanent differences                          (101)      (601)    (1,677)
      Change in valuation allowance                   169     17,613       (591)
      Change in estimates, principally due to changes
        in estimated tax depreciation and NOLs        686         -          -
      State income taxes, net of federal benefit      488        369        332
      Net effect of German operations               1,940        754      1,958
      Expired foreign tax credits                      -       1,770      3,607
      Other, net                                      (15)     2,222         -
                                                   ------     ------     ------
                                                   $7,993     $3,185    $   830
                                                   ======     ======    =======


<PAGE>



      The major components of the deferred tax assets and liabilities as of June
      30, 1998 and 1999 are presented below:
                                                       1998        1999
                                                      ------      ------
                                                           (In 000's)
         Deferred tax assets:
         Net operating loss carry forwards           $15,254     $17,668
         Foreign tax credit carry forwards            12,816       7,527
         Inventory obsolescence reserves               3,582       3,307
         Bad debt reserves                             2,056       2,697
         Accruals not currently deductible for tax
           purposes                                    4,108       3,373
         Refinancing costs being amortized for tax
           purposes                                   13,125      10,683
         Other                                         7,611       8,170
      Total gross deferred tax assets                 58,552      53,425
      Less:  Valuation allowance                      47,085      44,443
                                                     -------     -------
      Deferred tax assets                            $11,467     $ 8,982
                                                     =======     =======

      Deferred tax liabilities:
         Property and equipment, due principally to
            depreciation  differences                $ 4,762     $ 3,349
         Other                                         5,168       3,580
                                                       -----      ------
      Total gross deferred tax liabilities (a)         9,930       6,929
                                                       -----      ------
      Net deferred tax assets                        $ 1,537     $ 2,053
                                                     =======     =======

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

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

      At June 30, 1999,  the Company had net operating  loss carry  forwards for
      federal  income tax  purposes of  approximately  $50.0  million  which are
      available to offset future federal taxable income, if any, expiring in the
      years 2007 through 2014. In addition,  approximately $6.7 million and $2.0
      million of the Company's net operating loss are not  deductible  until the
      year ended June 30, 2000 and 2001, respectively pursuant to Section 382 of
      the Internal  Revenue  Code.  At June 30, 1999 the Company had foreign tax
      credit  carry  forwards of  approximately  $7.5  million  and  alternative
      minimum tax credit (AMT) carry  forwards of  approximately  $1.7  million.
      Foreign tax credits have expiration  dates ranging from 2000 to 2004. AMT
      credits  are  available  to be  carried  forward  indefinitely  and may be
      utilized  against  regular  U.S.  corporate  tax to the extent it does not
      exceed computed AMT calculations.


<PAGE>



6.    SUPPLEMENTAL CASH FLOW INFORMATION

      The  following  supplemental  information  is related to the  consolidated
      statements of cash flows. The Company  recorded the following  significant
      non-cash items for the years ended June 30, 1997, 1998 and 1999:

<TABLE>
<CAPTION>

                                                           1997        1998      1999
                                                           ----        ----      ----
                                                             (In 000's)
         <S>                                              <C>        <C>        <C>
         Reclassify inventory to property, plant and
           equipment and leased gaming equipment          $ 9,642    $ 4,132    $9,613
         Dividends for Series E and Series B Special
           Stock                                           11,264      3,551     1,697
         Translation rate adjustment                       11,204      2,105     1,940
         Reclassify other assets to property, plant
           and equipment                                    1,818         -        444
         Reclassify receivables to other assets             1,837        540       376
         Deferred gain on sale/leaseback transaction           -          -      1,057
         Reclassify excess costs over net assets of acquired
           business to property, plant and equipment        1,436         -         -
</TABLE>


      Payments  for interest  expense in fiscal  years 1997,  1998 and 1999 were
      approximately   $22.5   million,   $19.9   million   and  $31.6   million,
      respectively.  Payments for income  taxes in fiscal  years 1997,  1998 and
      1999 were  approximately  $3.5  million,  $7.3  million and $3.3  million,
      respectively.

