##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACTS OF 1934
For the fiscal year ended June 30, 2001

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

Commission File Number 0-4281

ALLIANCE GAMING CORPORATION


(Exact name of registrant as specified in its charter)


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

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

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

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

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

(Title of Class)

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

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

The aggregate market value of the common equity held by non-affiliates of the
registrant was approximately $385,352,000 as of September 7, 2001.

The number of shares of Common Stock, $0.10 par value, outstanding as of
September 7, 2001 according to the records of registrants registrar and
transfer agent, was 21,907,207.

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.





---

TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | ITEM 1. BUSINESS                                                                             
|              | ITEM 2. PROPERTIES                                                                           
|              | ITEM 3. LEGAL PROCEEDINGS                                                                    
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                
|              | ITEM 6. SELECTED FINANCIAL DATA                                                              
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|              | ITEM 11. EXECUTIVE COMPENSATION                                                              
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV      
|              | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES   
|EXHIBIT 4.2  
|EXHIBIT 10.30
|EXHIBIT 21   
|EXHIBIT 23.1 
|EXHIBIT 23.2 



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001




PART I




ITEM 1. BUSINESS

General

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 operates a significant installed
base of gaming machines, (iii) owns and operates two casinos and (iv) in
Germany, is a full-service supplier of wall-mounted gaming machines and
amusement games. 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 74,000 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 147,000 game monitoring units (GMUs)
installed worldwide. The Company also owns, operates and services an installed
base of over 8,800 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 approximately
26 table games and 1,450 gaming devices (collectively, Casino
Operations). In addition, operating under the Bally Wulffname, the Company
is a leading supplier of wall-mounted gaming machines and amusement games in
Germany, having sold over 63,000 wall machines and amusement games during the
last five years.

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 primary operating subsidiaries of Bally Gaming, Inc. (a.k.a. Bally
Gaming and Systems) and Bally Wulff (a.k.a. Wall Machines and Amusement Games).
The terms the Company, we, our as used herein refer 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

Overview.The Bally Gaming and Systems
business unit consists of three
separate divisions: Gaming Products, Gaming Operations and Gaming Systems. The
following table sets forth the percentages of revenues provided by each of the
Bally Gaming and Systems divisions for the periods indicated:

|                    |  |                        |     |      |  |      |     |   |  |  |     |  
|------------------- |  | ---------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                    |  | Percentage of Revenues
|Revenue by division |  | Years ended June 30,  
|                    | 
|                    |  | 1999                   |     | 2000 |  | 2001
|                    |  |                        |     |      |  |     
|Gaming Products     |  |                        | 74  | %    |  |      | 55  | % |  |  | 54  | %
|Gaming Systems      |  |                        | 25  |      |  |      | 30  |   |  |  | 28  |  
|Gaming Operations   |  |                        | 1   |      |  |      | 15  |   |  |  | 18  |  
|                    |  |                        |     |      |  |      |     |   |  |  |     |  
|                    |  |                        | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                    |  |                        |     |      |  |      |     |   |  |  |     |  

Markets.The Company believes that the domestic installed base of gaming
machines now exceeds 600,000 units. The state of Nevada has the largest
installed base, totaling approximately 200,000 units as of June 30, 2001.

The gaming industry continues to expand 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 also
distributes gaming machines,

2



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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; Bally Gaming de Puerto
Rico, Inc., principally to customers in Puerto Rico; and Bally Gaming and
Systems, SA, in Montevideo, Uruguay, principally to customers in South America.

Markets for computerized slot data systems.

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

Gaming Products.The Company designs, manufactures and sells a variety of
electronic slot and video gaming machines. Gaming machines are differentiated
from one another by graphic design and theme, cabinet style and size, pay
table, reel-type design, betting denomination and minimum/maximum betting
amount. Slot machines are normally produced to specific order, with design and
configuration customized to a customers particular requirements. Customers may
also change from one gaming model to another gaming model by ordering a
conversion kit consisting of artwork, reel strips, and a computer chip. The
Companys video gaming machines are designed to simulate various card games,
video reel-spinning games and keno through a video display and can offer the
player the chance to play a multitude of different games. New games and themes
are introduced periodically to satisfy customer demand and to compete with
product designs introduced by competitors. The Company introduced its
ProSeries reel-type slot machines in late 1993 and its multi-game touch screen
machine, the GameMaker®, in late 1994. In March 1998 the Company introduced
the first major upgrade to both the ProSeries and upgraded the GameMaker
product line, to the V7200 platform that is capable of multi-line video and
multi-coin functionality.

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 $44.6 million, $23.6 million and $32.3
million for the years ended June 30, 1999, 2000 and 2001, respectively.

The V7200 can offer up to ten different video games within one gaming device,
or can be configured as a dedicated single title game. The games can be
selected by the casino from a game library that has over 600 games. The games
simulate various card games, keno and popular reel-spinning games. The V7200
machines contain bill acceptors and many other features believed to be popular
with casinos and their customers. The V7200 machines are available in upright,
bar top, slim-line and slant top cabinets. Revenues from sales of V7200
machines (and its predecessor, the GameMaker) were approximately $17.7 million,
$23.6 million and $30.2 million for the years ended June 30, 1999, 2000 and
2001, respectively.

The Company commenced development of a new game platform in January 2000, with
the intent of creating enhanced audio and video capabilities for its video
product line. The Company engaged Microsoft to assist in the development of an
NT based graphics and audio package addition to the legacy V7000 game board.
The result was the Evolution platform, or EVO, that offers superior audio and
graphic capabilities on the wealth of Windows® based software and content
programmers available in the marketplace. This new game platform will allow
for the creation of game content at much faster rates than before, thus
reducing the time to market for new products developed.

The Company typically offers a 90-day parts and labor 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

3



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

Internet web site for technical support, 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. Sale of used equipments were approximately $5.6 million, $3.7 million
and $3.1 million for the years ended June 30, 1999, 2000 and 2001,
respectively.

Gaming machines have a mechanical life that can exceed ten 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.

Gaming Operations.During the past two years, the proprietary gaming
operations division of Bally Gaming and Systems has moved to become a full
service provider of gaming products by adding to its product line games which
are either linked on a wide-area progressive system, or are non-linked niche
games, which are gaming machines that have secondary bonus features. 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 that 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. Ballys
Gaming Operations generated recurring revenues of approximately $1.5 million,
$20.8 million and $28.4 million for the fiscal years ended June 30, 1999, 2000
and 2001, respectively.

The Company received regulatory approval from the Nevada Gaming Control Board
of its wide-area progressive jackpot system named Thrillions in November
1998. The Thrillions system has been designed to allow patrons playing nickel,
quarter and dollar machines to compete for the same progressive jackpot with
the odds of winning the jackpot adjusted based on the amount wagered. Separate
wide-area progressives are being operated by the Company in Nevada, Mississippi
and Native American lands, and by a separate third-party trust arrangement in
Atlantic City.

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

|                  |  |            |      |                |  |                   |     |  |  |  |       | 
|----------------- |  | ---------- | ---- | -------------- |  | ----------------- | --- |  |  |  | ----- | 
|                  |  |            |      |                |  | Units
Outstanding
|                  |  | Date       |      | As of June 30,
|                  |  | Introduced |      | 2000           |  | 2001             
|                  |  |            |      |                |  |                  
|Betty Boop        |  |            | 3/99 |                |  |                   | 960 |  |  |  | 1,035 | 
|Blondie           |  |            | 3/01 |                |  |                   |    |  |  |  | 420   | 
|Millionaire 777s |  |            | 6/01 |                |  |                   |    |  |  |  | 225   | 
|                  |  |            |      |                |  |                   |     |  |  |  |       | 
|                  |  |            |      |                |  |                   | 960 |  |  |  | 1,680 | 
|                  |  |            |      |                |  |                   |     |  |  |  |       | 

The Company has introduced a series of non-linked secondary bonus games. These
games have been marketed under names such as Roll the Dice ®, Bell Ringer ®,
Love Meter , 99 Bottle of Beer, and Lets Make a Deal , all of which are
approved in most major gaming markets. The Company believes that games with
such secondary bonus features will continue to gain floor space in casinos.
The Thrillions system has been designed to allow casinos to use their own
branding for the product. Currently, Park Place Entertainment utilizes the
Thrillions system as a platform for their own network of linked games for their
properties in Nevada and Mississippi markets, for which they pay a daily fee
per game. The Company also earns recurring revenues from gaming devices
deployed at three horse racing facilities under an agreement with the Delaware
State Lottery Commission. As of June 30, 2001, the Company had an installed
base of daily fee games totaling 1,500 units.

4



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

System Products.The Company designs, integrates, and sells computerized slot
data systems (SDS) for slot and video gaming machines which provide casino
operators with on-line, real time data relative to a machines accounting,
security and cash monitoring functions. When purchased along with other third
party player tracking applications, SDS 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 is comprised primarily of
(1) hardware consisting of microcontroller-based printed circuit boards
installed within the slot and video machines as well as card readers, displays
and keypads which provide casinos with the ability to track player gaming
activity and monitor access to slot and video machines by the casinos
employees, (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. Total spending on product research and
development by Bally Gaming and Systems was approximately $13.9 million, $12.6
million and $11.0 million during the years ended June 30, 1999, 2000 and 2001,
respectively. The decrease in research and development spending in the year
ended June 30, 2001, is a result of the comparison to the prior fiscal years
which included incremental development costs related to the launch of the
wide-area progressive system.

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, printer capability, and coin and currency
handling. Hardware development efforts are focused on player appeal, product
reliability and ease of maintenance. Development cycles for hardware can range
from a few days for simple enhancements to more than a year for new electronics
or new mechanical packages.

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

All new or modified hardware and software are designed to satisfy all
applicable testing standards. Typically, new products require regulatory
approval for most North American jurisdictions, but generally no approval is
needed for other jurisdictions. For Nevada, new gaming machine platforms must
be filed with the state gaming laboratory which tests the products for from two
to three months or more before a mandatory 30 to 60 day field test is conducted
in a casino. For new product platforms, the Nevada State Gaming Control Board
and the Nevada Gaming Commission must each approve these products at their
monthly, public meetings. For modifications of existing products or casino
associated equipment, the process in Nevada is similar to new platforms, except
a field test is usually not required and the 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 ends the field trial and accepts the gaming machines.

Product development for the SDS product is also divided into hardware and
software. The major areas of hardware development include 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
5Table of ContentsALLIANCE GAMING CORPORATION
FORM 10-KYear Ended June 30, 2001architecture, that allows development to be focused on 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
player. In addition, the architecture allows customers to upgrade existing
components or add new components with minimal impact. Development cycles for
hardware can vary between a few months for minor revisions to more than a year
for major design changes or for changes made by various slot manufacturers with
which Systems product must communicate and be physically integrated. Software
development results in (1) periodic product releases that include new features
that extend and enhance the SDS product, (2) periodic maintenance releases that
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 has developed a form of cashless wagering that uses bar-coded
coupons, which can be read by the bill validators in slot machines connected to
the SDS system. 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 continues to be in regulatory field test in New
Jersey and Nevada. The Company installed its second form of cashless, SDS
Ticketing, into the following markets: California, New Mexico, Arizona,
Minnesota and Connecticut during the fiscal year ended June 30, 2001. The
Company continues to focus attention on the development of other cashless
capabilities that will give casino operators the option of allowing their slot
players to move club account funds to the gaming machine as well as deposit
back to the club account.Sales and Marketing.Bally Gaming and Systems uses a direct sales force and,
to a lesser extent, an independent distributor network to distribute its
products. Bally Gaming and Systems North America sales staff consists of
approximately 25 people in offices in Nevada, New Jersey, Mississippi,
Illinois, California, Missouri and Florida.Bally Gaming and Systems direct sales force, other than personnel at GmbH,
generated approximately 80%, 75% and 70% of new unit machine sales for the
years ended June 30, 1999, 2000 and 2001, 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 7%, 7% and 19% of new gaming machine unit sales for the
years ended June 30, 1999, 2000 and 2001, respectively. GmbH generated
approximately 13%, 18% and 11% of new gaming machine unit sales for the years
ended June 30, 1999, 2000 and 2001, respectively.As of June 30, 2001, the Company had over 147,000 game monitoring units
installed in 145 locations, of which approximately 98% are in the United
States. Substantially all Systems revenues are generate by its direct sales
force.For the year ended June 30, 2001, approximately 93% of the Companys slot and
video gaming machine sales were on terms of 90 days or less. Approximately 7%
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 8% to 14%. International
sales are generally consummated on a cash basis backed by a letter of credit or
financed over three years or less. In addition, in certain situations the
Company has participated in the financing of other gaming-related equipment
manufactured by third parties in the emerging markets. For SDS sales, the
Company generally 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 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 or replacement
of malfunctioning hardware and software, software version upgrades, and on-call
support for software.Customers.The demand for slot machines and video gaming machines varies
depending on new construction and renovation of casinos and other facilities
with needs for new equipment as well as the replacement of existing machines
(which have an average replacement cycle of three to seven years). For the year
ended June 30, 2001, the ten largest6Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

customers accounted for approximately 42% of the Bally Gaming and Systems new
unit sales, with the largest single customer accounting for 9% of new units
sales.

The demand for computerized slot monitoring systems is driven by regulatory
requirements in a given jurisdiction and by a casino operators competitive
need to properly track machine and player activity and 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 year ended June 30, 2001, the ten largest computerized
monitoring system customers (which include certain multi-site casino operators
that have corporate agreements) accounted for approximately 76% of game
monitoring unit sales revenues. 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 continued
penetration of the international markets, further expansion in the established
and emerging markets, as well as continued development efforts to provide
customers with new and innovative hardware and software product offerings.

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

In March 2000, the Company entered into an agreement with Multimedia Games,
Inc. to supply gaming devices for use in Class III and other markets. The
agreement was amended in April 2000 to include Class II markets.

Management believes 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 to a particular customers design/feature request.
Bally Gaming and Systems produces products for individual customer orders,
thereby 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). 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, Aristocrat, Innovative
Gaming Corporation of America, Mikohn Gaming Corporation (Mikohn), Shuffle
Master, Inc., Sigma Games, Inc., Silicon Gaming, Universal Distributing of
Nevada, Inc. WMS Industries, Inc. (WMS) and companies that market gaming
machines under the brand names of Atronic, Cirsa, Konami, Novomatic and Sega
Enterprises Ltd. Many of these companies look to expand their market share by
decreasing the Companys current market share. Other
7Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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

In August 2001, the regulators approved a change to the play parameters for
wall machines, reducing the time per play cycle from 15 seconds to 12 seconds,
an improvement of 25%. The 12-second games will be offered beginning January
1, 2002, and conversion kits for existing 15-second games will also be sold.
This change was petitioned by the arcade operators who believe that the
improved speed of play will attract players to wall machines and away from
other types of non-gaming amusement games.

Wall machine sales into the arcade market account for approximately 30% of the
total wall machine sales in Germany. As of June 30, 2001, a number of arcades
(approximately 8%) 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 22%, 21% and 30% for the years ended June
30, 1999, 2000 and 2001, respectively. Market share is impacted by the
popularity of the machines in the locations and can fluctuate between periods
based on this and a wide range of other factors. The German legislative
authorities regulate and monitor the wall machine industry on an ongoing basis
to ensure conformance with certain manufacturing standards and the fairness of
each machine to users. Existing legislation covers prescribed licensing
procedures, the use, installation and operation of wall machines and the
taxation of wall machines.

Operations of Bally Wulff

Products.Bally Wulffs manufacturing operations were founded in Berlin in
1950. Bally Wulff produces and distributes a variety of models of wall machines
under the trade name Bally Wulff for operation in arcades, hotels,
restaurants and taverns primarily in Germany. These wall machines are
coin-operated, armless gaming devices similar to slot machines that award
winnings for matching numbers or symbols on three to five wheels or drums and
differ primarily in appearance, graphic design, theme, pay-table and customer
appeal. Each game play costs up to 40 pfennigs (approximately $0.17 at the
exchange rate of $1.00=DM 2.29 prevailing as of June 30, 2001, which rate is
used hereinafter) to play, although the player may deposit larger amounts to
provide continuous play but not to increase
8Table of ContentsALLIANCE GAMING CORPORATION
FORM 10-KYear Ended June 30, 2001payoffs. German regulations limit the maximum payout to ten times the players
stake (DM 4.00 or approximately $2.29 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.In February 1999, Bally Wulff began selling a single-site progressive linked
jackpot system under the name Magic Jackpot. Initially, up to ten wall machines
could be linked to one system. The average selling price for the system was
approximately DM 15, 500 (approximately $6,760). Although there were initially
strong sales of this product in fiscal year 1999, consumer demand for product
was not long-lived, and sales slowed substantially in fiscal year 2000, and
virtually no sales of this product were made in fiscal year 2001.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:

|                                                                               |  |                        |     |      |  |      |     |   |  |  |     |  
|------------------------------------------------------------------------------ |  | ---------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                                                               |  | Percentage of Revenues
|Product Line                                                                   |  | Years ended June 30,  
|                                                                              
|                                                                               |  | 1999                   |     | 2000 |  | 2001
|                                                                               |  |                        |     |      |  |     
|Sale of wall machines manufactured by Bally Wulff                              |  |                        | 43  | %    |  |      | 40  | % |  |  | 42  | %
|Leasing of wall machines manufactured by Bally Wulff                           |  |                        | 10  |      |  |      | 14  |   |  |  | 12  |  
|Entertainment and amusement machines and third party
wall machines distributed |  |                        | 25  |      |  |      | 42  |   |  |  | 42  |  
|Other (primarily used machines, parts and service)                             |  |                        | 22  |      |  |      | 4   |   |  |  | 4   |  
|                                                                               |  |                        |     |      |  |      |     |   |  |  |     |  
|                                                                               |  |                        | 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 that are responsible for
generating ideas for creative new machines. These teams are comprised of
representatives of each department involved in the production and distribution
of machines, such as art, design, engineering, manufacturing, marketing and
sales. The design teams meet for three days each calendar quarter at a site
away from Bally Wulffs headquarters. The teams analyze machines currently
being marketed by Bally Wulff and 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 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 $3.2
million, $2.7 million and $2.5 million during the years ended June 30, 1999,
2000 and 2001, respectively.