7.    COMMITMENTS AND CONTINGENCIES

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

      The Company is obligated under several patent  agreements to pay royalties
      ranging from  approximately  $25 to $107 per applicable  game depending on
      the components in the gaming machines. Additionally, based on an amendment
      to the trademark  licensing agreement between BGII and Bally Entertainment
      Corporation  dated May 10, 1996, the Company is obligated to pay a royalty
      on new machines sold or leased after June 18, 1996 of $35 per machine with
      a minimum annual royalty payment of $1.0 million for the initial five-year
      term of the  amended  agreement,  which  is  subject  to  annual  renewals
      thereafter  at the  option of the  Company.  Royalty  expense  under  this
      agreement  for the  years  ended  June  30,  1997,  1998 and 1999 was $1.0
      million.  Royalty  expense  for the  Company  for the years ended June 30,
      1997,  1998 and 1999 was $3.0  million,  $2.2  million  and $1.9  million,
      respectively.  In addition, the Company has obtained the rights to certain
      game ideas and  intellectual  property  that call for payment of royalties
      based  on  either  fixed  amounts  or  variable   amounts  based  on  game
      performance.

      The  Company  leases  office  space,   equipment,   warehouse  and  repair
      facilities,  Route Operation  locations,  casino and other locations under
      non-cancelable  operating leases.  Certain Route Operation location leases
      provide only for  contingent  rentals  based upon a  percentage  of gaming
      revenue and are  cancelable  at any time by either party.  Future  minimum
      rentals under non-cancelable operating leases at June 30, 1999 are:

<TABLE>
<CAPTION>

                                                  Years ended June 30,
                                                      (In 000's)
                               2000      2001     2002    2003     2004   Thereafter  Total
                               ----      ----     ----    ----     ----   ----------  -----
      <S>                    <C>       <C>       <C>      <C>      <C>      <C>       <C>
      Minimum rentals        $13,859   $12,172   $9,634   $6,530   $2,277   $35,295   $79,767
      Total sublease income   (1,088)     (696)    (669)    (570)    (534)   (2,182)   (5,739)
                             ---------------------------------------------------------------
        Net minimum rentals  $12,771   $11,476   $8,965   $5,960   $1,743   $33,113   $74,028
                             ===============================================================
</TABLE>



      Operating lease rental expense,  including  contingent lease rentals,  for
      years ended June 30, 1997, 1998 and 1999 was as follows:
                                      1997          1998        1999
                                      ----          ----        ----
                                                 (In 000's)
      Minimum rentals              $15,126       $15,534     $17,147
      Contingent rentals            70,744        85,915     118,304
                                    ------        ------     -------
                                    85,870       101,449     135,451
      Sublease rental income        (1,606)       (2,136)     (1,574)
                                    ------        ------      ------
                                   $84,264       $99,313    $133,877
                                   =======       =======    ========

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

      During  fiscal 1999,  Bally Wulff  increased the amount of tax reserves by
      $0.6  million  (to a  total  reserve  of  $2.0  million)  as a  result  of
      developments in ongoing  quadrennial audits of Wulff's tax returns for the
      years  1988  through  1996.  The  German  tax  authorities  have  proposed
      preliminary  adjustments  of $2.0  million,  which has been  accrued.  The
      German tax authorities have not yet issued the final assessment from their
      quadrennial audits.

      Litigation

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

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

8.    CONCENTRATION OF CREDIT RISK

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


<PAGE>



      At June 30,  1999  net  accounts  and  notes  receivable  by  region  as a
      percentage of total net receivables are as follows:
<TABLE>
<CAPTION>


                                            Gaming    Wall Machines
                                           Equipment   and Amusement    Route     Casino
                                          and Systems     Games      Operations  Operations    Total
                                          -----------     -----      ----------  ----------    -----
      <S>                                      <C>         <C>          <C>        <C>         <C>
      Germany                                  0.3%        40.2%         -%          -%         40.5%
      Other international jurisdictions       24.7          0.1          -           -          24.8
      Nevada                                  16.1          -           4.4          -          20.5
      Louisiana                                3.0          -            -           -           3.0
      Atlantic City                            2.5          -            -           -           2.5
      Mississippi                              2.4          -            -         0.1           2.5
      Others individually less than 5%         6.2          -            -           -           6.2
                                              ----        ----        ----        ----         -----
                                              55.2%       40.3%        4.4%        0.1%        100.0%
                                              ====        ====        ====         ===         =====
</TABLE>

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

9.    SEGMENT AND GEOGRAPHICAL INFORMATION

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

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

                                                    Years Ended June 30,
                                                 1997        1998       1999
                                                 ----        ----       ----
                                                        (In $000's)
        Revenues:
          Gaming Equipment and Systems         $134,734   $109,597   $127,810
          Wall Machines and Amusement Games     131,934     98,611     90,834
          Route Operations                      127,028    148,507    175,854
          Casino Operations                      51,450     60,657     63,682
                                                -------    -------    -------
        Total revenues                         $445,146   $417,372   $458,180
                                               ========   ========   ========

       Intersegment revenues:
         Gaming Equipment and Systems            $1,954     $1,640      $ 751
         Wall Machines and Amusement Games           95        226        413
         Route Operations                             -          -          -
                                                  -----      -----       ----
       Total intersegment revenues               $2,049     $1,866     $1,164
                                                 ======     ======     ======

       Operating income:
        Gaming Equipment and Systems            $10,616    $ 5,238    $ 5,779
        Wall Machines and Amusement Games        23,332     13,094      5,334
        Route Operations                         13,082     16,432     14,586
        Casino Operations                        15,407     18,736     19,348
        Corporate/other                         (20,978)   (17,237)   (19,724)
                                               --------   --------   --------
       Total operating income                   $41,459    $36,263    $25,323
                                                =======    =======    =======

                                               Years Ended June 30,
                                               1997    1998     1999
                                                      (In $000's)
       Identifiable assets:
        Gaming Equipment and Systems           $138,047   $141,167   $153,183
        Wall Machines and Amusement Games       106,176     96,135     87,620
        Route Operations                         54,474     66,659     62,487
        Casino Operations                        41,760     43,980     44,592
        Corporate/other                          11,559     18,896      8,425
                                                -------    -------    -------
       Total identifiable assets               $352,016   $366,837   $356,307
                                               ========   ========   ========

       Capital expenditures:
        Gaming Equipment and Systems             $2,610     $1,769     $2,587
        Wall Machines and Amusement Games         2,091      1,306      1,129
        Route Operations                          5,545      8,336      5,476
        Casino Operations                         2,658      3,980      2,414
        Corporate/other                             353        150        149
                                                -------     ------     ------
       Total capital expenditures               $13,257    $15,541    $11,755
                                                =======    =======    =======

       Depreciation and amortization:
        Gaming Equipment and Systems             $6,055     $5,570     $4,020
        Wall Machines and Amusement Games         6,387      5,567      4,816
        Route Operations                          7,118      8,145     10,274
        Casino Operations                         1,945      2,045      2,324
        Corporate/other                           1,101      1,511      1,670
                                                -------    -------     ------
       Total depreciation and amortization      $22,606    $22,838    $23,104
                                                =======    =======    =======

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

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

                                                    Years Ended June 30,
                                              1997         1998          1999
                                              ----         ----          ----
                                                      (In $000's)
       Revenues:
        United States                      $302,142      $305,082     $350,339
        Germany                             142,866       111,279      100,939
        Other foreign                           138         1,011        6,902
                                            -------       -------      -------
       Total revenues                      $445,146      $417,372     $458,180
                                           ========      ========     ========

       Operating income:
        United States                       $19,260       $23,677      $22,329
        Germany                              23,347        13,978        3,451
        Other foreign                        (1,148)       (1,392)        (457)
                                            -------        ------       -----
       Total operating income               $41,459       $36,263      $25,323
                                            =======       =======      =======




                                               Years Ended June 30,
                                               1997    1998     1999

                                                     (In $000's)
       Identifiable assets:
        United States                      $231,634      $252,092     $248,470
        Germany                             117,860       111,559      103,687
        Other foreign                         2,522         3,186        4,150
                                           --------       -------      -------
       Total identifiable assets           $352,016      $366,837     $356,307
                                           ========      ========     ========