9



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

Sales and Marketing.Bally Wulff sells virtually all of its products through
its direct sales force of approximately 55 individuals located in 20 regional
sales offices. Independent German distributors account for approximately 4% of
sales. Virtually all of Wulffs sales of new wall machines are in the German
market. The sales offices are operated as independent profit centers and are
assigned geographic areas in which the offices are responsible for sales,
servicing the machines and assisting in collecting customers accounts
receivable balances.

The wall machines manufactured and sold by Bally Wulff generally sell for
prices ranging from DM 3,600 to DM 7,500 (approximately $1,600 to $3,300). Due
to price competition among the three largest manufacturers, selling prices have
declined since 1997. Management believes that such declines in prices have
reached bottom, and are expected to improve in the future. For the year ended
June 30, 2001 approximately 80% of Bally Wulff machine sales were on terms of
90 days or less. Remaining sales of machines are financed by Bally Wulff
generally over a 12-month period, with interest rates between 6% and 24%. For
this reason, Bally Wulff establishes an internal credit rating and credit limit
for each customer. Under Bally Wulffs conditions of sale, a security interest
in a machine is retained by 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 2001. Leasing machines to customers accounted for 10%, 14% and 12% of
total revenues for the years ended June 30, 1999, 2000 and 2001, 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 ten customers has maintained their
relationship with Bally Wulff for over five years. For the year ended June
30, 2001, Bally Wulffs top ten customers accounted for approximately 10% of
Bally Wulffs revenues, while no single customer accounted for more than 2% of
Bally Wulffs revenues.

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

Assembly Operations.Bally Wulffs manufacturing process is primarily an
assembly operation. 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. Furthermore, increased foreign competition in
Germany may have an adverse impact on the Companys future wall machine
revenues. Management
10Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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.In June 2001, the Company voluntarily terminated an agreement
previously entered into to sell its Nevada-based route operations. The Company
paid a breakup fee and related costs and expenses totaling $6.5 million.
Additionally, as part of the refinancing of its senior bank debt in June 2001,
the Company repaid certain operating leases for gaming equipment used in the
Nevada route operation, totaling approximately $13.0 million. The effect of
the repayment of the operating leases will be to, on a prospective basis,
reduce rental expense by $6.5 million and increase depreciation expense by $4.0
million, annually.

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,
|                                           |  |                     
|                                           |  | 1999                 |       | 2000 |  | 2001
|                                           |  |                      |       |      |  |     
|Average number of gaming machines operated |  |                      | 7,300 |      |  |      | 7,856 |  |  |   | 8,083 | 
|Average number of locations                |  |                      | 680   |      |  |      | 687   |  |  |   | 703   | 
|Average win per day per gaming machine     |  | $                    | 57.20 |      |  | $    | 63.10 |  |  | $ | 67.75 | 

At June 30, 2001, the Company operated approximately 8,150 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. Contract takeovers added approximately 200 and 470 gaming
machines to the Nevada route during the years ended June 30, 1999 and 2000,
respectively, and no such takeovers occurred in the fiscal year 2001.

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, the owner of the
local establishment must have a gaming license, in addition to the general slot
route operators license the Company holds. 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 88%, 84%, and 80% of
revenues and 76%, 74%, and 77% of installed machines, respectively, in the
Companys Nevada route operations for the years ended June 30 1999, 2000 and
2001. At June 30, 2001, the weighted average remaining term of the Companys
revenue sharing arrangements was approximately 2.8 years. Space lease
arrangements accounted for approximately 12%, 16%, and 20% of revenues and 24%,
26%, and 23% of installed machines, respectively, in the Companys Nevada route
operations for the years ended June 30, 1999, 2000 and 2001. At June 30, 2001,
the weighted average remaining term of the Companys space leases was 2.9
years.

11



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 proprietary cardless slot players club and player tracking
system, which allows multiple local establishments to be linked together into a
distributed gaming environment. Through this technology, 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, choices 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 Gamblers Bonus members.

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, 2001, the Company had the Gamblers Bonus installed in over 3,900 gaming
machines at approximately 377 locations or 47% 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.

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 3% of the Companys revenues generated from Nevada
route operations during the year ended June 30, 2001, although approximately 8%
of such revenues were generated through an affiliated group of such customers.
The affiliated group consists of eight partnerships each having one individual
partner who is common to all such partnerships. For the year ended June 30,
2001, the ten largest customers accounted for approximately 16% of the Nevada
route operations revenues.

Assembly Operations.In years prior to 1988, the Companys route operations
manufactured its own gaming machines for use in its Nevada route operations.
These machines represent approximately 38% of the gaming machines currently
used in the Nevada route operations at June 30, 2001. 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, 2001,
approximately 34% 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, Anchor Gaming,
ET&T, and Southwest Gaming are the largest route operators in Nevada. The
principal methods of competition for route operators include the economic terms
of the revenue sharing or space lease arrangement, the services provided, the
Gamblers Bonus product and the reputation of the route operator. Price
competition is intense and can reduce the Companys gross margin on such
operations if the percentage of the gaming machine revenues retained by the
local establishment increases.

12



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 in the greater New Orleans area and eight associated
off-track betting parlors (OTBs). 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,
2001, the Company had approximately 670 video poker machines in Louisiana.

Under the Louisiana gaming laws and regulations, the majority stockholder of
any entity operating video poker machines in Louisiana must be a domiciled
resident of the State of Louisiana. As a result, the Company owns 49% of the
common stock of VSI and three prominent members of the Louisiana business and
legal community owns 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 is designed to
attract primarily local residents to VSIs 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 expand its operations selectively in the greater New Orleans area by
increasing the number of video poker machines in certain of its existing
locations as demand warrants. The Company continues to investigate the addition
of new locations under its current contract with the Fair Grounds in areas
where competitive factors are favorable. Under the Louisiana Act, racetracks
and OTBs are permitted to install an unlimited number of video poker machines
while truckstops and taverns may install only limited numbers of such machines.

Competition.The racetrack and OTB locations where the Company operates video
poker machines compete with riverboats, truckstops and locations with liquor
licenses throughout the New Orleans area. Each truckstop is permitted to
operate up to fifty video poker machines and each tavern is permitted to
operate up to three video poker machines. Louisiana has riverboat gaming
statewide and three riverboats are currently operating in the greater New
Orleans area. Riverboats are permitted to have live table games and an
unlimited number of gaming machines, including slot machines. Louisiana has
also has one land-based casino currently operating.

Casino Operations

Overview.

Rainbow Casino.The Rainbow Hotel Casino located in Vicksburg, Mississippi
began operations in July 1994. The facility includes a 33,000-square foot
casino, with 955 gaming devices and 19 table games as well as a 250-seat
restaurant/buffet and 20,000-square foot conference center. The facility also
includes the 89-room Rainbow Hotel, which is owned and operated by a third
party. Rainbow Casino is marketed as a locals casino and draws its
13Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

customers principally from within a 75-mile radius of Vicksburg. The Vicksburg
casino market generated approximately $229 million in gaming revenue in the
twelve months ended June 30, 2001.

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

Rail City Casino.In April 1990, the Company purchased, for an aggregate
purchase price of $9.5 million, substantially all of the assets of the Rail
City Casino (formerly the Plantation Station Casino) located near the border
between the cities of Reno and Sparks in northern Nevada. Rail City is a
20,000 square-foot casino, which as of June 30, 2001 operated approximately 500
gaming devices, 7 table games, and live keno. In addition, Rail City Casino
includes a 300-seat restaurant, and offers a race and sports book that is
leased to an independent race and sports book operator. Rail City Casino is
convenient to both Reno and Sparks and caters primarily to the local market.

Sales and Marketing.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 that 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 that offer more amenities, as well as smaller
casinos and taverns that appeal to local area residents.

The Rainbow Casino was 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 may be developed. Both of these projects will be contingent on several
factors including regulatory approval and financing.

Patents, Copyrights and Trade Secrets

Bally Gaming, Inc., is the copyright owner (or has licenses to use) game
software, artwork and video presentation and has registered some of these
copyrights with the U.S. Copyright Office. Some games, cash handling
mechanisms, and other gaming device mechanisms (either currently used or
reserved for future development including several related to Gamblers Bonus)
are covered either by pending patent applications or issued patents, both
foreign and domestic. The expiration dates of these patents vary and are based
on their filing or issue dates. In addition, many of the games have trademarks
registered with the U.S. Patent and Trademark Office, state trademark
registries, or both. The Company and its subsidiaries have over two hundred
registered or pending trademark applications in the United States and around
the world, including the registered U.S. trademark, Gamblers Bonus.

Bally Gaming, Inc., is obligated under several patent agreements to pay
royalties ranging from approximately $25 to $250 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 $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
14Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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, 1999, 2000, and 2001 was $1.9 million, $3.4 million, and $3.5 million,
respectively.

Employees and Labor Relations

As of June 30, 2001, the Company and its subsidiaries employed approximately
2,400 persons, including approximately 1,330 persons in Nevada, 60 persons in
Louisiana, 560 persons in Mississippi, 50 persons in various other states and
400 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 who acquires a controlling interest in the Company would have to
meet the requirements of all governmental bodies that regulate the Companys
gaming businesses. 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 manufacture or distribute gaming devices or
15Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

conduct gaming operations at various locations, (collectively, the Nevada
Subsidiaries) are required to be licensed by the Nevada Gaming Authorities.
The licenses held by the Nevada Subsidiaries require periodic payments of fees
and taxes and are not transferable. The Company, through registered
intermediary companies (individually an Intermediary Company and collectively
the Intermediary Companies), has been found suitable to own the stock of the
Nevada Subsidiaries, each of which is a corporate licensee (individually a
Corporate Licensee and collectively the Corporate Licensees) under the
terms of the Nevada Act. As a Registered Corporation, 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 they are distributed or
exposed for play. The approval process for gaming machines and cashless
wagering systems includes rigorous testing by the Nevada Board, a field trial
and a determination as to whether the gaming machines or cashless wagering
systems meet strict technical standards set forth in the regulations of the
Nevada Commission. Associated equipment (as defined in the Nevada Act) must be
administratively approved by the chairman of the Nevada Board before it is
distributed in Nevada.

The Nevada Gaming Authorities may investigate any individual who has a material
relationship or material involvement with, 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. A finding of suitability is comparable to
licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant for licensing
or a finding of suitability must pay all the costs of the investigation.
Changes in licensed positions must be reported to the Nevada Gaming Authorities
and in addition to their authority to deny an application for a finding of
suitability or licensing, the Nevada Gaming Authorities have jurisdiction to
disapprove a change in a corporate position. The Nevada Gaming Authorities may
deny an application for licensing or finding of unsuitability for any cause
they deem reasonable.

If the Nevada Gaming Authorities were to find an officer, director, or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the 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
16Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

gaming establishment operated by a Corporate Licensee and, under certain
circumstances, earnings generated during the supervisors appointment (except
for reasonable rental of the casino property) could be forfeited to the state.
Limitation, conditioning, or suspension of the gaming licenses of the Corporate
Licensees or the appointment of a supervisor could, and revocation of any
gaming license would, materially adversely affect the gaming-related operations
of the Company.

The Gaming Authorities may, at their discretion, require the holder of any
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,
17Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

(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.

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 acquires control may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission on a variety of
stringent standards before assuming control of the Registered Corporation. The
Nevada Commission may also require controlling stockholders, officers,
directors and other persons having a material relationship or involvement with
the entity proposing to acquire control to be investigated and licensed as a
part of the approval process relating to the transaction.

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

License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Licensees 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 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
18Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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). Licensing and regulatory control is maintained by a
single gaming control board for the regulation of gaming in Louisiana. This
Board, created on May 1, 1996, is called the Louisiana Gaming Control Board
(the Louisiana Board) and oversees all licensing for all forms of legalized
gaming in Louisiana (including all regulatory enforcement, and supervisory
authority that exists in the state as to gaming on Native American lands). The
Video Gaming Division of the Gaming Enforcement Section of the Office of State
Police within the Department of Public Safety and Corrections (the Division)
performs the 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, have each been granted a license as a device owner by
the Division. These gaming subsidiaries are Louisiana Licensees (the Louisiana
Licensees) under the terms of the Louisiana Act. The licenses held by the
Louisiana Licensees expire at midnight on June 30, 2004. Annual fees must be
paid on or before July 1 in each year regardless of the license expiration
date.

The Louisiana Board may deny, impose a condition on or suspend or revoke a
license, renewal or application for a license for violations of any rules and
regulations of the Louisiana Board or any violations of the Louisiana Act. In
addition, fines for violations of gaming laws or regulations may be levied
against the Louisiana Licensees and the persons involved for each violation of
the gaming laws. The 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 applies
to the cost of the investigation.

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

19



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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

Mississippi.The manufacture and distribution of gaming and associated
equipment and the ownership and operation of casino facilities in Mississippi
are subject to extensive state and local regulation, 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 is permissible in 9 of the 14
eligible counties in the state and gaming operations have 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., 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
and a wide-area progressive operator license to operate its progressive slot
system. Such licenses are issued by the Mississippi Commission subject to
certain conditions, including continued compliance with all applicable state
laws and regulations.

20



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

Gaming and manufacturer and distributor licenses are not transferable, are
issued for a three-year period and must be renewed or continued thereafter. In
June 2000, RCVP was granted a renewal of its gaming license by the Mississippi
Commission, and BGI was granted a renewal of its manufacturer and distributor
license and its wide-area progressive operator license. 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
15% 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.

21



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 as
security for a public offering 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.

22



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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, distributor, and wide-area progressive operations, as the case
may be.

License fees and taxes, computed in various ways depending on the type of
gaming involved, are payable to the State of Mississippi and to the counties
and cities in which a licensed gaming subsidiarys operations are conducted.
Depending on the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based on (i) a percentage
of the gross gaming revenues received by the casino operation, (ii) the number
of 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 that amount to at least 25% of the casino cost. The
Mississippi Commission adopted a change to this regulation increasing the
infrastructure requirement to 100%; however, the regulation grandfathers
existing licensees and applies only to new casino projects and casinos that are
not operating at the time of acquisition or purchase by new owners. Management
of the Company believes the Rainbow Casino 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). The Company is a holding
company of BGI, as that term is defined by the Casino Control Act, and thus is
a qualifier in connection with BGIs CSI license and has been approved as such
by the New Jersey Commission. BGI has filed for renewal of its CSI license. The
New Jersey Division of Gaming Enforcement, as part of its normal duties in
conjunction with the license renewal process, is conducting its investigation
of BGI, the Company, and its qualifiers.

23



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

In considering whether to renew a CSI license, the New Jersey Commission
requires 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. Such persons and entities may be investigated and may be
required to make certain regulatory filings and to disclose and/or to provide
consents to disclose personal and financial data. The costs associated with
such investigation are typically borne by the applicant.

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

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

Germany.German legislative authorities regulate and monitor the wall machine
industry to ensure certain manufacturing standards and the fairness of each
machine to users. The most significant legislation presently affecting the
wall machine industry 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. After receiving governmental licensing approval for a machine, the
wall machine manufacturer is permitted to reproduce the sample machine
initially submitted for government approval. Every wall machine carries with
it a small license card that permits the machine to be operated for up to four
years after the initial date of sale, after which it may not be used in
Germany. In Germany, wall machines sold via the secondary market may be
operated by a new owner but only for the residual time remaining on each
machines four-year life. In addition to licensing requirements for
manufacturers, any person or entity that intends to operate a licensed wall
machine must apply to local regulatory authorities for a license, which will
not be granted by the authorities if facts justify the assumption that the
applicant does not possess the requisite reliability. In this proceeding, the
applicant must furnish a police certificate of conduct.

German legislation prohibits the public play of wall machines by people under
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 10 times the maximum stake of DM 0.40,
or DM 4.00 (approximately $1.74), 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.

24



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 $262).

During fiscal 2000, Bally Wulff increased the amount of tax reserves by $0.5
million as a result of ongoing audits of open tax years 1992 to 1995. The
German tax authorities have not yet issued the final assessment from their
quadrennial audits covering the period 1992 to 1995.

With the switch to the Euro as the sole currency of wall machines, the maximum
payout will change from DM 4.0 to Euro 2.0, which given the current conversion
rate, results in a slightly lower effective payout. To compensate for this
slight decrease, certain new regulations set to take effect March 1, 2002 will
reduce the duration of each play on wall machines from 15 seconds to 12
seconds, thus increasing the number of potential plays per hour by 25%.
Conversion kits for 15-second games will be allowed to be marketed, however,
the Company believes many arcade operators may elect to purchase new wall
machines as part of the Euro-conversion. In order to facilitate the transition
of these new regulations, regulators will allow machines whose four year life
would otherwise expire between October 2001 and February 2002 to continue to be
operated until February 28, 2002.

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.

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. In some cases this process may require the holder or prospective
holder to disclose or provide consents to disclose personal and financial data
in connection with necessary investigations, the costs of which are typically
borne by the applicant. The investigatory and approval process can take three
to six months to complete under normal circumstances.