       Capital expenditures:
        United States                       $11,137       $14,124      $10,314
        Germany                               2,120         1,372        1,141
        Other foreign                             -            45          300
                                            -------        ------       ------
       Total capital expenditures           $13,257       $15,541      $11,755
                                            =======       =======      =======

       Depreciation and amortization:
        United States                       $15,699       $16,410      $17,437
        Germany                               6,579         5,747        4,998
        Other Foreign                           328           681          669
                                             ------        ------       ------
       Total depreciation and amortization  $22,606       $22,838      $23,104
                                            =======       =======      =======

 10.  INTERIM FINANCIAL INFORMATION (Unaudited)

      Following is the unaudited  quarterly results of the Company for the years
      ended  June 30,  1998 and 1999.  This  information  is not  covered by the
      Independent Auditors' Report.

<TABLE>
<CAPTION>
                                                              Quarter
                                              First      Second      Third      Fourth
                                                 (In 000's, except per share data)
      <S>                                    <C>        <C>        <C>         <C>
                  1998
      Revenues                               $97,971    $106,714   $102,226    $110,461
      Operating income                         7,444      11,442      7,988       9,389
      Net income                             (60,909)      3,346       (731)        988
      Net income (loss) applicable to common
        shares                               (79,862)      2,973     (1,115)        594
      Income (loss) per share                 $(8.78)      $0.33     $(0.12)      $0.06

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

</TABLE>


11.   CONSOLIDATING FINANCIAL STATEMENTS

      The following  consolidating financial statements are presented to provide
      certain financial information regarding  guaranteeing and non-guaranteeing
      subsidiaries in relation to the Company's Senior  Subordinated Notes which
      were issued in the Refinancing  transaction  completed in August 1997 (see
      note 3). The financial  information  presented  includes  Alliance  Gaming
      Corporation (the "Parent") and its wholly-owned  guaranteeing subsidiaries
      (together   the  "Parent   and   Guaranteeing   Subsidiaries"),   and  the
      non-guaranteeing subsidiaries Video Services, Inc., United Gaming Rainbow,
      BGI  Australia  Pty.  Limited,  Bally  Gaming de Puerto  Rico,  Inc.,  and
      Alliance  Automaten GmbH & Co. KG (the subsidiary that holds the Company's
      German  interests)  (together the  "Non-Guaranteeing  Subsidiaries").  The
      notes to consolidating  financial statements should be read in conjunction
      with these consolidating financial statements.


<PAGE>


                                CONSOLIDATING BALANCE SHEETS
                                       June 30, 1998
                                         (In 000's)
                                           ASSETS
<TABLE>
<CAPTION>


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

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


                             See accompanying unaudited notes.


<PAGE>



                                CONSOLIDATING BALANCE SHEETS
                                       June 30, 1999
                                         (In 000's)
                                           ASSETS
<TABLE>
<CAPTION>

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

                     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
  Accounts payable                               $14,706     $ 2,666   $    -      $ 17,372
  Accrued liabilities                             26,771      13,746      (1,321)    39,196
  Current maturities of long-term debt             6,175       3,299      (7,547)     1,927
                                                  ------      ------      -------    ------
     Total current liabilities                    47,652      19,711      (8,868)    58,495
                                                  ------      ------      -------    ------
Term loan facilities                             134,096        -           -       134,096
Senior Subordinated Notes due 2007, net          149,298        -           -       149,298
Other long-term debt, less current maturities    104,826      24,379     (95,820)    33,385
Other liabilities                                  7,370       2,330        (242)     9,458
                                                  ------      ------      -------    ------
     Total liabilities                           443,242      46,420    (104,930)   384,732
                                                 -------      ------    ---------   -------
Minority interest                                  1,983        -           -         1,983
Commitments and contingencies
Stockholders' equity (deficiency):
  Series E Special Stock                          15,380        -           -        15,380
  Common Stock                                       979      17,832     (17,832)       979
  Treasury stock                                    (522)                              (522)
  Additional paid-in capital                     129,991      68,700     (68,700)   129,991
  Accumulated other comprehensive loss           (15,845)    (16,143)     16,002    (15,986)
  Retained earnings (accumulated deficit)       (160,276)     16,932     (16,906)  (160,250)
                                                --------      ------     -------    --------
    Total stockholders' equity (deficiency)      (30,293)     87,321     (87,436)   (30,408)
                                                 -------      ------    --------    --------
                                                $414,932    $133,741   $(192,366)  $356,307
                                                ========    ========   ==========  ========
</TABLE>