25



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001




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, 2001, all of which are fully utilized unless otherwise
noted (in 000s):

|                  |  |                                          |  |             |         |          |  |        |     |        |  | 
|----------------- |  | ---------------------------------------- |  | ----------- | ------- | -------- |  | ------ | --- | ------ |  | 
|                  |  |                                          |  |             |         |          |  |        |     | Annual
|                  |  |                                          |  |             |         | Building |  | Rental
|Location          |  | Use                                      |  | Square Feet |         | Payments
|                  |  |                                          |  |             |         |         
|Las Vegas, NV     |  | Nevada route operations                  |  |             | 18,500  |          |  | $      | 231 |       
|Las Vegas, NV     |  | Research and development offices         |  |             | 20,000  |          |  |        | 300 |       
|Sparks, NV        |  | Administrative offices and warehousing   |  |             | 38,300  |          |  |        | 345 |       
|Sparks, NV        |  | Sales offices and warehousing            |  |             | 11,000  |          |  |        | 132 |       
|Absecon, NJ       |  | Sales offices and warehousing            |  |             | 15,800  |          |  |        | 101 |       
|Biloxi, MS        |  | Sales offices                            |  |             | 5,000   |          |  |        | 43  |       
|Westchester, IL   |  | Sales offices                            |  |             | 4,900   |          |  |        | 26  |       
|Dania, FL         |  | Sales offices                            |  |             | 3,400   |          |  |        | 7   |       
|Temecula, CA      |  | Sales offices                            |  |             | 2,000   |          |  |        | 18  |       
|Elko, NV          |  | Sales office and route operations        |  |             | 4,200   |          |  |        | 9   |       
|Atlantic City, NJ |  | Administrative offices                   |  |             | 750     |          |  |        | 10  |       
|San Juan, P R     |  | Sales offices                            |  |             | 1,000   |          |  |        | 12  |       
|Las Vegas, NV     |  | Warehousing                              |  |             | 86,300  |          |  |        | 423 |       
|Las Vegas, NV     |  | Warehousing                              |  |             | 1,500   |          |  |        | 52  |       
|Berlin, Germany   |  | Administrative offices and manufacturing |  |             | 115,500 |          |  |        | 439 |       
|Hannover, Germany |  | Administrative offices and warehousing   |  |             | 20,100  |          |  |        | 168 |       
|Sparks, NV        |  | Route operations                         |  |             | 12,100  |          |  |        | 96  |       
|Carson City, NV   |  | Route operations                         |  |             | 2,500   |          |  |        | 9   |       
|Winnemucca, NV    |  | Route operations                         |  |             | 1,200   |          |  |        | 5   |       
|Pahrump, NV       |  | Route operations                         |  |             | 750     |          |  |        | 7   |       
|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   |          |  |        | 65  |       
|Metairie, LA      |  | OTB operation                            |  |             | 5,500   |          |  |        | 59  |       
|LaPlace, LA       |  | OTB operation                            |  |             | 2,250   |          |  |        | 105 |       
|Sparks, NV        |  | Warehousing                              |  |             | 3,600   |          |  |        | 23  |       



---

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

The following table sets forth information regarding properties owned by the
Company as of June 30, 2001, all of which are fully utilized unless otherwise
noted:

|                    |  |                            |  |             |         |          |  | 
|------------------- |  | -------------------------- |  | ----------- | ------- | -------- |  | 
|                    |  |                            |  |             |         | Building
|Location            |  | Use                        |  | Square Feet
|                    |  |                            |  |            
|Las Vegas, NV       |  | Administrative offices and |  |             |         |         
|                    |  | manufacturing (a)          |  |             | 150,000 |         
|Reno/Sparks, NV     |  | Casino (a)                 |  |             | 35,000  |         
|Vicksburg, MS       |  | Casino                     |  |             | 33,000  |         
|Vicksburg, MS       |  | Entertainment facility     |  |             | 20,000  |         
|Vicksburg, MS       |  | Administrative offices     |  |             | 3,200   |         
|Vicksburg, MS       |  | Vacant- Land               |  |             |        |         
|Las Vegas, NV       |  | Tavern/Land                |  |             | 5,000   |         
|North Las Vegas, NV |  | Land/Parking               |  |             | -       |         

26



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

(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 6 months to 10 years
with monthly payments ranging from approximately $2,500 to $16,400.

In addition to the principal facilities, the Company has 18 leased locations
and two owned locations in Germany which are primarily used for sales and
service offices as well as for warehousing purposes. The properties range in
size from approximately 2,300 square feet to 17,000 square feet. The leased
locations have terms of occupancy varying from six months to six and one half
years with monthly payments ranging from approximately $1,500 to $15,800.

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 is vigorously pursuing all
legal defenses available to it.

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

27



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001




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. The prices
shown below have been adjusted to reflect the two-for-one stock split effective
August 21, 2001 for shareholders of record on July 31, 2001. 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, 2000
|                                | 1st Quarter |  | $              | 4.06  |     |  | $ | 1.84 | 
|                                | 2nd Quarter |  |                | 4.40  |     |  |   | 1.22 | 
|                                | 3rd Quarter |  |                | 2.15  |     |  |   | 1.09 | 
|                                | 4th Quarter |  |                | 1.28  |     |  |   | 0.75 | 
|Fiscal Year Ended June 30, 2001
|                                | 1st Quarter |  | $              | 1.94  |     |  | $ | 0.84 | 
|                                | 2nd Quarter |  |                | 5.50  |     |  |   | 1.74 | 
|                                | 3rd Quarter |  |                | 9.69  |     |  |   | 4.19 | 
|                                | 4th Quarter |  |                | 19.89 |     |  |   | 9.08 | 

As of September 1, 2001 the Company had approximately 1,320 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 loan 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.

28



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001




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.

|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |         |  
|---------------------------------------------------------- | ----------------------------------------- | - | --------------------------- | ------- | ---- | - | ------------------------------------ | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                           |                                           |   | Fiscal Years Ended June 30,
|                                                           |                                           |   |                            
|                                                           |                                           |   | 1997                        |         | 1998 |   | 1999                                 |         | 2000 |   | 2001   
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |        
|                                                           |                                           |   |                             |         |      |   | (In 000's, except per share amounts) |         |      |   |        
|Statements of Operations Data                              |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|Revenues:                                                  |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|                                                           | Gaming equipment and systems              |   | $                           | 134,734 |      |   | $                                    | 109,597 |      |   | $       | 127,810 |   |   | $       | 135,180 |   |   | $       | 160,890 |  
|                                                           | Wall machines and amusement games         |   |                             | 131,934 |      |   |                                      | 98,611  |      |   |         | 90,834  |   |   |         | 68,952  |   |   |         | 72,228  |  
|                                                           | Route operations                          |   |                             | 127,028 |      |   |                                      | 148,507 |      |   |         | 175,854 |   |   |         | 202,480 |   |   |         | 221,505 |  
|                                                           | Casino operations                         |   |                             | 51,450  |      |   |                                      | 60,657  |      |   |         | 60,691  |   |   |         | 68,053  |   |   |         | 73,499  |  
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|                                                           |                                           |   | 445,146                     |         |      |   | 417,372                              |         |      |   | 455,189 |         |   |   | 474,665 |         |   |   | 528,122 |        
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|Costs and expenses:                                        |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|                                                           | Cost of gaming equipment and systems      |   |                             | 84,496  |      |   |                                      | 61,684  |      |   |         | 69,721  |   |   |         | 75,508  |   |   |         | 77,423  |  
|                                                           | Cost of wall machines and amusement games |   |                             | 68,426  |      |   |                                      | 54,241  |      |   |         | 54,035  |   |   |         | 43,301  |   |   |         | 39,243  |  
|                                                           | Cost of route operations                  |   |                             | 95,716  |      |   |                                      | 114,645 |      |   |         | 137,692 |   |   |         | 161,062 |   |   |         | 178,103 |  
|                                                           | Cost of casino operations                 |   |                             | 22,269  |      |   |                                      | 25,930  |      |   |         | 27,011  |   |   |         | 27,933  |   |   |         | 32,541  |  
|                                                           | Selling, general and administrative       |   |                             | 99,520  |      |   |                                      | 86,318  |      |   |         | 101,113 |   |   |         | 101,740 |   |   |         | 98,635  |  
|                                                           | Research and development                  |   |                             | 9,954   |      |   |                                      | 15,778  |      |   |         | 17,190  |   |   |         | 15,318  |   |   |         | 13,576  |  
|                                                           | Depreciation and amortization             |   |                             | 22,606  |      |   |                                      | 22,838  |      |   |         | 23,104  |   |   |         | 26,788  |   |   |         | 27,745  |  
|                                                           | Unusual items                             |   |                             | 700     |      |   |                                      | (325    | )    |   |         |        |   |   |         | 2,164   |   |   |         | 6,489   |  
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|                                                           |                                           |   | 403,687                     |         |      |   | 381,109                              |         |      |   | 429,866 |         |   |   | 453,814 |         |   |   | 473,755 |        
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|Operating income                                           |                                           |   | 41,459                      |         |      |   | 36,263                               |         |      |   | 25,323  |         |   |   | 20,851  |         |   |   | 54,367  |        
|Other income (expense)                                    
|                                                           | Interest expense, net                     |   |                             | (22,006 | )    |   |                                      | (27,787 | )    |   |         | (30,836 | ) |   |         | (33,654 | ) |   |         | (33,764 | )
|                                                           | Rainbow royalty                           |   |                             | (4,722  | )    |   |                                      | (587    | )    |   |         |        |   |   |         |        |   |   |         |        |  
|                                                           | Rainbow Royalty Buyout (1)                |   |                             |        |      |   |                                      | (19,000 | )    |   |         |        |   |   |         |        |   |   |         |        |  
|                                                           | Minority interest and other               |   |                             | (1,092  | )    |   |                                      | (2,002  | )    |   |         | (2,053  | ) |   |         | (2,155  | ) |   |         | (2,165  | )
|                                                           | Other, net                                |   |                             | 139     |      |   |                                      | 1,025   |      |   |         | (431    | ) |   |         | 924     |   |   |         | (181    | )
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|Income (loss) before income taxes                          |                                           |   | 13,778                      |         |      |   | (12,088                              | )       |      |   | (7,997  | )       |   |   | (14,034 | )       |   |   | 18,257  |        
|Income tax provision                                       |                                           |   | (7,993                      | )       |      |   | (3,185                               | )       |      |   | (830    | )       |   |   | (1,001  | )       |   |   | (611    | )      
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|Income (loss) before extraordinary item                    |                                           |   | 5,785                       |         |      |   | (15,273                              | )       |      |   | (8,827  | )       |   |   | (15,035 | )       |   |   | 17,646  |        
|Extraordinary loss without tax benefit                     |                                           |   |                            |         |      |   | (42,033                              | )       |      |   |        |         |   |   |        |         |   |   | (3,164  | )      
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|Net income (loss)                                          |                                           |   | 5,785                       |         |      |   | (57,306                              | )       |      |   | (8,827  | )       |   |   | (15,035 | )       |   |   | 14,482  |        
|Special stock dividends                                    |                                           |   | (11,264                     | )       |      |   | (3,551                               | )       |      |   | (1,697  | )       |   |   |        |         |   |   |        |        
|Premium on repurchase/redemption of
Series B Special Stock |                                           |   | (710                        | )       |      |   | (16,553                              | )       |      |   |        |         |   |   |        |         |   |   |        |        
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|Net income (loss) applicable to common shares              |                                           | $ | (6,189                      | )       |      | $ | (77,410                              | )       |      | $ | (10,524 | )       |   | $ | (15,035 | )       |   | $ | 14,482  |        
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|Basic earnings (loss) per share (2)                        |                                           | $ | (0.34                       | )       |      | $ | (4.24                                | )       |      | $ | (0.55   | )       |   | $ | (0.74   | )       |   | $ | 0.70    |        
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        
|Diluted earnings (loss) per share (2)                      |                                           | $ | (0.34                       | )       |      | $ | (4.24                                | )       |      | $ | (0.55   | )       |   | $ | (0.74   | )       |   | $ | 0.69    |        
|                                                           |                                           |   |                             |         |      |   |                                      |         |      |   |         |         |   |   |         |         |   |   |         |        

29



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

ITEM 6. SELECTED FINANCIAL DATA (Continued)

|                                                            |  |                             |         |      |  |                                      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | --------------------------- | ------- | ---- |  | ------------------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Fiscal Years Ended June 30,
|                                                            |  |                            
|                                                            |  | 1997                        |         | 1998 |  | 1999                                 |         | 2000 |  | 2001
|                                                            |  |                             |         |      |  |                                      |         |      |  |     
|                                                            |  |                             |         |      |  | (In 000's, except per share amounts) |         |      |  |     
|Balance Sheet Data                                          |  |                             |         |      |  |                                      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash and cash equivalents and
securities available for sale |  | $                           | 28,924  |      |  | $                                    | 23,487  |      |  | $    | 16,930  |   |  | $ | 34,044  |   |  | $ | 54,845  |  
|Working capital                                             |  |                             | 110,795 |      |  |                                      | 119,480 |      |  |      | 108,661 |   |  |   | 115,979 |   |  |   | 112,669 |  
|Total assets                                                |  |                             | 352,016 |      |  |                                      | 366,837 |      |  |      | 356,307 |   |  |   | 351,287 |   |  |   | 380,197 |  
|Total long term debt,
including current maturities          |  |                             | 173,839 |      |  |                                      | 325,953 |      |  |      | 318,706 |   |  |   | 345,059 |   |  |   | 340,100 |  
|Total stockholders equity (deficiency)                     |  |                             | 53,555  |      |  |                                      | (23,748 | )    |  |      | (30,408 | ) |  |   | (50,795 | ) |  |   | (39,205 | )



---

|(1) |  | Represents royalty fee related to the HFS financing at the Rainbow
Casino. The Company repurchased this royalty obligation from HFS on
August 12, 1997.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The earnings per share amounts have been restated to reflect the
two-for-one stock split effective August 21, 2001.                                    




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

Liquidity and Capital Resources

As of June 30, 2001, the Company had $54.8 million in cash and cash
equivalents, and $25.0 million in unborrowed availability on its new revolving
credit facility. In addition the Company had net working capital of
approximately $112.7 million, a decrease of approximately $3.3 million from
June 30, 2000, which is explained in the working capital section below.
Consolidated cash and cash equivalents at June 30, 2001 includes approximately
$20.8 million of cash which is utilized in Casino and Route Operations which is
held in vaults, cages or change banks.

In June 2001, the Company completed a refinancing of its senior bank credit
facility which now consists of $190.0 million term loan and a $25.0 million
revolving credit facility (which can be increased by $15.0 million at the
Companys discretion any time until December 31, 2002). Proceeds from the term
loan were used to repay the Companys existing bank term loans and credit
facility, totaling $166.0 million, repay certain gaming equipment operating
leases totaling $13.0 million, and to pay transaction fees and expenses. The
new term loan has a 1% per year mandatory principal amortization, with a 5.5
year maturity. The revolving credit facility commitment decreases ratably over
the 5 year term of the commitment. There is no borrowing base collateral
requirement for the revolving credit facility. As of June 30, 2001, there were
no borrowings outstanding on the revolving credit facility. The new bank loan
contains certain financial and operational covenants, however there are no
borrowing base requirements. As of June 30, 2001, the Company is in compliance
with all covenants. In conjunction with the refinancing, the Company recorded a
extraordinary charge of $3.2 million to write off the balance of deferred
financial costs, related to the repaid term loans

Management believes that cash flows from operating activities, cash and cash
equivalents held and the up to $40.0 million revolving credit facility
commitment will provide the Company with sufficient capital resources and
liquidity. At June 30, 2001, the Company had no material commitments for
capital expenditures.

30



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

Working Capital

The following table presents the components of consolidated working capital at
June 30, 2000 and 2001:

|                                                   |                      |   |                     |         |      |   |         |         |  |   |        |        | 
|-------------------------------------------------- | -------------------- | - | ------------------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------ | 
|                                                   |                      |   | Balance at June 30, |         |      |   |        
|                                                   |                      |   |                     |         |      |   |        
|                                                   |                      |   | 2000                |         | 2001 |   | Change 
|                                                   |                      |   |                     |         |      |   |        
|Cash, cash equivalents, and short term investments |                      | $ | 34,044              |         |      | $ | 54,845  |         |  | $ | 20,801 |       
|Accounts and notes receivable, net                 |                      |   | 82,444              |         |      |   | 79,369  |         |  |   | (3,075 | )     
|Inventories, net                                   |                      |   | 32,019              |         |      |   | 35,082  |         |  |   | 3,063  |       
|Other current assets                               |                      |   | 11,198              |         |      |   | 10,814  |         |  |   | (384   | )     
|                                                   |                      |   |                     |         |      |   |         |         |  |   |        |        | 
|                                                   | Total current assets |   |                     | 159,705 |      |   |         | 180,110 |  |   |        | 20,405 | 
|Accounts payable                                   |                      |   | 10,367              |         |      |   | 19,531  |         |  |   | 9,164  |       
|Accrued liabilities                                |                      |   | 32,323              |         |      |   | 46,978  |         |  |   | 14,655 |       
|Current maturities of long-term debt               |                      |   | 1,036               |         |      |   | 932     |         |  |   | (104   | )     
|                                                   |                      |   |                     |         |      |   |         |         |  |   |        |        | 
|Total current liabilities                          |                      |   | 43,726              |         |      |   | 67,441  |         |  |   | 23,715 |       
|                                                   |                      |   |                     |         |      |   |         |         |  |   |        |        | 
|Net working capital                                |                      | $ | 115,979             |         |      | $ | 112,669 |         |  | $ | (3,310 | )     
|                                                   |                      |   |                     |         |      |   |         |         |  |   |        |        | 

The primary fluctuations contributing to the decrease in working capital were:
(i) an increase in accounts payable resulting from timing of
payments, (ii) an
increase in accrued liabilities resulting from timing of payments relating to
the refinancing, (iii) a net decrease in accounts receivable resulting from
cash collections and decreases in bad debt reserves (iv) the impact of foreign
exchange fluctuations between the dollar and the deutschemark on all working
capital categories, and (v) the corresponding impact of the above listed items
on cash and cash equivalents.

Cash Flow

During the year ended June 30, 2001, cash provided from operating activities
totaled $56.9 million, an increase of $59.8 million compared to the cash flows
from operations in the prior years. This improvement is directly attributable
to the overall improved profitability of the Company, and $24.1 million
provided by the active management of working capital.

During the year ended June 30, 2001, the Company used $27.8 million of cash in
investing activities resulting primarily from $11.7 million in capital
expenditures, $13.0 million used to purchase assets formerly under operating leases,
$1.2 million of payments made in acquiring gaming rights for route locations,
and $2.1 million of payments made to acquire other long term assets.

During the year ended June 30, 2001, prior to the refinancing, cash was used to
paydown the revolving credit facility ($23.3 million), and was also used for
payments on other long term debt ($2.8 million). The refinancing transaction
provided $190.0 million, proceeds from which were used to repay the existing
Term Loans and revolving Credit Facility ($166.0 million), and to pay transaction
fees and expenses.

Customer Financing

Management believes that customer financing terms and leasing have become an
increasingly important competitive factor for the Bally Gaming and Systems and
Wall Machine and Amusement Games business units. Competitive conditions
sometimes require Bally Gaming and Systems to grant extended payment terms on
gaming machines, systems and other gaming equipment, especially for sales in
emerging markets. While these financings are normally collateralized by such
equipment, the resale value of the collateral in the event of default may be
less than the 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.

31



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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. Regulations regarding the transition to the Euro currency are not yet
finalized in the area of wall machines. It is currently believed that
conversion kits will be allowed for games in the wall machine that currently
accept only deutschmark. The Company also intends to pre-sell Euro denominated
wall machines, which will be available for shipment and installation in the
days immediately after the first of the calendar year.

Results of Operations

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

|                                          |                             |   |                      |        |      |   |         |        |  |   |         |        | 
|----------------------------------------- | --------------------------- | - | -------------------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                          |                             |   | Years ended June 30,
|                                          |                             |   |                     
|                                          |                             |   | 1999                 |        | 2000 |   | 2001   
|                                          |                             |   |                      |        |      |   |        
|EBITDA by business unit:                  |                             |   |                      |        |      |   |         |        |  |   |         |       
|Bally Gaming and Systems                  |                             | $ | 9,799                |        |      | $ | 12,385  |        |  | $ | 36,066  |       
|Wall Machines and Amusement Games         |                             |   | 10,150               |        |      |   | 3,583   |        |  |   | 10,459  |       
|Route Operations                          |                             |   | 24,860               |        |      |   | 24,503  |        |  |   | 24,786  |       
|Casino Operations                         |                             |   | 21,672               |        |      |   | 25,954  |        |  |   | 27,558  |       
|Corporate expenses                        |                             |   | (18,054              | )      |      |   | (14,688 | )      |  |   | (10,268 | )     
|                                          |                             |   |                      |        |      |   |         |        |  |   |         |       
|                                          | EBITDA before unusual items |   |                      | 48,427 |      |   |         | 51,737 |  |   |         | 88,601 | 
|Unusual items                             |                             |   |                     |        |      |   | (4,098  | )      |  |   | (6,489  | )     
|                                          |                             |   |                      |        |      |   |         |        |  |   |         |       
|                                          | Total EBITDA                |   | $                    | 48,427 |      |   | $       | 47,639 |  |   | $       | 82,112 | 
|                                          |                             |   |                      |        |      |   |         |        |  |   |         |       
|Operating income (loss) by business unit: |                             |   |                      |        |      |   |         |        |  |   |         |       
|Bally Gaming and Systems                  |                             | $ | 5,779                |        |      | $ | (693    | )      |  | $ | 27,039  |       
|Wall Machines and Amusement Games         |                             |   | 5,334                |        |      |   | (4,219  | )      |  |   | 4,904   |       
|Route Operations                          |                             |   | 14,586               |        |      |   | 15,162  |        |  |   | 15,482  |       
|Casino Operations                         |                             |   | 19,348               |        |      |   | 23,805  |        |  |   | 25,258  |       
|Corporate expenses/unusual items          |                             |   | (19,724              | )      |      |   | (13,204 | )      |  |   | (18,316 | )     
|                                          |                             |   |                      |        |      |   |         |        |  |   |         |       
|                                          | Total Operating Income      |   | $                    | 25,323 |      |   | $       | 20,851 |  |   | $       | 54,367 | 
|                                          |                             |   |                      |        |      |   |         |        |  |   |         |       

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 (loss) 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.
EBITDA may not be comparable to similarly titled measures reported by other
companies.

2001 Compared with 2000

Bally Gaming and Systems

For the year ended June 30, 2001, the Bally Gaming and Systems business unit
reported revenues of $160.9 million, an increase of 19% compared to revenues of
$135.2 million in the prior year. Gaming Products sales totaled $86.6 million,
an increase of 16% compared to $74.9 million in the prior year. New unit sales
totaled 10,500 units, a 20% increase compared to 8,700 in the prior year
period. The average new unit selling price increased 7% from the prior year to
$6,700. By market segment, unit sales for the current year consisted of
approximately 1,590 units to the Nevada and Atlantic City markets, 1,440 units
to Canada, 1,000 units to international markets, 1,980 units in

32



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

California and 4,490 units to other Native American, riverboats and other
domestic markets. Bally Systems reported revenues of $45.9 million compared to
$40.2 million in the prior year. Systems reported shipments of 32,700 SDS
units, a 7% decrease compared to 35,300 units in the prior year. This decrease
was primarily a result of comparisons to the record year 2000, which included
certain Y2K related replacements as well as several larger sales as a result of
mergers and acquisitions which took place in the casino operator market, which
activity declined in fiscal year 2001. Gaming Operations reported revenues of
$28.4 million, an increase of 41% compared to the prior year. The increased
revenues were driven by an increase in the installed base of recurring revenue
units, which total approximately 3,200 units as of June 30, 2001, compared to
approximately 2,700 units at June 30, 2000, and an increase in the revenue per
unit as a result of the increased number of higher revenue wide-area
progressive games deployed compared to the lower revenue daily-fee games.

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

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

Wall Machines and Amusement Games

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

The Wall Machines and Amusement Games business unit continued its leasing
program whereby new wall machines and certain amusement games 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, 2001, a total of 6,400 machines were deployed in
the leasing program compared to 5,500 at June 30, 2000, an increase of 15%.

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

Route Operations

For the year ended June 30, 2001, the Route Operations business unit reported
total revenues of approximately $221.5 million, an increase of 9% compared to
revenues of $202.5 million in the prior year. Revenues from the Nevada route
operations increased to approximately $205.1 million or 12% over the prior
year. This improvement was attributable to an increase in the average net win
per gaming machine per day of 7% to $67.74 from $63.30 in the prior year and a
4% increase in the weighted average number of gaming machines during the
current year to 8,000 units as compared to 7,800 units in the prior year.
Gamblers Bonus, a cardless players club and player tracking system continued
to have a favorable impact on the net win per day. As of June 30, 2001, the
Gamblers Bonus product was installed in over 3,860 gaming machines at
approximately 377 locations statewide or 47% of the installed base of gaming
machines.

33



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

Revenues from route operations in Louisiana totaled $16.4 million, a decrease
of 15% compared to the prior year. This decrease was primarily the result of a
decline in the net win per gaming machine per day of 14% to $66.53 from $77.50
in the prior year and the average number of machines remained constant at 680,
resulting from the loss of two locations due to parish gaming referendums.
These declines are reflective of the competitive market resulting from the
significant increase in the number of truck stop casinos in the metro New
Orleans area.

For the year ended June 30, 2001, cost of revenues for Route Operations totaled
as a percentage of revenues, increased to 81% from 80% in the prior year. This
increase was primarily due to higher space lease and participation costs for
the Nevada route operations. Cost of route revenues for Route Operations
includes rents under both space lease and revenue sharing arrangements, gaming
taxes and direct labor including payroll taxes and benefits. As part of
recently completed refinancing the company repaid all of the gaming equipment
leases, which prospectively will eliminate approximately $5.8 million of yearly
game rental cost and increase depreciation by approximately $4.0 million per
year.

For the fiscal year ended June 30, 2001, the Route Operations business unit
reported operating income of $15.5 million, an increase of 2% compared to
operating income of $15.2 million in the prior year. The increase in operating
income resulted from the aforementioned increase in revenues, offset by an
increase in selling, general, and administrative expenses as a percentage of
revenues, principally marketing and promotion costs at the Nevada route
operations, and a higher provision for doubtful receivables for the Nevada
route operations.

Casino Operations

For the year ended June 30, 2001, the Casino Operations business unit reported
revenues of $73.5 million, an increase of 8% compared to revenues of $68.1
million in the prior year. This improvement is due to an 8% increase in
revenues at the Rainbow Casino and a 9% increase in revenues at the Rail City
Casino. The improvement at the Rainbow Casino was attributable to a 9%
increase in the average number of gaming machines, and by a 2% increase in the
net win per day to $151, both of which are a result of the casino expansion
completed during the current fiscal year. The revenue improvement at the Rail
City Casino was attributable to an increase in the average gaming machine net
win per day of 8% to $84 from $78 in the prior year and a 2% increase in the
average number of gaming machines.

For the year ended June 30, 2001, the cost of revenues for Casino Operations as
a percentage of revenues, improved to 44% compared to 41% for the prior year.
This improvement was a result of the increase in revenues, which were achieved
without incremental increases in certain operating costs. Cost of casino
revenues includes cost of goods sold, gaming taxes, rent and direct labor
including payroll taxes and benefits.

Unusual Items

During the fiscal year ended June 30, 2001, the Company recorded the following
unusual or extraordinary items:



| |  | Unusual charge of $6.5 million for costs and expenses incurred to terminate the agreement to
sell the Nevada Route Operations.                                            
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Non-cash extraordinary charge of $3.2 million to write off the balance of deferred financing
costs as a result of the refinancing of the Companys $230 million bank debt.

During the fiscal year ended June 30, 2000, the Company recorded the following unusual items:



| |  | Restructuring and related charges totaling $8.1 million. The restructuring and related costs
were incurred pursuant to a plan adopted by the Company for staff reductions at the Bally
Gaming and Systems, Wall Machine and Amusement Games, and at its corporate office. Included
in the restructuring costs described above is a $1.9 million charge for a valuation reserve
for certain inventory for the Australian market, which is included in the cost of gaming
equipment and systems in the Consolidated Statement of Operations.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Gains from the sale of certain gaming management and development rights totaling $4.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                            

34



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

Consolidated

Total revenues for the year ended June 30, 2001, were approximately $528.1
million, an increase of 11% compared to revenues of $474.7 million in the prior
year. Each of the Companys business units reported year over year growth in
revenues. Cost of revenues as a percentage of total revenues decreased to 62%
from 64% in the prior year period.

Selling, general and administrative expenses for the year ended June 30, 2001
were approximately $98.6 million, a decrease of 3% compared to costs of $101.7
million in the prior year. This decrease was due to the decreases in expenses
at all of the business units, except Casino Operations costs.

Research and development costs for the year ended June 30, 2001 were
approximately $13.6 million, a decrease of 11% compared to costs of $15.3
million in the prior year, which is discussed above.

Depreciation and amortization for the year ended June 30, 2001 were
approximately $27.7 million, a 4% increase compared to $26.8 million in the
prior fiscal year. The increase was driven by the larger base of assets in
the Bally Gaming Operations division.

Interest Income and Expense and Income Taxes

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

The Company recorded an income tax provision of $0.6 million in the year ended
June 30, 2001, compared to a provision of $1.0 million in the prior year. The
decrease in the current year provision is due primarily to income tax refund of
$0.6 million offset by state income taxes. At June 30, 2001, the Company had
net operating income carry forwards for federal income tax purposes of
approximately $101 million which are available to offset future federal taxable
income, if any, expiring in the years 2008 through 2021. At June 30, 2001 the
Company had foreign tax credit carry forwards of approximately $6.6 million and
alternative minimum tax credit (AMT) carry forwards of approximately $0.9
million. Foreign tax credits have expiration dates ranging from 2001 to 2005
unless utilized prior to such time. AMT credits are available to be carried
forward indefinitely and may be utilized against regular U.S. corporate tax to
the extent it does not exceed computed AMT calculations.

2000 Compared with 1999

Bally Gaming and Systems

For the year ended June 30, 2000, the Bally Gaming and Systems business unit
reported revenues of $135.2 million, an increase of 6% compared to revenues of
$127.8 million in the prior year. Gaming Product sales totaled $74.9 million, a
decrease of 21% compared to $94.9 million in the prior year. New unit sales
totaled 8,700 units, a 30% decrease compared to 12,300 in the prior year
period. The average new unit selling price increased 10% from the prior year to
$6,300. By market segment, unit sales for the current year consisted of
approximately 1,370 units to the Nevada and Atlantic City markets, 840 units to
Canada, 2,870 units to international markets, and 4,460 units to riverboats,
Native American and other domestic markets. Bally Systems reported revenues of
$40.2 million compared to $31.4 million in the prior year. Systems reported
shipments of 35,300 SDS units, a 59% increase compared to 22,300 units in the
prior year. This increase was primarily a result of shipments related to new
casino openings and to casinos acquired by Harrahs and Park Place
Entertainment that previously used competitors systems, and to a lesser extent
units sold

35



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

related to Y2K upgrades. Gaming Operations reported revenues of $20.1 million,
an increase of 286% compared to revenues of $1.5 million in the prior year. At
year-end, the Gaming operations division had an installed base of approximately
2,300 units earning recurring revenues, compared to approximately 1,200 units
at June 30, 1999.

For the year ended June 30, 2000, gross profit margins remained constant at
approximately 46%, which was attributed to the increase in higher margin
recurring revenues and SDS sales, offset by lower game sales margins due to low
unit volume.

Bally Gaming and Systems reported operating loss of ($0.7) million, compared to
operating income of $5.8 million in the prior year. The decrease in operating
income resulted primarily from the high level of fixed overhead costs, higher
depreciation expenses due to the continued roll out of progressive gaming
devices, higher provision for uncollectible receivables and unusual charges for
the costs incurred to close certain unprofitable sales offices and writedowns
of inventory. Research and development costs totaled $12.6 million, a decrease
of 9% over the prior year.

Wall Machines and Amusement Games

For the year ended June 30, 2000, Wall Machines and Amusement Games reported
revenues of $68.9 million, a decrease of 24% compared to revenues of $90.8
million in the prior year. The decrease in revenues resulted primarily from an
18% 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, and a 9% decrease in leased wall
machine and amusement game revenues, due primarily to lower market demand
pending the outcome of potential changes to laws regulating wall machines. 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 decreased revenues by
$7.9 million during the current year.

The Wall Machines and Amusement Games business unit continued its leasing
program whereby new wall machines and certain amusement games 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, 2000, a total of 5,500 machines were deployed in
the leasing program compared to 5,000 at June 30, 1999, an increase of 10%.

For the year ended June 30, 2000, gross profit margin decreased to 37% from 41%
in the prior year. The gross margin decrease resulted primarily from the
unfavorable impact of lower revenues, and increased competition which has led
to offering higher values on used machines taken on trade-ins and a lower fixed
cost absorption rate as well as lower sales of the higher margin jackpot
systems. Wall Machines and Amusement Games reported operating loss of ($4.2)
million, compared to operating income of $5.3 million in the prior year period.

Route Operations

For the year ended June 30, 2000, the Route Operations business unit reported
total revenues of approximately $202.5 million, an increase of 15% compared to
revenues of $175.9 million in the prior year. Revenues from the Nevada route
operations increased to approximately $183.2 million or 19% over the prior
year. This improvement was attributable to an increase in the average net win
per gaming machine per day of 11% to $63.30 from $57.20 in the prior year and a
7% increase in the weighted average number of gaming machines during the
current year to 7,800 units as compared to 7,300 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, 2000, the
Gamblers Bonus product was installed in over 3,500 gaming machines at
approximately 345 locations statewide or 44% of the installed base of gaming
machines. Revenues from route operations in Louisiana totaled $19.2 million, a
decrease of 11% compared to the prior year. This decrease was primarily the
result of a decline in the net win per gaming machine per day of 4% to $77.50
from $80.50 in the prior year and a 9% decrease in the average number of
machines to 680 from 740 in the prior year resulting from the loss of two
locations due to parish gaming referendums.

36



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

For the year ended June 30, 2000, cost of revenues for Route Operations totaled
as a percentage of revenues, increased to 80% from 78% in the prior year. This
increase was primarily due to higher space lease and participation costs for
the Nevada route operations. Cost of route revenues for Route Operations
includes rents under both space lease and revenue sharing arrangements, gaming
taxes and direct labor including payroll taxes and benefits.

For the fiscal year ended June 30, 2000, the Route Operations business unit
reported operating income of $15.2 million, an increase of 4% compared to
operating income of $14.6 million in the prior year. The increase in operating
income resulted from the aforementioned increase in revenues, offset by an
increase in selling, general, and administrative expenses as a percentage of
revenues, principally marketing and promotion costs at the Nevada route
operations, and a higher provision for doubtful receivables for the Nevada
route operations.

Casino Operations

For the year ended June 30, 2000, the Casino Operations business unit reported
revenues of $68.1 million, an increase of 12% compared to revenues of $60.7
million in the prior year. This improvement is due to a 9% increase in
revenues at the Rainbow Casino and a 22% increase in revenues at the Rail City
Casino. The improvement at the Rainbow Casino was attributable to a 16%
increase in the average number of gaming machines, offset by a 7% decrease in
the net win per day to $148, both of which are a result of the casino expansion
completed during the current fiscal year. The revenue improvement at the Rail
City Casino was attributable to an increase in the average gaming machine net
win per day of 20% to $78 from $65 in the prior year and a 7% increase in the
average number of gaming machines.

For the year ended June 30, 2000, the cost of revenues for Casino Operations as
a percentage of revenues improved to 39% compared to 42% for the prior year.
This improvement was a result of the increase in revenues, which were achieved
without incremental increases in certain operating costs. Cost of casino
revenues includes cost of goods sold, gaming taxes, rent and direct labor
including payroll taxes and benefits.

Consolidated

Total revenues for the year ended June 30, 2000 were approximately $474.7
million, an increase of 4% compared to revenues of $455.2 million in the prior
year. Each of the Companys business units reported year over year growth in
revenues, except for its Wall Machines and Amusement Games business unit. Cost
of revenues as a percentage of total revenues increased slightly to 64% from
63% in the prior year period.

Selling, general and administrative expenses for the year ended June 30, 2000
were approximately $101.7 million, an increase of 1% compared to costs of
$101.1 million in the prior year. This increase was due to the increases in
expenses at all of the business units, except Wall Machine and Amusement Games
and Corporate Administrative costs.

Research and development costs for the year ended June 30, 2000 were
approximately $15.3 million, a decrease of 11% compared to costs of $17.2
million in the prior year, which is discussed above.

Depreciation and amortization for the year ended June 30, 2000 were
approximately $26.8 million, a 16% increase compared to $23.1 million in the
prior fiscal year. In the prior year the Company incurred higher levels of
research and development costs related to the launch of the wide-area
progressive system.

Interest Income and Expense and Income Taxes

Interest expense (net of interest income) in the year ended June 30, 2000,
totalled $33.7 million, an increase of 9% compared to the net interest expense
of $30.8 million in the prior year. The increase is due primarily to fees
totaling $1.0 million associated with amendments to the Companys previous bank
credit agreement, coupled with a higher average amount of debt outstanding
during the year and higher interest rates.