                             See accompanying unaudited notes.


<PAGE>


                           CONSOLIDATING STATEMENTS OF OPERATIONS

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

                                                                                     Alliance
                                                                                      Gaming
                                              Parent and      Non-                 Corporation
                                             Guaranteeing  Guaranteeing  Elimina-      and
                                             Subsidiaries  Subsidiaries    tions   Subsidiaries
<S>                                              <C>        <C>        <C>         <C>
Revenues:
  Gaming equipment and systems                  $130,764    $ 11,070    $ (7,100)   $134,734
  Wall machines and amusement games                    -     131,954         (20)    131,934
  Route operations                               108,148      18,880         -       127,028
  Casino operations                               11,738      39,712         -        51,450
                                                 -------     -------      ------     -------
                                                 250,650     201,616      (7,120)    445,146
                                                 -------     -------      ------     -------
Costs and expenses:
  Cost of gaming equipment and systems            82,673       8,796      (6,973)     84,496
  Cost of wall machines and amusement games            -      68,437         (11)     68,426
  Cost of route operations                        83,592      12,124         -        95,716
  Cost of casino operations                        7,528      14,741         -        22,269
  Selling, general and administrative             53,913     45,616          (9)      99,520
  Research and development                         6,701       3,253         -         9,954
  Depreciation and amortization                   13,390       9,216         -        22,606
  Unusual items                                      700           -         -           700
                                                 -------     -------     -------     -------
                                                 248,497     162,183      (6,993)    403,687
                                                 -------     -------     -------     -------
Operating income (loss)                            2,153      39,433        (127)     41,459

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

Other income (expense):
  Interest income                                  1,635         369        (384)      1,620
  Interest expense                               (21,042)     (2,968)        384     (23,626)
  Rainbow royalty                                      -      (4,722)        -        (4,722)
  Minority interest                               (1,092)        -           -        (1,092)
  Other, net                                         135           4         -           139
                                                   -----       -----      ------      ------
Income before income taxes                         5,413      32,116     (23,751)     13,778

Income tax benefit (provision)                       499      (8,492)        -        (7,993)
                                                   -----      ------     -------      ------
Net income                                         5,912      23,624     (23,751)      5,785
Special Stock dividends                          (11,974)          -           -     (11,974)
                                                 -------     -------     -------     -------
Net income (loss) applicable to common shares   $ (6,062)   $23,624    $(23,751)    $ (6,189)
                                                ========    =======    ========     ========

</TABLE>

                             See accompanying unaudited notes.


<PAGE>


                           CONSOLIDATING STATEMENTS OF OPERATIONS

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

                                                                                     Alliance
                                                                                      Gaming
                                              Parent and      Non-                 Corporation
                                             Guaranteeing  Guaranteeing  Elimina-      and
                                             Subsidiaries  Subsidiaries    tions   Subsidiaries
<S>                                              <C>        <C>        <C>         <C>
Revenues:
  Gaming equipment and systems                  $104,141    $ 13,455     $(7,999)   $109,597
  Wall machines and amusement games                    -      98,759        (148)     98,611
  Route operations                               127,424      21,083         -       148,507
  Casino operations                               13,426      47,231         -        60,657
                                                --------     -------    --------     -------
                                                 244,991     180,528      (8,147)    417,372
                                                 -------     -------      ------     -------
Costs and expenses:
  Cost of gaming equipment and systems            60,154       9,555      (8,025)     61,684
  Cost of wall machines and amusement games            -      54,389        (148)     54,241
  Cost of route operations                       101,052      13,593         -       114,645
  Cost of casino operations                        8,278      17,652         -        25,930
  Selling, general and administrative             47,066      39,252         -        86,318
  Research and development                        12,739       3,039         -        15,778
  Depreciation and amortization                   14,181       8,657         -        22,838
  Unusual items                                     (370)         45         -          (325)
                                                  ------     -------    --------      ------
                                                 243,100     146,182      (8,173)    381,109
                                                 -------     -------      ------     -------
Operating income                                   1,891      34,346          26      36,263