37



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

The Company recorded an income tax provision of $1.0 million in the year ended
June 30, 2000, compared to a provision of $0.8 million in the prior year. The
current year provision is due primarily to establishing additional reserves for
open tax years currently under audit in Germany, and domestic state income
taxes.

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

The Company has a substantial amount of indebtedness. As of June 30, 2001, the
aggregate outstanding principal amount of the Companys long-term indebtedness
including current maturities was $340.1 million. The Company also has
available up to $40.0 million in unborrowed commitment under its revolving
credit facility.

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.

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

38



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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.

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 to new and emerging markets, is based on competitive
customer pricing and financing terms, appeal to the player, product quality,
and having an extensive distribution and sales network. Sales to established
casinos in Nevada normally require completion of a successful trial period for
the machines in the casino.

The competition for the computerized monitoring systems currently consists of
IGT, Casino Data Systems and, to a lesser extent, Acres Gaming, Inc., Gaming
Systems International, Inc., and Mikohn Gaming Corporation. Competition is
keen in this market due to the number of providers and the limited number of
casinos and the jurisdictions in which they operate. Pricing, product feature
and function, accuracy, and reliability are all main factors in determining a
providers success in selling its system. Bally Gaming and Systems believes
the future success of 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 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, payment of one-time fees for the right to
operate gaming locations 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

39



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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.

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 the Vicksburg market.
Competition from casinos in nearby locations may also be reducing the market
from which Vicksburg casinos draw most of their patrons. Moreover, additional
potential gaming sites remain in and around Vicksburg and Sparks; some of these
sites may be closer to larger population centers and, if developed, might enjoy
a competitive advantage over 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 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 continues to deploy new products that are placed in
casinos and earn recurring revenues and cash flows. The amount of revenues
earned is dependent on the earning power of the game. The games will likely
have a shorter life than more traditional games, and the Company will have to
continue to design and deploy successful games to maintain this stream of
revenue. There can be no assurance that the games recently deployed will be
successful or that 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 on 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 jurisdictions currently
permitting gaming will continue to do so in the future.

40



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

Management believes that customer financing terms and leasing have become an
increasingly important competitive factor for the Bally Gaming and Systems and
Wall Machine and Amusement Games business units. Competitive conditions
sometimes require Bally Gaming and Systems to grant extended payment terms on
gaming machines, systems and other gaming equipment, especially for sales in
emerging markets. While these financings are normally collateralized by such
equipment, the resale value of the collateral in the event of default may be
less than the 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. As
of June 30, 2001, Bally Gaming and Systems has $12.4 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, on the
continued services of a relatively small group of executive personnel. The
loss or unavailability of one or more of such executive officers or the
inability to attract or retain key employees in the future could have an
adverse effect on the Companys operations.

Strict Regulation by Gaming Authorities

The manufacture and distribution of gaming machines and the conduct of gaming
operations are subject to extensive federal, state, local and foreign
regulation by various gaming authorities (each, a Gaming Authority).
Although the laws and regulations of the various jurisdictions in which 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.

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.

41



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

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 2000, Bally Wulff increased the
amount of tax reserves by $0.5 million (to a total reserve of $0.8 million) as
a result of developments in ongoing quadrennial audits of Wulffs tax returns
for the years 1992 through 1995. The German tax authorities have proposed
preliminary adjustments of $0.3 million, which has been accrued. The German tax
authorities have not yet issued the final assessment from their quadrennial
audits.

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 changes in taxation on gaming operations.

Change of Control

Upon the occurrence of a Change of Control (as defined), each holder of the
Senior Subordinated Notes may require 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 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 credit
facility. There can be no assurance that the Company will have the financial
ability to purchase the Senior Subordinated Notes on the occurrence of a change
of control. There can be no assurance that the Company will be able to comply
with all of its obligations under the new credit facility, the indenture, and
its other indebtedness on 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 2000 and 2001, which resulted in
assets and liabilities denominated in local currencies being translated into
fewer dollars. 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, of changes in the market interest rates or currency exchange rates.

42



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

The results of the sensitivity analysis at June 30, 2001, are as follows:

Interest Rate Risk:

The Company had total debt as of June 30, 2001 of $340.1 million, of which
$190.0 million are Term Loans with interest rates tied to LIBOR. These Term
Loans are broken into individual loans with varying terms from one to six
months. The interest rate for each loan is set on the borrowing date and is
effective for the term outstanding. If the LIBOR rates were to increase or
decrease by 100 basis points, with all other factors remaining constant,
earnings would decrease or increase by approximately $1.9 million on a pre-tax
basis.

Foreign Currency Exchange Rate Risk:

The Companys German subsidiaries utilize the German deutschemark as their
functional currency, which will be converted to the Euro during fiscal year
2002. If the German deutschemark declined 10% against the U.S. dollar, there
would be a corresponding increase in earnings reported in the consolidated
group, 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 comprehensive loss, which is a component of stockholders
equity, of approximately $4.4 million, all other factors remaining constant.

Estimates

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




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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 are included after the signature page beginning at page
F-1.




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

Effective June 1, 2000, Alliance Gaming Corporation (the Company) dismissed
KPMG LLP (KPMG) and engaged Arthur Andersen LLP. The decision to change
accountants was approved by the Audit Committee and the Board of Directors of
the Company.

The reports of KPMG on the Companys consolidated statement of operations,
stockholders equity (deficiency) and cash flows for the one year period ending
June 30, 1999, did not contain an adverse opinion or disclaimer of opinion, and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles.

There were no disagreements between the Company and KPMG as to any matter of
accounting principles or practices, financial statement disclosure, or audit
scope or procedure, which disagreements, if not resolved to the satisfaction of
KPMG, would have caused it to make a reference to the subject matter of the
disagreement in connection with its reports on the financial statements for
such periods within the meaning of Item 304 (a)(1)(iv) of Regulation S-K.

Effective June 1, 2000, the Company engaged the firm of Arthur Andersen LLP as
independent accountants for the Companys fiscal year ending June 30, 2000, to
replace KPMG. The Companys Board of Directors approved the

43



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

selection of Arthur Andersen LLP as independent accountants upon the
recommendation of the Companys Audit Committee.




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.

44



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001




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:                                                                                         |  |         
|   |  | Reports of Independent Public Accountants                                                                     |  | F-1 F-2
|   |  | Consolidated Balance Sheets as of June 30, 2000 and 2001                                                      |  | F-3     
|   |  | Consolidated Statements of Operations for the Years Ended June 30, 1999, 2000 and 2001                        |  | F-4     
|   |  | Consolidated Statements of Stockholders Equity (Deficiency) for the Years Ended June 30,
1999, 2000 and 2001 |  | F-5     
|   |  | Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 2000 and 2001                        |  | F-6     
|   |  | Notes to Consolidated Financial Statements                                                                    |  | F-7     
|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 Form S-4 dated May 9, 1996)

45



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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     |  | Loan Agreement among Alliance Gaming Corporation, Bally Wulff Vertriebs
GmbH, Bally Wulff Automaten GmbH and various lenders, and Bank of
America, N.A. (Administrative Agent), dated June 22, 2001 (incorporated
herein by reference)                                                                                                                                                                                                                                                                                                                                          
|4.3     |  | Rights Agreement dated as of March 9, 1998 between the Company and
American Stock Transfer & Trust Company (incorporated herein by
reference to Form 8-A dated March 10, 1998)                                                                                                                                                                                                                                                                                                                                                                                                  
|4.4     |  | First Amendment to the Rights Agreement dated as of September 15, 1998
between the Company and American Stock Transfer & Trust Company
(incorporated herein by reference to the Companys annual report on Form
10-K dated June 30, 1998)                                                                                                                                                                                                                                                                                                                                       
|4.5     |  | Form of Certificate of Designations with respect to Series F Special
Stock (attached as Exhibit A to the Rights Agreement) (incorporated
herein by reference to Form 8-A dated March 10, 1998)                                                                                                                                                                                                                                                                                                                                                                                  
|4.6     |  | Form of Right Certificate (attached as Exhibit B to the Rights
Agreement) (incorporated herein by reference to Form 8-A dated March 10,
1998)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.7     |  | Summary of Rights to Purchase Series F Special Shares (attached as
Exhibit C to the Rights Agreement) (incorporated herein by reference to
Form 8-A dated March 10, 1998)                                                                                                                                                                                                                                                                                                                                                                                                       
|10.1    |  | Alliance Gaming Corporation 1996 Long Term Incentive Plan (incorporated
herein by reference to the Companys Form S-8 filed August 12, 1997
Registration Number 333-34077).*                                                                                                                                                                                                                                                                                                                                                                                                    
|10.2    |  | Letter of Agreement dated June 25, 1993 among United Gaming, Inc. and
Kirkland-Ft. Worth Investment Partners, L.P., Kirkland Investment
Corporation and as to certain provisions, Alfred H. Wilms, including
Exhibit A (Form of Securities Purchase Agreement), Exhibit B (Form of
Stockholders Agreement), Exhibit C (Form of Certificate of Designations
of Non-Voting Junior Convertible Preferred Stock), Exhibit D (Form of
Warrant Agreement), and Exhibit E (Form of press release) thereto
(incorporated herein by reference to Alliances Form 8-K dated June 25,
1993)
|10.3    |  | Advisory Agreement, dated June 25, 1993 among United Gaming, Inc.,
Gaming Systems Advisors, L.P. and, as to certain provisions, Mr. Alfred
H. Wilms, including Exhibit A (Form of Warrant Agreement) and Exhibit B
(Form of press release) thereto (incorporated herein by reference to
Alliances Form 8-K dated June 25, 1993)                                                                                                                                                                                                                                                
|10.4    |  | United Gaming, Inc. 1991 Long-Term Incentive Stock Option Plan
(incorporated herein by reference to Alliances Form S-8 Registration
Number 33-45811 and Registration Number 33-75308).*                                                                                                                                                                                                                                                                                                                                                                                        
|10.5    |  | Agreement, dated as of September 14, 1993, by and among United Gaming,
Inc., Kirkland-Ft. Worth Investments Partners, L.P., Kirkland Investment
Corporation, Gaming Systems Advisors, L.P. and Alfred H. Wilms
(incorporated herein by reference to Alliances Form 8-K dated September
21, 1993)                                                                                                                                                                                                                                                                               
|10.6    |  | Stockholders Agreement, dated as of September 21, 1993, by and among
United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P., and
Alfred H. Wilms (incorporated herein by reference to Alliances Form 8-K
dated September 21, 1993)                                                                                                                                                                                                                                                                                                                                  

46



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

|        |  |                                                                                                                                                                                                                                                                                                                                                            
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                            
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                            
|10.7    |  | Amendment to Stockholders Agreement dated as of October 20, 1994
(incorporated herein by reference to Alliances Form S-8 Registration
Number 33-45811 and Registration Number 33-75308)                                                                                                                                                                   
|10.8    |  | Selling Stockholder Letter Agreement dated as of March 20, 1995
(incorporated herein by reference to Alliances Form S-3 Registration
Number 33-58233)                                                                                                                                                                                                     
|10.9    |  | Securities Purchase Agreement, dated as of September 21, 1993, by and
among United Gaming, Inc., Kirkland-Ft. Worth Investment Partners, L.P.
and Kirkland Investment Corporation (incorporated herein by reference to
Alliances Form 8-K dated September 21, 1993)                                                                                       
|10.10   |  | Management Agreement, dated as of October 29, 1993, among Rainbow
Casino-Vicksburg Partnership, L.P., Rainbow Casino Corporation and
Mississippi Ventures, Inc., as manager (incorporated herein by reference
to Alliances Form 8-K dated October 29, 1993)                                                                                               
|10.11   |  | Letter Agreement, dated as of June 29,1994, among United Gaming, Inc.,
Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel,
consented to by HFS Gaming Corporation (incorporated herein by reference
to Alliances Form 8-K dated August 11, 1994)                                                                                          
|10.12   |  | Letter Agreement, dated as of July 16, 1994, among United Gaming, Inc.,
Rainbow Casino Corporation, John A. Barrett, Jr. and Leigh Seippel,
consented to by HFS Gaming Corporation (incorporated herein by reference
to Alliances Form 8-K dated August 11, 1994)                                                                                         
|10.13   |  | Second Amendment to Casino Financing Agreement, dated as of August 11,
1994, among United Gaming, Inc., United Gaming Rainbow, Inc., Rainbow
Casino-Vicksburg Partnership, L.P., Rainbow Casino Corporation, John A.
Barrett, Jr., Leigh Seippel and HFS Gaming Corporation (incorporated
herein by reference to Alliances Form 8-K dated August 11, 1994)
|10.14   |  | Partnership Agreement of Rainbow Casino-Vicksburg Partnership, L.P.,
dated as of July 8, 1994 (incorporated herein by reference to Alliances
Form 8-K dated August 11, 1994)                                                                                                                                                                              
|10.15   |  | Second Amended and Restated Agreement of Limited Partnership, dated
March 29,1995, between United Gaming Rainbow and Rainbow Casino
Corporation (incorporated herein by reference to Alliances Form 8-K
dated March 29, 1995)                                                                                                                             
|10.16   |  | Letter Agreement, dated March 29, 1995, among United Gaming Rainbow,
RCC, Leigh Seippel, John A. Barrett, Jr. and Butler, Snow, OMara,
Stevens & Cannada (incorporated herein by reference to Alliances Form
8-K dated March 29, 1995)                                                                                                                   
|10.17   |  | Class A Note Payable, dated March 29, 1995, issued by RCVP to United
Gaming Rainbow (incorporated herein by reference to Alliances Form 8-K
dated March 29, 1995)                                                                                                                                                                                         
|10.18   |  | Class B Note Payable, dated March 29, 1995, issued by RCVP to United
Gaming Rainbow (incorporated herein by reference to Alliances Form 8-K
dated March 29, 1995)                                                                                                                                                                                         
|10.19   |  | Class B Note Payable, dated March 29, 1995, issued by RCVP to National
Gaming Mississippi, Inc. (incorporated herein by reference to Alliances
Form 8-K dated March 29, 1995)                                                                                                                                                                             
|10.20   |  | Trademark License Agreement, dated November 11, 1991 between Bally
Manufacturing Corporation and Bally Gaming International, Inc.
(incorporated herein by reference to exhibit 10(i)(d) included in BGIIs
Annual Report on Form 10-K for the fiscal year ended December 31, 1991)                                                                         

47



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

|        |  |                                                                                                                                                                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                          
|10.21   |  | Amended and Restated Trademark License Agreement, dated July 8, 1992, by
and between Bally Gaming International, Inc. and Bally Manufacturing
Corporation (incorporated herein by reference to exhibit 10(i)(d)
included in BGIIs Registration Statement on Form S-1 No. 33-48347 filed
on July 9, 1992)
|10.22   |  | Second Amendment to Trademark License Agreement and Settlement
Agreement, dated March 31, 1995, by and between Bally Entertainment
Corporation and Bally Gaming International, Inc. (incorporated herein by
reference to Exhibit I, included in BGIIs Current Report on Form 8-K
dated April 3, 1995)   
|10.23   |  | Third Amendment to Trademark License Agreement and Settlement Agreement,
dated May 10, 1996, by and between Bally Entertainment Corporation,
Alliance Gaming Corporation and BGII Acquisition Corp. (incorporated by
reference to exhibit 10.77 to S-2 Registration Statement No. 333-02147)             
|10.24   |  | Employment Agreement Supplement, dated as of August 29, 1996, between
the Company and Joel Kirschbaum (incorporated by reference to the
Company quarterly report on Form 10-Q for December 31, 1996).*                                                                                                   
|10.25   |  | Employment Agreement Supplement, dated as of August 29, 1996, between
the Company and Anthony DiCesare (incorporated by reference to the
Company quarterly report on Form 10-Q for December 31, 1996).*                                                                                                  
|10.26   |  | Employment Agreement, dated July 1, 1997 between the Company and Joel
Kirschbaum (incorporated herein by reference to the Companys Annual
Report on Form 10-K dated June 30, 1997).*                                                                                                                    
|10.27   |  | Employment Agreement, dated July 1, 1997 between the Company and Anthony
DiCesare (incorporated herein by reference to the Companys Annual
Report on Form 10-K dated June 30, 1997).*                                                                                                                   
|10.28   |  | 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)                                                                                                                 
|10.29   |  | Amendment Number 1 to the agreement between the Company and Kirkland
Investment Corporation dated July 1, 1997 (incorporated by reference to
the Companys Annual Report on Form 10-K dated June 30, 1997)                                                                                               
|10.30   |  | Amended and Restated Employment Agreement, effective April 24, 2001,
between the Company and Robert L. Miodunski (incorporated herein by
reference)                                                                                                                                                      
|10.31   |  | Amendment to Employment Agreement between the Company and Anthony L.
DiCesare, effective January 4, 2000 (incorporated by reference to the
Companys quarterly report on Form 10-Q for March 31, 2000)                                                                                                   
|10.32   |  | Amendment to Employment Agreement between the Company and Joel
Kirschbaum, effective January 4, 2000 (incorporated by reference to the
Companys quarterly report on Form 10-Q for March 31, 2000)                                                                                                       
|10.33   |  | Amendment #2 to the Agreement between the Company and Kirkland
Investment Corporation effective January 4, 2000 (incorporated by
reference to the Companys quarterly report on Form 10-Q for March 31,
2000)                                                                                            
|21      |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                          
|23.1    |  | Consent of Arthur Andersen LLP                                                                                                                                                                                                                                                                           
|23.2    |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                      



---

|* |  | Management contract or compensatory plan or arrangement.
|- |  | --------------------------------------------------------

48



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001

ITEM 14 (continued).



|(b) |  | Reports on Form 8-K:                                                                                                                                 
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On June 25, 2001, the Company filed a report on Form 8-K disclosing the
completion of the $230 million refinancing of the Companys senior bank debt.
|   
|(c) |  | See Item 14(a)(3) above.                                                                                                                             
|   
|(d) |  | See Item 14(a)(2) above.                                                                                                                             

49



---



##### Table of Contents



ALLIANCE GAMING CORPORATION
FORM 10-K

Year Ended June 30, 2001




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 27,2001
|--------------------------- | ------------------------



|By | /s/ Robert L. Miodunski | 
|-- | ----------------------- | 
|   |                         | 

| | Robert L. Miodunski,
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/ Robert L. Miodunski

Robert L. Miodunski |  | Director, President and Chief Executive
Officer (Principal Executive Officer)                          |  | September 27,2001
|                                            
|/s/ Robert L. Saxton

Robert L. Saxton       |  | Sr. Vice President, Treasurer
and Chief Financial Officer (Principal
Financial and Accounting Officer) |  | September 27,2001
|                                            
|/s/ Jacques Andre
Jacques Andre              |  | Director                                                                                               |  | September 27,2001
|                                            
|/s/ Anthony DiCesare
Anthony DiCesare        |  | Director                                                                                               |  | September 27,2001
|                                            
|/s/ Joel Kirschbaum
Joel Kirschbaum          |  | Director                                                                                               |  | September 27,2001
|                                            
|/s/ David Robbins
David Robbins              |  | Director and Chairman of the Board                                                                     |  | September 27,2001
|                                            
|/s/ Morton Topfer
Morton Topfer              |  | Director                                                                                               |  | September 27,2001
|                                            
|/s/ Kevin Verner
Kevin Verner                |  | Director                                                                                               |  | September 27,2001

50



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Alliance Gaming
Corporation and Subsidiaries as of June 30, 2000 and 2001 and the related
consolidated statements of operations, stockholders deficiency and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alliance Gaming
Corporation and Subsidiaries as of June 30, 2000 and 2001, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States.

Arthur Andersen LLP

Las Vegas, Nevada
August 15, 2001

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders
Alliance Gaming Corporation:

We have audited the accompanying consolidated statements of operations,
stockholders equity (deficiency) and cash flows for the year 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 audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Alliance Gaming Corporation and Subsidiaries for the year ended June 30, 1999,
in conformity with accounting principles generally accepted in the United
States of America.



| | KPMG LLP
| | --------

Phoenix, Arizona
August 11, 1999

F-2



---



##### Table of Contents



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

ASSETS

|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |          |   |    |         |  
|------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------- | ------------------------------ | - | -------- | ------- | -------- | - | -- | ------- | -
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   | June 30, |         | June 30,
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   | 2000     |         | 2001    
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|Current assets                                                                                               |                                                                                                      |   |                                                                                       |                                |   |          |         |          |   |   
|                                                                                                             | Cash and cash equivalents                                                                            |   | $                                                                                     | 32,044                         |   |          | $       | 54,845   |   |    |        
|                                                                                                             | Short-term investments                                                                               |   |                                                                                       | 2,000                          |   |          |         |         |  
|                                                                                                             | Accounts and notes receivable, net of allowance for doubtful accounts
of $19,255 and $15,991         |   |                                                                                       | 82,444                         |   |          |         | 79,369   |  
|                                                                                                             | Inventories, net of reserves of $6,660 and $6,593                                                    |   |                                                                                       | 32,019                         |   |          |         | 35,082   |  
|                                                                                                             | Other current assets                                                                                 |   |                                                                                       | 11,198                         |   |          |         | 10,814   |  
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|                                                                                                             |                                                                                                      |   |                                                                                       | Total current assets           |   |          | 159,705 |          |   |    | 180,110 |  
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|Long-term notes receivable, net of allowance for doubtful accounts
of $953 and $10                           |                                                                                                      |   | 4,043                                                                                 |                                |   |          | 1,433   |          |   |    |         |  
|Leased gaming equipment, net of accumulated depreciation of $10,713 and $14,986                              |                                                                                                      |   | 16,959                                                                                |                                |   |          | 22,677  |         
|Property, plant and equipment, net of accumulated depreciation and amortization
of $60,028 and $74,245       |                                                                                                      |   | 76,823                                                                                |                                |   |          | 88,412  |         
|Excess of costs over net assets of acquired businesses,
net of accumulated amortization of $6,420 and $7,433 |                                                                                                      |   | 54,994                                                                                |                                |   |          | 49,514  |         
|Intangible assets, net of accumulated amortization of $20,609 and $20,693                                    |                                                                                                      |   | 21,850                                                                                |                                |   |          | 22,212  |         
|Deferred tax assets, net of valuation allowance of $64,245 and $66,829                                       |                                                                                                      |   | 12,174                                                                                |                                |   |          | 11,944  |         
|Other assets, net of reserves of $1,813 and $1,826                                                           |                                                                                                      |   | 4,739                                                                                 |                                |   |          | 3,895   |         
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|                                                                                                             |                                                                                                      | $ | 351,287                                                                               |                                |   | $        | 380,197 |         
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|LIABILITIES AND STOCKHOLDERS DEFICIENCY                                                                    
|Current liabilities:                                                                                         |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|                                                                                                             | Accounts payable                                                                                     |   | $                                                                                     | 10,367                         |   |          | $       | 19,531   |  
|                                                                                                             | Accrued liabilities                                                                                  |   |                                                                                       | 32,323                         |   |          |         | 46,978   |  
|                                                                                                             | Current maturities of long term debt                                                                 |   |                                                                                       | 1,036                          |   |          |         | 932      |  
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|                                                                                                             |                                                                                                      |   |                                                                                       | Total current liabilities      |   |          | 43,726  |          |   |    | 67,441  |  
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|Long term debt, net                                                                                          |                                                                                                      |   | 344,023                                                                               |                                |   |          | 339,168 |         
|Other liabilities                                                                                            |                                                                                                      |   | 12,972                                                                                |                                |   |          | 11,493  |         
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|                                                                                                             |                                                                                                      |   |                                                                                       | Total liabilities              |   |          | 400,721 |          |   |    | 418,102 |  
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|Minority interest                                                                                            |                                                                                                      |   | 1,361                                                                                 |                                |   |          | 1,300   |         
|Commitments and contingencies
Stockholders deficiency:                                                      |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|                                                                                                             | Special Stock, 10,000,000 shares authorized:                                                         |   |                                                                                       |                                |   |          |         |          |  
|                                                                                                             |                                                                                                      |   | Series E, $100 liquidation value; 46,242 shares and 120 shares
issued and outstanding |                                |   | 4,624    |         |          |   | 12 |        
|                                                                                                             | Common Stock, $.10 par value; 100,000,000 shares authorized,
10,335,000 and 21,776,000 shares issued |   |                                                                                       | 1,034                          |   |          |         | 2,178    |  
|                                                                                                             | Treasury stock, at cost, 83,000 shares and 256,000 shares                                            |   |                                                                                       | (508                           | ) |          |         | (501     | )
|                                                                                                             | Additional paid-in capital                                                                           |   |                                                                                       | 141,130                        |   |          |         | 147,828  |  
|                                                                                                             | Accumulated other comprehensive losses                                                               |   |                                                                                       | (21,790                        | ) |          |         | (27,919  | )
|                                                                                                             | Accumulated deficit                                                                                  |   |                                                                                       | (175,285                       | ) |          |         | (160,803 | )
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|                                                                                                             |                                                                                                      |   |                                                                                       | Total stockholders deficiency |   |          | (50,795 | )        |   |    | (39,205 | )
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         
|                                                                                                             |                                                                                                      | $ | 351,287                                                                               |                                |   | $        | 380,197 |         
|                                                                                                             |                                                                                                      |   |                                                                                       |                                |   |          |         |         

See accompanying notes to consolidated financial statements.

F-3



---



##### Table of Contents



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

|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |         |         |      |  | 
|---------------------------------------------------------------- | ----------------------------------------- | --------------------------------- | ----------------- | ------- | ------- | -------------------- | ------- | ------- | ------- | ----- | ------- | ------- | ------- | ---- |  | 
|                                                                 |                                           |                                   |                   |         |         | Years Ended June 30,
|                                                                 |                                           |                                   |                   |         |         |                     
|                                                                 |                                           |                                   |                   |         |         | 1999                 |         | 2000    |         | 2001 
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |      
|Revenues:                                                        |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|                                                                 |                                           | Gaming equipment and systems      |                   | $       | 127,810 |                      |         | $       | 135,180 |       |         | $       | 160,890 |     
|                                                                 |                                           | Wall machines and amusement games |                   |         | 90,834  |                      |         |         | 68,952  |       |         |         | 72,228  |     
|                                                                 |                                           | Route operations                  |                   |         | 175,854 |                      |         |         | 202,480 |       |         |         | 221,505 |     
|                                                                 |                                           | Casino operations                 |                   |         | 60,691  |                      |         |         | 68,053  |       |         |         | 73,499  |     
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|                                                                 |                                           |                                   | 455,189           |         |         |                      | 474,665 |         |         |       | 528,122 |        
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|Costs and expenses:                                              |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|                                                                 | Cost of gaming equipment and systems      |                                   |                   | 69,721  |         |                      |         | 75,508  |         |       |         | 77,423  |        
|                                                                 | Cost of wall machines and amusement games |                                   |                   | 54,035  |         |                      |         | 43,301  |         |       |         | 39,243  |        
|                                                                 | Cost of route operations                  |                                   |                   | 137,692 |         |                      |         | 161,062 |         |       |         | 178,103 |        
|                                                                 | Cost of casino operations                 |                                   |                   | 27,011  |         |                      |         | 27,933  |         |       |         | 32,541  |        
|                                                                 | Selling, general and administrative       |                                   |                   | 101,113 |         |                      |         | 101,740 |         |       |         | 98,635  |        
|                                                                 | Research and development costs            |                                   |                   | 17,190  |         |                      |         | 15,318  |         |       |         | 13,576  |        
|                                                                 | Depreciation and amortization             |                                   |                   | 23,104  |         |                      |         | 26,788  |         |       |         | 27,745  |        
|                                                                 | Unusual items, net                        |                                   |                   |        |         |                      |         | 2,164   |         |       |         | 6,489   |        
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|                                                                 |                                           |                                   | 429,866           |         |         |                      | 453,814 |         |         |       | 473,755 |        
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|Operating income                                                 |                                           |                                   | 25,323            |         |         |                      | 20,851  |         |         |       | 54,367  |        
|Other income (expense):                                          |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|                                                                 |                                           | Interest income                   |                   |         | 549     |                      |         |         | 465     |       |         |         | 1,043   |     
|                                                                 |                                           | Interest expense                  |                   |         | (31,385 | )                    |         |         | (34,119 | )     |         |         | (34,807 | )   
|                                                                 |                                           | Minority interest                 |                   |         | (2,053  | )                    |         |         | (2,155  | )     |         |         | (2,165  | )   
|                                                                 |                                           | Other, net                        |                   |         | (431    | )                    |         |         | 924     |       |         |         | (181    | )   
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|Income (loss) before income taxes                                |                                           |                                   | (7,997            | )       |         |                      | (14,034 | )       |         |       | 18,257  |        
|Income tax provision                                             |                                           |                                   | (830              | )       |         |                      | (1,001  | )       |         |       | (611    | )      
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|Net income (loss) before extraordinary item                      |                                           |                                   | (8,827            | )       |         |                      | (15,035 | )       |         |       | 17,646  |        
|Extraordinary item                                               |                                           |                                   |                  |         |         |                      |        |         |         |       | (3,164  | )      
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|Net income (loss)                                                |                                           |                                   | (8,827            | )       |         |                      | (15,035 | )       |         |       | 14,482  |        
|Special Stock dividends                                          |                                           |                                   | (1,697            | )       |         |                      |        |         |         |       |        |        
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|Net income (loss) applicable to common shares                    |                                           | $                                 | (10,524           | )       |         | $                    | (15,035 | )       |         | $     | 14,482  |        
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|Basic earnings (loss) per share:                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|                                                                 | Income (loss) before extraordinary item   |                                   | $                 | (0.55   | )       |                      | $       | (0.74   | )       |       | $       | 0.85    |        
|                                                                 | Extraordinary loss                        |                                   |                   |        |         |                      |         |        |         |       |         | (0.15   | )      
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|                                                                 |                                           |                                   | Net income (loss) |         | $       | (0.55                | )       |         | $       | (0.74 | )       |         | $       | 0.70 | 
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|Diluted earnings (loss) per share:                               |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|                                                                 | Income (loss) before extraordinary item   |                                   | $                 | (0.55   | )       |                      | $       | (0.74   | )       |       | $       | 0.84    |        
|                                                                 | Extraordinary loss                        |                                   |                   |        |         |                      |         |        |         |       |         | (0.15   | )      
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|                                                                 |                                           |                                   | Net income (loss) |         | $       | (0.55                | )       |         | $       | (0.74 | )       |         | $       | 0.69 | 
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|Weighted average common shares outstanding                       |                                           |                                   | 19,330            |         |         |                      | 20,442  |         |         |       | 20,618  |        
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        
|Weighted average common and common share equivalents outstanding |                                           |                                   | 19,330            |         |         |                      | 20,442  |         |         |       | 21,114  |        
|                                                                 |                                           |                                   |                   |         |         |                      |         |         |         |       |         |        

See accompanying notes to consolidated financial statements.

F-4



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIENCY

|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |         |  
|----------------------------------------------------- | -------------------------- |  | ------------ | - | -------- | - | ------------- | - | ------- | - | ------------- | - | ---------- | - | ------------- | - | ---------- | - | ------- | - | ----- | - | ----------- | - |  | - | -------- | - |  | - | ------- | ------- | -
|(In 000's)                                           
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   | Accumulated |   |  |   |          |   |  |   |        
|                                                      |                            |  | Common Stock |   |          |   |               |   |         |   |               |   | Additional |   | Other         |   |            |   |         |   | Total
|                                                      |                            |  |              |   | Series E |   | Treasury      |   | Paid-in |   | Comprehensive |   | Accum.     |   | Stockholders'
|                                                      |                            |  | Shares       |   | Dollars  |   | Special Stock |   | Stock   |   | Capital       |   | Income     |   | Deficit       |   | Deficiency
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |           
|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  | )      
|Foreign currency translation adjustment               |                            |  |             |   |          |   |              |   |         |   |              |   |            |   |              |   |            |   |        |   |       |   | (2,040      | ) |  |   |         |   |  |   | (2,040  | )      
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        
|                                                      | Total comprehensive loss   |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         | (10,867 | )
|1-for-3.5 reverse 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    | )      
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        
|Balances at June 30, 1999                             |                            |  | 9,791        |   |          |   | 979           |   |         |   | 15,380        |   |            |   | (522          | ) |            |   | 129,991 |   |       |   | (15,986     | ) |  |   | (160,250 | ) |  |   | (30,408 | )      
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        
|Net loss                                              |                            |  |             |   |          |   |              |   |         |   |              |   |            |   |              |   |            |   |        |   |       |   |            |   |  |   | (15,035  | ) |  |   | (15,035 | )      
|Foreign currency translation adjustment               |                            |  |             |   |          |   |              |   |         |   |              |   |            |   |              |   |            |   |        |   |       |   | (5,804      | ) |  |   |         |   |  |   | (5,804  | )      
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        
|                                                      | Total comprehensive loss   |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         | (20,839 | )
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        
|Treasury shares issued upon exercise
of options       |                            |  |             |   |          |   |              |   |         |   |              |   |            |   | 14            |   |            |   | (4      | ) |       |   |            |   |  |   |         |   |  |   | 10      |        
|Issuance of Special Stock                             |                            |  |             |   |          |   |              |   |         |   | 442           |   |            |   |              |   |            |   |        |   |       |   |            |   |  |   |         |   |  |   | 442     |        
|Common shares issued upon
conversion of Special Stock |                            |  | 544          |   |          |   | 55            |   |         |   | (11,198       | ) |            |   |              |   |            |   | 11,143  |   |       |   |            |   |  |   |         |   |  |   |        |        
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        
|Balances at June 30, 2000                             |                            |  | 10,335       |   |          |   | 1,034         |   |         |   | 4,624         |   |            |   | (508          | ) |            |   | 141,130 |   |       |   | (21,790     | ) |  |   | (175,285 | ) |  |   | (50,795 | )      
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        
|Net income                                            |                            |  |             |   |          |   |              |   |         |   |              |   |            |   |              |   |            |   |        |   |       |   |            |   |  |   | 14,482   |   |  |   | 14,482  |        
|Foreign currency translation adjustment               |                            |  |             |   |          |   |              |   |         |   |              |   |            |   |              |   |            |   |        |   |       |   | (6,129      | ) |  |   |         |   |  |   | (6,129  | )      
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        
|                                                      | Total comprehensive income |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         | 8,353   |  
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        
|Repurchases of common stock for treasury              |                            |  |             |   |          |   |              |   |         |   |              |   |            |   | (436          | ) |            |   |        |   |       |   |            |   |  |   |         |   |  |   | (436    | )      
|Shares issued upon exercise of options                |                            |  | 329          |   |          |   | 33            |   |         |   |              |   |            |   | 443           |   |            |   | 3,197   |   |       |   |            |   |  |   |         |   |  |   | 3,673   |        
|Common shares issued upon
conversion of Special Stock |                            |  | 224          |   |          |   | 22            |   |         |   | (4,612        | ) |            |   |              |   |            |   | 4,590   |   |       |   |            |   |  |   |         |   |  |   |        |        
|2-for-1 stock split                                   |                            |  | 10,888       |   |          |   | 1,089         |   |         |   |              |   |            |   |              |   |            |   | (1,089  | ) |       |   |            |   |  |   |         |   |  |   |        |        
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        
|Balances at June 30, 2001                             |                            |  | 21,776       |   |          | $ | 2,178         |   |         | $ | 12            |   |            | $ | (501          | ) |            | $ | 147,828 |   |       | $ | (27,919     | ) |  | $ | (160,803 | ) |  | $ | (39,205 | )      
|                                                      |                            |  |              |   |          |   |               |   |         |   |               |   |            |   |               |   |            |   |         |   |       |   |             |   |  |   |          |   |  |   |         |        

See accompanying notes to consolidated financial statements.