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

Other income (expense):
  Interest income                                  1,339         418        (944)        813
  Interest expense                               (27,581)     (1,963)        944     (28,600)
  Rainbow royalty                                  4,884      (5,471)        -          (587)
  Rainbow royalty buyout                         (19,000)        -           -       (19,000)
  Minority interest                               (2,002)        -           -        (2,002)
  Other, net                                       1,136        (111)        -         1,025
                                                  ------       ------  ---------      -------
Income (loss) before income taxes                (16,489)     27,219     (22,818)    (12,088)
Income tax (provision) benefit                     1,190      (4,375)        -        (3,185)
                                                  ------      -------  ---------      -------
Net income (loss) before extraordinary item      (15,299)     22,844     (22,818)    (15,273)
Extraordinary loss, without tax benefit          (42,033)          -          -      (42,033)
                                                 -------      ------ ----------    ---------
Net income (loss)                                (57,332)     22,844     (22,818)    (57,306)

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

</TABLE>

                            See accompanying unaudited notes.


<PAGE>

<TABLE>
<CAPTION>


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

                                                                                     Alliance
                                                                                      Gaming
                                              Parent and      Non-                 Corporation
                                             Guaranteeing  Guaranteeing  Elimina-      and
                                             Subsidiaries  Subsidiaries    tions   Subsidiaries
<S>                                              <C>        <C>        <C>         <C>
Revenues:
  Gaming equipment and systems                  $124,022    $ 12,416     $(8,628)   $127,810
  Wall machines and amusement games                    -      91,178        (344)     90,834
  Route operations                               154,171      21,683         -       175,854
  Casino operations                               14,549      49,133         -        63,682
                                                 -------     -------      ------     -------
                                                 292,742     174,410      (8,972)    458,180
                                                 -------     -------      ------     -------
Costs and expenses:
  Cost of gaming equipment and systems            67,726      10,623      (8,628)     69,721
  Cost of wall machines and amusement games          -        54,046         (11)     54,035
  Cost of route operations                       123,444      14,248         -       137,692
  Cost of casino operations                        8,644      18,367         -        27,011
  Selling, general and administrative             63,032      41,405        (333)    104,104
  Research and development                        13,947       3,243         -        17,190
  Depreciation and amortization                   14,996       8,108         -        23,104
                                                  ------      ------   ---------      -------
                                                 291,789     150,040      (8,972)    432,857
                                                 -------     -------      ------     -------
Operating income                                     953      24,370         -        25,323

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

Other income (expense):
  Interest income                                    960         427        (838)        549
  Interest expense                               (30,495)     (1,728)        838     (31,385)
  Rainbow royalty                                  5,679      (5,679)        -          -
  Minority interest                               (2,053)        -           -        (2,053)
  Other, net                                         221        (652)        -          (431)
                                                   -----      ------     -------      ------
Income (loss) before income taxes                 (9,860)     16,738     (14,875)     (7,997)
Income tax (provision) benefit                     1,033      (1,863)        -          (830)
                                                  ------      ------     -------      ------
Net income (loss)                                 (8,827)     14,875     (14,875)     (8,827)

Special Stock dividends                           (1,697)        -           -        (1,697)
                                                  ------      ------      ------      ------
Net income (loss) applicable to common shares   $(10,524)    $14,875    $(14,875)   $(10,524)
                                                ========     =======    ========    ========
</TABLE>


                            See accompanying unaudited notes.



<PAGE>


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

                                                                                         Alliance
                                                                                          Gaming
                                                  Parent and      Non-                  Corporation
                                                 Guaranteeing  Guaranteeing  Elimina-       and
                                                 Subsidiaries  Subsidiaries    tions    Subsidiaries
<S>                                                  <C>         <C>         <C>         <C>
Cash flows from operating activities:
  Net income                                         $  5,912    $ 23,624    $(23,751)   $  5,785
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
      Depreciation and amortization                    13,390       9,216        --        22,606
      Amortization of debt discounts                      295         512        --           807
      Write down of other assets                          803         272        --         1,075
      Loss on sale of assets                              503         730        --         1,233
      Provision for doubtful receivables                5,049       4,010        --         9,059
      Other                                                32        (683)       --          (651)
  Net change in operating assets and liabilities:
      Accounts and notes receivable                     1,912     (10,495)      3,982      (4,601)
      Inventories                                       4,587     (12,165)        680      (6,898)
      Other current assets                               (287)     (1,262)       --        (1,549)
      Intercompany accounts                           (20,472)      5,673      14,799        --
      Accounts payable                                 (4,425)       (177)      2,632      (1,970)
      Accrued liabilities                              (8,943)      7,269         914        (760)
                                                     --------    --------    --------    --------
        Net cash provided by (used in) operating
          activities                                   (1,644)     26,524        (744)     24,136
                                                     --------    --------    --------    --------
Cash flows from investing activities:
  Additions to property, plant and equipment           (9,198)     (4,059)       --       (13,257)
  Proceeds from disposal of property, plant
    and equipment                                          78         176        --           254
  Other additions to long-term assets                  (8,375)       (199)       --        (8,574)
                                                     --------    --------    --------    --------
        Net cash used in investing activities         (17,495)     (4,082)       --       (21,577)
                                                     --------    --------    --------    --------
Cash flows from financing activities:
  Reduction of long-term debt                            (767)     (6,751)        744      (6,774)
  Net change in credit lines                           (7,525)     (4,053)       --       (11,578)
  Repurchase of Series B Special Stock                 (3,879)       --          --        (3,879)
  Proceeds from exercise of stock options                 767        --          --           767
  Dividends received (paid)                            10,051     (10,051)      --          --
                                                     --------    --------    --------    --------
        Net cash used in financing activities          (1,353)    (20,855)        744     (21,464)

Effect of exchange rate changes on cash                  --          (228)       --          (228)
Cash and cash equivalents:
  Increase (decrease) for period                      (20,492)      1,359        --       (19,133)
  Balance, beginning of period                         36,954      11,103        --        48,057
                                                     --------    --------    --------    --------
  Balance, end of period                             $ 16,462    $ 12,462    $   --      $ 28,924
                                                     ========    ========    ========    ========
</TABLE>


                            See accompanying unaudited notes.


<PAGE>


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

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

Cash flows from investing activities:
  Additions to property, plant and equipment              (11,534)     (4,007)       --       (15,541)
   Proceeds from disposal of property, plant and
     equipment                                                (88)        143        --            55
  Additions to long-term assets                            (9,263)     (5,873)      5,503      (9,633)
                                                        ---------   ---------   ---------   ---------
     Net cash used in investing activities                (20,885)      5,503     (25,119)
                                                        ---------   ---------   ---------   ---------
Cash flows from financing activities:
  Refinancing fees and expenses                           (32,752)       --          --       (32,752)
  Capitalized debt issuance costs                         (11,456)       --          --       (11,456)
  Proceeds from long-term debt                            309,318        --        (5,584)    303,734
  Reduction of long-term debt                            (179,348)     (2,540)      2,141    (179,747)
  Net change in credit lines                               22,738       2,660        --        25,398
  Redemption of Series B Special Stock                    (77,568)       --          --       (77,568)
  Proceeds from exercise of stock options                     855        --          --           855
  Dividends received (paid)                                16,971     (16,971)       --          --
                                                        ---------   ---------   ---------   ---------
     Net cash provided by (used in) financing
       activities                                          48,758     (16,851)     (3,443)     28,464
                                                                    ---------   ---------   ---------
Effect of exchange rate changes on cash                      --          (122)       --          (122)

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

                            See accompanying unaudited notes.