F-5



---



##### Table of Contents



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

|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |          |        |   |         |  
|------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------- | -------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------ | -------------------- | ------- | ------- | ------- | ---- | ------ | -------- | ------ | - | ------- | -
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |       
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        | Years Ended June 30,
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                     
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        | 1999                 |         | 2000    |         | 2001
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |     
|Cash flows from operating activities: |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|                                      |                                                                                    | Net income (loss)                       |                                                                                                    | $                                                   | (8,827 | )                    |         | $       | (15,035 | )    |        | $        | 14,482 |  
|                                      |                                                                                    |                                         | Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities: |                                                     |        |                      |         |         |         |      |        |          |        |   |        
|                                      |                                                                                    |                                         |                                                                                                    | Depreciation and amortization                       |        |                      | 23,104  |         |         |      | 26,788 |          |        |   | 27,745  |  
|                                      |                                                                                    |                                         |                                                                                                    | Amortization of debt discounts                      |        |                      | 52      |         |         |      | 52     |          |        |   | 154     |  
|                                      |                                                                                    |                                         |                                                                                                    | Extraordinary item                                  |        |                      |        |         |         |      |       |          |        |   | 3,164   |  
|                                      |                                                                                    |                                         |                                                                                                    | Write down of other assets                          |        |                      | 828     |         |         |      | 411    |          |        |   | 117     |  
|                                      |                                                                                    |                                         |                                                                                                    | (Gain) loss on sale of assets                       |        |                      | 225     |         |         |      | (4,158 | )        |        |   | 808     |  
|                                      |                                                                                    |                                         |                                                                                                    | Provision for losses on receivables                 |        |                      | 3,174   |         |         |      | 7,927  |          |        |   | 3,825   |  
|                                      |                                                                                    |                                         |                                                                                                    | Other                                               |        |                      | (1,171  | )       |         |      | 351    |          |        |   | 1,860   |  
|                                      | Change in operating assets and liabilities, net of effects of
businesses acquired: |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |          |       
|                                      |                                                                                    |                                         |                                                                                                    | Accounts and notes receivable                       |        |                      | (1,553  | )       |         |      | 130    |          |        |   | (2,791  | )
|                                      |                                                                                    |                                         |                                                                                                    | Inventories                                         |        |                      | (13,649 | )       |         |      | (3,445 | )        |        |   | (19,986 | )
|                                      |                                                                                    |                                         |                                                                                                    | Other current assets                                |        |                      | (429    | )       |         |      | (1,911 | )        |        |   | 2,239   |  
|                                      |                                                                                    |                                         |                                                                                                    | Accounts payable                                    |        |                      | 6,940   |         |         |      | (6,870 | )        |        |   | 9,376   |  
|                                      |                                                                                    |                                         |                                                                                                    | Accrued liabilities                                 |        |                      | (139    | )       |         |      | (7,199 | )        |        |   | 15,859  |  
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|                                      |                                                                                    |                                         |                                                                                                    | Net cash provided by (used in) operating activities |        |                      | 8,555   |         |         |      | (2,959 | )        |        |   | 56,852  |  
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|Cash flows from investing activities: |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|                                      | Additions to property, plant and equipment                                         |                                         |                                                                                                    | (11,755                                             | )      |                      |         | (13,012 | )       |      |        | (11,702  | )     
|                                      | Acquisition of assets formerly under operating leases                              |                                         |                                                                                                    |                                                    |        |                      |         |        |         |      |        | (13,040  | )     
|                                      | Proceeds from disposal of assets                                                   |                                         |                                                                                                    | 356                                                 |        |                      |         | 4,316   |         |      |        | 258      |       
|                                      | Proceeds from sale/leaseback transactions                                          |                                         |                                                                                                    | 5,240                                               |        |                      |         | 3,169   |         |      |        |         |       
|                                      | Additions to other long-term assets                                                |                                         |                                                                                                    | (5,943                                              | )      |                      |         | (4,305  | )       |      |        | (3,297   | )     
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|                                      |                                                                                    |                                         |                                                                                                    | Net cash used in investing activities               |        |                      | (12,102 | )       |         |      | (9,832 | )        |        |   | (27,781 | )
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|Cash flows from financing activities: |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|                                      | Capitalized debt issuance costs                                                    |                                         |                                                                                                    |                                                    |        |                      |         |        |         |      |        | (6,969   | )     
|                                      | Proceeds from issuance of long-term debt                                           |                                         |                                                                                                    |                                                    |        |                      |         |        |         |      |        | 190,000  |       
|                                      | Payoff of debt from refinancing                                                    |                                         |                                                                                                    |                                                    |        |                      |         |        |         |      |        | (166,058 | )     
|                                      | Reduction of long-term debt                                                        |                                         |                                                                                                    | (5,089                                              | )      |                      |         | (6,467  | )       |      |        | (2,811   | )     
|                                      | Net change in revolving credit facility                                            |                                         |                                                                                                    | (2,077                                              | )      |                      |         | 34,661  |         |      |        | (23,303  | )     
|                                      | Purchase of common stock for treasury                                              |                                         |                                                                                                    | (522                                                | )      |                      |         |        |         |      |        | (436     | )     
|                                      | Proceeds from exercise of stock options and warrants                               |                                         |                                                                                                    | 4,778                                               |        |                      |         | 10      |         |      |        | 3,673    |       
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|                                      |                                                                                    |                                         |                                                                                                    | Net cash provided by (used in) financing activities |        |                      | (2,910  | )       |         |      | 28,204 |          |        |   | (5,904  | )
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|                                      |                                                                                    | Effect of exchange rate changes on cash |                                                                                                    |                                                     | (100   | )                    |         |         | (299    | )    |        |          | (366   | )
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|                                      |                                                                                    | Cash and cash equivalents:              |                                                                                                    |                                                     |        |                      |         |         |         |      |        |          |        |  
|                                      |                                                                                    |                                         |                                                                                                    | Increase (decrease) for year                        |        |                      | (6,557  | )       |         |      | 15,114 |          |        |   | 22,801  |  
|                                      |                                                                                    |                                         |                                                                                                    | Balance, beginning of year                          |        |                      | 23,487  |         |         |      | 16,930 |          |        |   | 32,044  |  
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         
|                                      |                                                                                    |                                         |                                                                                                    | Balance, end of year                                |        | $                    | 16,930  |         |         | $    | 32,044 |          |        | $ | 54,845  |  
|                                      |                                                                                    |                                         |                                                                                                    |                                                     |        |                      |         |         |         |      |        |         

See accompanying notes to consolidated financial statements.

F-6



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 1999, 2000 and 2001



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF BUSINESS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Description of business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Alliance Gaming Corporation (Alliance or the Company), a Nevada
corporation, is a diversified, worldwide gaming company that (i) designs,
manufactures and distributes gaming machines and computerized monitoring
systems for gaming machines, (ii) owns and manages a significant
installed base of gaming machines, (iii) owns and operates two regional
casinos and (iv) in Germany, 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. Cash and cash
equivalents also includes $22.0 million and $20.8 million at June 30,
2000 and 2001, respectively, utilized in Casino and Route Operations which is held in
vaults, cages or change banks. The Company maintains a restricted cash
account to ensure availability of funds to pay progressive jackpot
liabilities which totaled approximately $1.3 million and $2.1 million at
June 30, 2000 and 2001, respectively.
|  
|   |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Cost elements included for work-in-process
and finished goods include raw materials, freight, direct labor and
manufacturing overhead.                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Inventories, net of reserves, consist of the following (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                |                   |   |        |        |      |   |        |        | 
|--------------- | ----------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                |                   |   | 2000   |        | 2001
|                |                   |   |        |        |     
|Raw materials   |                   | $ | 14,143 |        |      | $ | 15,222 |       
|Work-in-process |                   |   | 948    |        |      |   | 1,774  |       
|Finished goods  |                   |   | 16,928 |        |      |   | 18,086 |       
|                |                   |   |        |        |      |   |        |       
|                | Total inventories |   | $      | 32,019 |      |   | $      | 35,082 | 
|                |                   |   |        |        |      |   |        |       



| |  | Property, plant and equipment and leased gaming equipment                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Property, plant and equipment are stated at cost and depreciated over the
estimated useful lives or lease terms, if less, using the straight line
method as follows: buildings and improvements, 28-40 years; gaming
equipment, 4-7 years; furniture, fixtures and equipment, 3-7 years; and
leasehold improvements, 5-10 years. Leased gaming equipment is stated at
cost and depreciated over estimated useful lives ranging from 3-4 years.
|
| |  | Significant replacements and improvements are capitalized; other
maintenance and repairs are expensed. The cost and accumulated
depreciation of assets retired or otherwise disposed of are eliminated
from the accounts and any resulting gain or loss is credited or charged
to income as appropriate.                                                                                                                                      

F-7



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

|                                               |                                          |   |         |        |      |   |         |        | 
|---------------------------------------------- | ---------------------------------------- | - | ------- | ------ | ---- | - | ------- | ------ | 
|                                               |                                          |   | 2000    |        | 2001
|                                               |                                          |   |         |        |     
|Land and land improvements                     |                                          | $ | 21,310  |        |      | $ | 21,569  |       
|Buildings and leasehold improvements           |                                          |   | 32,338  |        |      |   | 39,392  |       
|Gaming equipment                               |                                          |   | 62,947  |        |      |   | 72,284  |       
|Furniture, fixtures and equipment              |                                          |   | 20,256  |        |      |   | 29,412  |       
|Less accumulated depreciation and amortization |                                          |   | (60,028 | )      |      |   | (74,245 | )     
|                                               |                                          |   |         |        |      |   |         |       
|                                               | Total property, plant and equipment, net |   | $       | 76,823 |      |   | $       | 88,412 | 
|                                               |                                          |   |         |        |      |   |         |       



| |  | Excess of costs over fair value of 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, and primarily results from the acquisition of Bally
Gaming International, Inc. in 1996. Subsequent to an acquisition, the
Company continually evaluates whether later events and circumstances have
occurred that indicate the remaining estimated useful life of such an
intangible asset may warrant revision or that the remaining balance may
not be recoverable. When factors indicate that an impairment evaluation
is required, the Company uses estimates of future undiscounted cash flows
in determining if the asset value is recoverable.
|
| |  | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Intangible assets consist primarily of costs associated with the
acquisition of location leases which are capitalized and amortized over
the expected life of the leases, ranging from one to 28 years, with an
average life of approximately 6 years, and deferred issuance costs for
financings which are amortized over the life of the related financing.                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Accrued liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Accrued liabilities consists of the following (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                         |                           |   |       |        |      |   |        |        | 
|---------------------------------------- | ------------------------- | - | ----- | ------ | ---- | - | ------ | ------ | 
|                                         |                           |   | 2000  |        | 2001
|                                         |                           |   |       |        |     
|Payroll and related costs                |                           | $ | 9,912 |        |      | $ | 11,830 |       
|Interest                                 |                           |   | 7,111 |        |      |   | 6,452  |       
|Professional and consulting fees         |                           |   | 1,399 |        |      |   | 1,460  |       
|Sales, use, withholding and income taxes |                           |   | 1,619 |        |      |   | 1,230  |       
|Deferred revenues                        |                           |   | 327   |        |      |   | 5,303  |       
|Jackpot liabilities                      |                           |   | 2,011 |        |      |   | 1,927  |       
|Other                                    |                           |   | 9,944 |        |      |   | 18,776 |       
|                                         |                           |   |       |        |      |   |        |       
|                                         | Total accrued liabilities |   | $     | 32,323 |      |   | $      | 46,978 | 
|                                         |                           |   |       |        |      |   |        |       



| |  | 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.

F-8



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | 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 computerized monitoring systems is recognized in
accordance with the AICPAs Statement of Position 97-2 (SOP 97-2)
Software Revenue Recognition. In accordance with the provisions of SOP
97-2, the contracts for the sales of computerized monitoring units are
considered to have multiple elements because they include hardware,
software, installation supervision, training and post-contract customer
support. Accordingly, revenues from the sale of systems is deferred and
begins to be recognized at the point when the system is deemed to be
functionally operational, and the residual method is used to recognize
revenue for the remaining elements as they are delivered, each having
vendor specific objective evidence of relatives sales values.
Post-contract customer support revenues are recognized over the period of
the support agreement (generally one year).
|
| |  | The Companys Bally Gaming and Systems business unit earns revenues from
recurring revenue sources which consist of the operations of the
multi-site linked progressive jackpot systems, the operation of gaming
machines at customer locations, exclusive of route operations, the
revenues from gaming machines owned by the Company and placed in a casino
on a daily lease or rental basis, and revenues from computer monitoring
system maintenance and support services. Revenue is normally recognized
based on the Companys share of 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.                                                                                                                                                                                                                                                                                              
|
| |  | The Company has adopted the provisions of Staff Accountant Bulletin No.
101 issued on October 1, 2000, by the Securities and Exchange Commission,
which had no material impact on the reported results of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Promotional allowances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | During fiscal year 2001, the Company adopted EITF Issue 00-22,
Accounting for Points and certain other Time-Based or Volume-Based
Sales Incentive Offers, and Other Offers For Free Products or Service to
be Delivered in the Future. EITF 00-22 requires that sales incentives
be recorded as a reduction of revenue rather than as an operating
expense. Accordingly, prior year revenues and expenses have been
restated to conform with EITF 00-22, although it had no impact on the net
income of the Company.                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Unusual items                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The Company separately discloses certain income and expense items that
are unusual or infrequently occurring. Generally such items are netted
together and shown as a separate component of Operating Income (loss);
items reflected elsewhere in the consolidated statements of operations
are separately identified below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | During the year ended June 30, 2001, the Company recorded the following
unusual item:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



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

F-9



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | During the year ended June 30, 2000, the Company recorded the following
unusual items:
| |  | --------------------------------------------------------------------------------------



| |  |  | Restructuring and related charges totaling $8.1 million. The
restructuring and related costs were incurred pursuant to a plan
adopted by the Company for staff reductions at the Bally Gaming and
Systems, Wall Machine and Amusement Games, and at its corporate
office. Included in the restructuring costs described above is a
$1.9 million charge for a valuation reserve for certain inventory
for the Australian market, which is included in the cost of gaming
equipment and systems in the accompanying consolidated statement of
operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Gains from the sale of certain gaming management and
development rights totaling $4.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |  | The Company recorded no unusual items during the year ended June 30,
1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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.
|
| |  | Stock split                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Effective August 21, 2001, the Company recorded a 2-for-1 stock split in
the form of a stock dividend. All share and per share information
presented in the Consolidated Financial Statements and notes thereto have
been presented to reflect this stock split.                                                                                                                                                                                                                                                                              
|
| |  | Earnings (loss) per share calculations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The following computation of basic and diluted loss per share from
continuing operations, extraordinary loss and income (loss) applicable
to common shares as adjusted for the stock split, are as follows (in
000s except per share amounts):                                                                                                                                                                                                                                                                                               

|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |        |  |        |       |  
|------------------------------------------------------- | ----------------------------------------- | - | ----------------- | --------------------------------------- | - | --------------------------- | ------- | ------- | - | ------- | ------ | ------ |  | ------ | ----- | -
|                                                        |                                           |   |                   |                                         |   | Fiscal Years ended June 30,
|                                                        |                                           |   |                   |                                         |   |                            
|                                                        |                                           |   |                   |                                         |   | 1999                        |         | 2000    |   | 2001   
|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |        
|Income (loss) before extraordinary item                 |                                           | $ | (8,827            | )                                       |   | $                           | (15,035 | )       |   | $       | 17,646 |       
|Extraordinary loss                                      |                                           |   |                  |                                         |   |                             |        |         |   |         | (3,164 | )     
|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       
|                                                        |                                           |   | Net income (loss) |                                         |   | (8,827                      | )       |         |   | (15,035 | )      |        |  | 14,482 |      
|Special Stock dividends                                 |                                           |   | (1,697            | )                                       |   |                             |        |         |   |         |       |       
|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       
|                                                        | Income (loss) applicable to common shares |   | $                 | (10,524                                 | ) |                             | $       | (15,035 | ) |         | $      | 14,482 | 
|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       
|Weighted average common shares
outstanding              |                                           |   | 19,330            |                                         |   |                             | 20,442  |         |   |         | 20,618 |       
|Effect of dilutive securities                           |                                           |   |                  |                                         |   |                             |        |         |   |         | 496    |       
|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       
|Weighted average common and
dilutive shares outstanding |                                           |   | 19,330            |                                         |   |                             | 20,442  |         |   |         | 21,114 |       
|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       
|Income (loss) per basic share:                          |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       
|                                                        |                                           |   |                   | Income (loss) before extraordinary item |   | $                           | (0.55   | )       |   | $       | (0.74  | )      |  | $      | 0.85  |  
|                                                        |                                           |   |                   | Extraordinary item                      |   |                             |        |         |   |         |       |        |  |        | (0.15 | )
|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       
|Basic EPS                                               |                                           | $ | (0.55             | )                                       |   | $                           | (0.74   | )       |   | $       | 0.70   |       
|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       
|Income (loss) per diluted share:                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       
|                                                        |                                           |   |                   | Income (loss) before extraordinary item |   | $                           | (0.55   | )       |   | $       | (0.74  | )      |  | $      | 0.84  |  
|                                                        |                                           |   |                   | Extraordinary item                      |   |                             |        |         |   |         |       |        |  |        | (0.15 | )
|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       
|Diluted EPS                                             |                                           | $ | (0.55             | )                                       |   | $                           | (0.74   | )       |   | $       | 0.69   |       
|                                                        |                                           |   |                   |                                         |   |                             |         |         |   |         |        |       

F-10



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | The following securities were not
included in the computation of diluted earnings
(loss) per share because to do so would have been anti-dilutive for the
periods presented (in 000s):
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       |  |                             |       |      |  |      |       |  |  |  |       | 
|---------------------- |  | --------------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                       |  | Fiscal Years ended June 30,
|                       |  |                            
|                       |  | 1999                        |       | 2000 |  | 2001
|                       |  |                             |       |      |  |     
|Stock options          |  |                             | 2,966 |      |  |      | 3,246 |  |  |  | 1,366 | 
|Warrants               |  |                             | 4,588 |      |  |      | 1,858 |  |  |  | 1,429 | 
|Series E Special stock |  |                             | 1,494 |      |  |      | 450   |  |  |  |      | 
|                       |  |                             |       |      |  |      |       |  |  |  |       | 
|                       |  |                             | 9,048 |      |  |      | 5,554 |  |  |  | 2,795 | 
|                       |  |                             |       |      |  |      |       |  |  |  |       | 



| |  | 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, 2000 and 2001 for the Companys financial instruments
approximate fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date. Taxes on
income of the Companys foreign subsidiaries are provided at the tax
rates applicable to the tax jurisdictions in which they are located.