<PAGE>


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

 <TABLE>
<CAPTION>

                                                                                         Alliance
                                                                                          Gaming
                                                  Parent and      Non-                  Corporation
                                                 Guaranteeing  Guaranteeing  Elimina-       and
                                                 Subsidiaries  Subsidiaries    tions    Subsidiaries
<S>                                                 <C>         <C>         <C>         <C>

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

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

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

                            See accompanying unaudited notes.


<PAGE>


                          Years Ended June 30, 1997, 1998 and 1999

Basis of Presentation

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

Debt and Lines of Credit

Long-term debt and lines of credit at June 30, 1998 consist of the following :

<TABLE>
<CAPTION>

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

</TABLE>

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

<TABLE>
<CAPTION>

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

</TABLE>




Income Taxes

The federal,  foreign and state income tax effects of temporary differences that
give rise to significant  portions of the deferred tax assets and liabilities as
of June 30, 1998 are as follows (in 000's):

<TABLE>
<CAPTION>

                                                                              Alliance
                                                                               Gaming
                                      Parent and      Non-                  Corporation
                                      Guaranteeing  Guaranteeing  Elimina-       and
                                      Subsidiaries  Subsidiaries    tions   Subsidiaries
                                                            (in 000's)
<S>                                       <C>          <C>        <C>        <C>
Deferred tax assets:
  Net operating loss carry forwards       $ 15,254    $           $          $ 15,254
  Foreign tax credit carry forwards         12,816      12,816
  Inventory obsolescence reserves            2,729         853                  3,582
  Bad debt reserves                          2,045          11                  2,056
  Accruals not currently deductible
      for tax purposes                       3,809         299                  4,108
  Refinancing costs being amortized
    for tax purposes                        13,125      13,125
  Other                                      4,430       3,181                  7,611
                                          --------    --------    --------   --------
Total gross deferred tax assets             54,208       4,344                 58,552
Less:  Valuation allowance                 (47,085)    (47,085)
                                          --------    --------    --------   --------
Deferred tax assets                       $  7,123    $  4,344    $   --     $ 11,467
                                          --------    --------    --------   --------

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


<PAGE>



The federal,  foreign and state income tax effects of temporary differences that
give rise to significant  portions of the deferred tax assets and liabilities as
of June 30, 1999 are as follows (in 000's):

<TABLE>
<CAPTION>

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

Deferred tax liabilities:
  Property and equipment, principally
    due to depreciation differences       $  2,560    $    699    $           $  3,349
  Other                                      1,586       1,994                   3,580
                                          --------    --------    --------    --------
Total gross deferred tax liabilities         4,236       2,693                   6,929
                                           -------     -------    --------    --------
Net deferred tax assets (liabilities)     $   (114)   $  2,167    $   --      $  2,053
                                          ========    ========    ========    ========
</TABLE>


<PAGE>



12.   RESERVES AND ALLOWANCES

      The following  tables  represent the activity for each of the fiscal years
      ended June 30, 1997,  1998 and 1999 for each of the valuation  reserve and
      allowance accounts (in 000's):

                                      Balance at                      Balance at
                                     Beginning of                        End of
                                         Year    Additions   Deductions   Year

      Allowance for doubtful accounts:
        Year ended June 30, 1999        $13,041   $ 3,817     $ 3,162    $13,696
        Year ended June 30, 1998         23,901     2,722      13,582 (a) 13,041
        Year ended June 30, 1997         19,497     9,179       4,775     23,901

      Inventory valuation allowance:
        Year ended June 30, 1999        $ 6,797   $ 2,273     $ 1,993    $ 7,077
        Year ended June 30, 1998          8,856       355       2,414      6,797
        Year ended June 30, 1997          9,484     1,719       2,347      8,856

      Other assets valuation reserve:
        Year ended June 30, 1999        $ 3,488   $       -  $     20    $ 3,468
        Year ended June 30, 1998          3,502        18          32      3,488
        Year ended June 30, 1997          3,679       162         339      3,502
---------------

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