|2. |  | RECEIVABLES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Gaming Equipment and Systems and Wall Machines and Amusement Games
business units grant customers payment terms under contracts of sale.
These contracts are generally for terms of one to three years, with
interest at prevailing rates, and are generally collateralized by the
related equipment sold, although the value of such equipment, if
repossessed, may be less than the receivable balance outstanding. See
Concentration of Credit Risk. The Companys Nevada route operations
from time to time makes loans to location operators for build-outs,
tenant improvements and initial operating expenses, which are generally
secured by the personal guarantees of the operators and the locations
assets. The majority of the loans bear interest rates between 6% to 11%
and are expected to be repaid over a period of time not to exceed the
life of the revenue sharing arrangement and have due dates ranging from
September 2001 to August 2009.
|  
|   |  | The following table represents, at June 30, 2001, scheduled collections
of accounts and notes receivable (net of allowances for doubtful
accounts) by fiscal year (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                      |  |      |       |      |  |      |     |      |  |            |     |       |  |   |    |  |  |   |     |  |  |   |        | 
|--------------------- |  | ---- | ----- | ---- |  | ---- | --- | ---- |  | ---------- | --- | ----- |  | - | -- |  |  | - | --- |  |  | - | ------ | 
|Years ending June 30,
|                     
|2002                  |  | 2003 |       | 2004 |  | 2005 |     | 2006 |  | Thereafter |     | Total
|                      |  |      |       |      |  |      |     |      |  |            |     |      
|$78,668               |  | $    | 1,619 |      |  | $    | 191 |      |  | $          | 126 |       |  | $ | 90 |  |  | $ | 108 |  |  | $ | 80,802 | 
|                      |  |      |       |      |  |      |     |      |  |            |     |       |  |   |    |  |  |   |     |  |  |   |        | 

F-11



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|3. |  | DEBT, REVOLVING CREDIT FACILITY AND REFINANCING TRANSACTION                                        
|-- |  | ---------------------------------------------------------------------------------------------------
|  
|   |  | Long-term debt and lines of credit at June 30, 2000 and 2001 consisted of
the following (in 000s):

|                                                                                      |                                         |   |         |         |      |   |         |         | 
|------------------------------------------------------------------------------------- | --------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | 
|                                                                                      |                                         |   | 2000    |         | 2001
|                                                                                      |                                         |   |         |         |     
|10 % Senior Subordinated Notes due 2007, net of
unamortized discount of $649 and $495 |                                         | $ | 149,351 |         |      | $ | 149,505 |        
|Term Loan facility                                                                    |                                         |   | 132,206 |         |      |   | 190,000 |        
|Revolving credit facility                                                             |                                         |   | 62,360  |         |      |   |        |        
|Other, secured by related equipment                                                   |                                         |   | 1,142   |         |      |   | 595     |        
|                                                                                      |                                         |   |         |         |      |   |         |        
|                                                                                      |                                         |   | 345,059 |         |      |   | 340,100 |        
|Less current maturities                                                               |                                         |   | 1,036   |         |      |   | 932     |        
|                                                                                      |                                         |   |         |         |      |   |         |        
|                                                                                      | Long-term debt, less current maturities |   | $       | 344,023 |      |   | $       | 339,168 | 
|                                                                                      |                                         |   |         |         |      |   |         |        



| |  | On June 22, 2001, the Company completed a senior bank debt refinancing
transaction (the Refinancing) whereby the Company entered into a $190
million term loan facility and a $25 million revolving credit facility
(which can be increased by $15 million at the Companys discretion until
December 31, 2002). Proceeds from the new term loan were used to repay
the existing bank term loans and credit facility, totaling $166.0
million, repay certain gaming equipment operating leases totaling $13.0
million, and to pay transaction fees and expenses. The term loan has an
interest rate of LIBOR plus 3.75% (or 7.6% as of June 30, 2001), has a 1%
per year mandatory principal amortization, and a 5.5 year maturity. The
revolving credit facility commitment decreases ratably over its 5 year
commitment. As of June 30, 2001, there were no borrowings outstanding on
the revolving credit facility. The new bank loan contains certain
customary financial and operational covenants.                                                                                                                                                                                                                                                                                                                              
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As a result of the Refinancing described above, the Company recorded an
extraordinary loss of $3.2 million for the write off of certain deferred
financing costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | 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 and Mississippi
operations, and secured by both a U.S. and German Pledge Agreement (both
as defined). The bank facility contains a number of maintenance
covenants and 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 or subordinated
indebtedness, issue or sell equity interests of the Companys
subsidiaries, engage in mergers or acquisitions, or engage in certain
transactions with subsidiaries and affiliates, and that otherwise
restrict corporate activities. As of June 30, 2001 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 of the Company, subject to certain exceptions including the
partially-owned entities through which its Mississippi casino and
Louisiana route operations are conducted. The Subsidiary Guarantees are
general unsecured obligations of the Guarantors, ranking subordinate in
right of payment to all Senior Debt of the Guarantors. The Company will
be able to designate other current or future subsidiaries as Unrestricted
Subsidiaries under certain circumstances. Unrestricted Subsidiaries will
not be required to issue a Subsidiary Guarantee and will not be subject
to many of the restrictive covenants set forth in the Indenture pursuant
to which the Senior Subordinated Notes were issued. The Indenture for
the Companys Senior Subordinated Notes contains various covenants,
including limitations on incurrence of additional indebtedness, on
restricted

F-12



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | 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.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Maturities of long-term debt, for each of the five fiscal years ending
subsequent to June 30, 2001 are as follows (in 000s):                                                                                                                                                                                                                                                                                                                        

|                      |  |      |       |      |  |      |       |      |  |            |       |       |  |   |         |  |  |   |         |  |  |   |         | 
|--------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---------- | ----- | ----- |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|Years ending June 30,
|                     
|2002                  |  | 2003 |       | 2004 |  | 2005 |       | 2006 |  | Thereafter |       | Total
|                      |  |      |       |      |  |      |       |      |  |            |       |      
|$932                  |  | $    | 2,026 |      |  | $    | 1,912 |      |  | $          | 1,900 |       |  | $ | 183,825 |  |  | $ | 149,505 |  |  | $ | 340,100 | 
|                      |  |      |       |      |  |      |       |      |  |            |       |       |  |   |         |  |  |   |         |  |  |   |         | 



|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 issued 113,160 shares of Series E Special Stock
to certain holders of the Companys 71/2% Convertible Subordinated
Debentures who elected to receive such stock in lieu of receiving common
stock. The holders of shares of Series E Special Stock have no voting
rights except as required by law. Each share of Series E Special Stock
accrued non-cash cumulative dividends until July 7, 1999 at an annual
rate of 111/2%, at which point the dividends ceased. On July 1, 1999, the
total shares of Series E Special Stock outstanding was 158,224,
convertible into approximately 1,538,000 shares of common stock (on a
post split basis). The Series E Special Stock is convertible into common
stock at a conversion price of $10.29 per share (equivalent to a
conversion rate of approximately 9.71829 shares of common stock per share
of Series E Special Stock), subject to adjustment under certain
circumstances, and has a $100 liquidation preference per share. During
the fiscal year ended June 30, 2001, approximately 46,122 shares of
Series E Special Stock were converted into approximately 448,214 shares
of common stock (on a post split basis).
|  
|   |  | Stock Option Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | In 1992, the Company created the 1991 Long Term Incentive Plan (the 1991
Plan) that, as amended, provides for the issuance of up to 1,714,000
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
1,714,000 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-13



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | Transactions involving stock options are summarized as follows (as
adjusted for the 2-for-1 stock split effective August 21, 2001):
| |  | -----------------------------------------------------------------------------------------------------------------------------------

|                             |           |  |                     |          |                |   |                  |      | 
|---------------------------- | --------- |  | ------------------- | -------- | -------------- | - | ---------------- | ---- | 
|                             |           |  | Options Outstanding
|                             |           |  |                    
|                             |           |  |                     |          |                |   | Weighted-Average
|                             |           |  | Shares              |          | Exercise Price
|                             |           |  |                     |          |               
|Balance, June 30, 1998       |           |  | 3,105,028           |          |                | $ | 6.60             |     
|                             | Granted   |  |                     | 457,828  |                |   |                  | 3.84 | 
|                             | Exercised |  |                     | (27,192  | )              |   |                  | 7.88 | 
|                             | Canceled  |  |                     | (569,888 | )              |   |                  | 6.15 | 
|                             |           |  |                     |          |                |   |                  |     
|Balance, June 30, 1999       |           |  | 2,965,776           |          |                |   | 6.25             |     
|                             | Granted   |  |                     | 973,956  |                |   |                  | 1.13 | 
|                             | Exercised |  |                     | (4,666   | )              |   |                  | 1.13 | 
|                             | Canceled  |  |                     | (680,032 | )              |   |                  | 1.35 | 
|                             |           |  |                     |          |                |   |                  |     
|Balance, June 30, 2000       |           |  | 3,255,034           |          |                |   | 5.02             |     
|                             | Granted   |  |                     | 466,286  |                |   |                  | 5.28 | 
|                             | Exercised |  |                     | (775,296 | )              |   |                  | 4.74 | 
|                             | Canceled  |  |                     | (496,848 | )              |   |                  | 6.49 | 
|                             |           |  |                     |          |                |   |                  |     
|Balance, June 30, 2001       |           |  | 2,449,176           |          |                | $ | 4.86             |     
|                             |           |  |                     |          |                |   |                  |     
|Exercisable at June 30, 2001 |           |  | 2,146,710           |          |                | $ | 4.77             |     
|                             |           |  |                     |          |                |   |                  |     



| |  | At June 30, 2001, the range of exercise prices, on a post-split basis,
for options outstanding was $0.94 to $18.29. The weighted average
remaining contractual life, by range of exercise price, for options
outstanding and exercisable at June 30, 2001 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     
|                |            |                  |      |                     |      |                     |           |            
|$0.94 - $2.00   |            |                  | 8.64 |                     |      |                     | 622,058   |             |           |               | 8.63 |      |      |  | 601,580   |       
|$2.01 - $2.50   |            |                  | 9.11 |                     |      |                     | 209,334   |             |           |               | 8.80 |      |      |  | 82,000    |       
|$2.51 - $5.00   |            |                  | 8.21 |                     |      |                     | 244,630   |             |           |               | 7.99 |      |      |  | 174,786   |       
|$5.01 - $7.50   |            |                  | 4.84 |                     |      |                     | 1,207,146 |             |           |               | 4.84 |      |      |  | 1,206,002 |       
|                | over $7.50 |                  |      | 9.23                |      |                     |           | 166,008     |           |               |      | 9.19 |      |  |           | 82,342 |          
|                |            |                  |      |                     |      |                     |           |             |           |               |      |      |      |  |           |       
|                |            | All              |      |                     | 6.80 |                     |           |             | 2,449,176 |               |      |      | 6.44 |  |           |        | 2,146,710 | 
|                |            |                  |      |                     |      |                     |           |             |           |               |      |      |      |  |           |       



| |  | 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 $10.5 million (or $0.55 per
share) to $12.4 million (or $0.65 per share) on a pro forma basis for the
year ended June 30, 1999 and from a loss of $15.0 million (or $0.74 per
share) to $17.8 million (or $0.88 per share) on a pro forma basis for the
year ended June 30, 2000 and decreased from net income of $14.5 million
(or $0.70 per share) to $13.3 million (or $0.63 per share) on a pro forma
basis for the year ended June 30, 2001. The pro forma net income (loss)
reflects only options granted since 1998. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net income (loss) amounts presented above
because compensation cost is reflected over the options
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | 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
1999, 2000 and 2001 was $2.74, $1.55 and $2.57 respectively, on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1999, 2000 and 2001: expected dividend
yield of 0%, risk free interest rates ranging from 3.9% to 6.0%, a
volatility factor of .62, .74, and .82 for 1999, 2000 and 2001,
respectively, and expected lives varying from 3 to 10 years.                      
|
| |  | Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Upon the completion of the BGII acquisition in 1996 the Company issued
warrants to Gaming Systems Advisors, L.P. (GSA) to purchase up to
1,428,572 shares of common stock at $2.63 per share, however the warrants
become exercisable in one-third tranches only after the market price of
the Common Stock reaches $19.25, $22.75 and $26.25, respectively, for 30
consecutive trading days. These warrants expire on June 18, 2002.                                                                                  
|
| |  | In 1996, in conjunction with certain financing transactions, the Company
issued warrants to certain third parties for the purchase of up to
142,858 shares of Common Stock at a price which was subject to future
adjustments, and which ultimately was set at $4.26 per share and which
expire on August 31, 2002.                                                                                                                                                                                                      
|
| |  | Share Repurchase Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | In January 1999 the Companys Board of Directors approved a share
repurchase plan for up to 2.3 million (post-split) shares of its Common
Stock. Under the plan, subject to price and market conditions, purchases
of shares were made from time to time during calendar 1999 in the open
market or in privately negotiated transactions using available cash
financing. During the fiscal years ended June 30, 1999, 2000 and 2001,
the Company repurchased 170,600, 0, and 208,000 shares of common stock
(post-split).
|
| |  | Shares Reserved                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | At June 30, 2001, shares of the Companys Common Stock were reserved for future issuance as follows:                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                                                |       |  |           |           | 
|------------------------------------------------------------------------------- | ----- |  | --------- | --------- | 
|Shares underlying stock options issued or
issuable under its stock option plans |       |  | 2,652,000 |          
|Shares underlying all warrants outstanding                                      |       |  | 1,571,000 |          
|Shares underlying Series E Special Stock outstanding                            |       |  | 1,000     |          
|                                                                                |       |  |           |          
|                                                                                | Total |  |           | 4,224,000 | 
|                                                                                |       |  |           |          



| |  | 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.

F-15



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|5. |  | INCOME TAXES                                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The components of the Companys income tax expense for the years ended June 30, 1999, 2000 and 2001 are as
follows (in 000s):

|                                 |                                 |               |     |      |     |      |       |      |     |   |     |   |      |  
|-------------------------------- | ------------------------------- | ------------- | --- | ---- | --- | ---- | ----- | ---- | --- | - | --- | - | ---- | -
|                                 |                                 |               |     | 1999 |     | 2000 |       | 2001
|                                 |                                 |               |     |      |     |      |       |     
|                                 | Current tax expense (benefit):  |               |     |      |     |      |       |      |     |   |     |   |     
|                                 |                                 | U. S. Federal |     | $    |    |      |       | $    |    |   |     | $ | (588 | )
|                                 |                                 | Foreign       |     |      | 64  |      |       |      | 280 |   |     |   | (8   | )
|                                 |                                 | State         |     |      | 510 |      |       |      | 527 |   |     |   | 705  |  
|                                 |                                 |               |     |      |     |      |       |      |     |   |     |  
|                                 |                                 |               | 574 |      |     |      | 807   |      |     |   | 109 |  
|                                 |                                 |               |     |      |     |      |       |      |     |   |     |  
|                                 | Deferred tax expense (benefit): |               |     |      |     |      |       |      |     |   |     |   |     
|                                 |                                 | U. S. Federal |     |      |    |      |       |      |    |   |     |   | (416 | )
|                                 |                                 | Foreign       |     |      | 256 |      |       |      | 194 |   |     |   | 918  |  
|                                 |                                 | State         |     |      |    |      |       |      |    |   |     |   |     |  
|                                 |                                 |               |     |      |     |      |       |      |     |   |     |  
|                                 |                                 |               | 256 |      |     |      | 194   |      |     |   | 502 |  
|                                 |                                 |               |     |      |     |      |       |      |     |   |     |  
|Total provision for income taxes |                                 | $             | 830 |      |     | $    | 1,001 |      |     | $ | 611 |  
|                                 |                                 |               |     |      |     |      |       |      |     |   |     |  



| |  | A reconciliation of the Companys income tax provision as compared to the tax provision (benefit)
calculated by applying the statutory federal tax rate (35%) to the income (loss) before income taxes for
the years ended June 30, 1999, 2000 and 2001 are as follows (in 000s):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                      |  |      |        |      |  |      |        |   |  |   |        |  
|----------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                      |  | 1999 |        | 2000 |  | 2001
|                                                      |  |      |        |      |  |     
|Computed expected income tax expense (benefit) at 35% |  | $    | (2,799 | )    |  | $    | (4,911 | ) |  | $ | 5,283  |  
|Permanent differences                                 |  |      | (1,677 | )    |  |      | (1,874 | ) |  |   | (7,338 | )
|Change in valuation allowance                         |  |      | (591   | )    |  |      | 1,895  |   |  |   | 2,584  |  
|State income taxes, net of federal benefit            |  |      | 332    |      |  |      | 343    |   |  |   | 458    |  
|Expired foreign tax credits                           |  |      | 3,607  |      |  |      |       |   |  |   | -      |  
|Other, net                                            |  |      | 1,958  |      |  |      | 5,548  |   |  |   | (376   | )
|                                                      |  |      |        |      |  |      |        |   |  |   |        |  
|                                                      |  | $    | 830    |      |  | $    | 1,001  |   |  | $ | 611    |  
|                                                      |  |      |        |      |  |      |        |   |  |   |        |  



| |  | The major components of the deferred tax assets and liabilities as of June 30, 2000 and 2001 are presented
below (in 000s):
| |  | ----------------------------------------------------------------------------------------------------------------------------

|                                         |                                                                     |   |        |        |      |   |        |        | 
|---------------------------------------- | ------------------------------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                         |                                                                     |   | 2000   |        | 2001
|                                         |                                                                     |   |        |        |     
|Deferred tax assets:                     |                                                                     |   |        |        |      |   |        |       
|                                         | Net operating loss carry forwards                                   |   | $      | 30,281 |      |   | $      | 35,235 | 
|                                         | Foreign tax credit carry forwards                                   |   |        | 6,639  |      |   |        | 6,639  | 
|                                         | Inventory obsolescence reserves                                     |   |        | 2,742  |      |   |        | 2,788  | 
|                                         | Bad debt reserves                                                   |   |        | 6,299  |      |   |        | 5,281  | 
|                                         | Accruals not currently deductible for tax purposes                  |   |        | 3,852  |      |   |        | 2,792  | 
|                                         | Refinancing costs being amortized for tax purposes                  |   |        | 8,582  |      |   |        | 6,480  | 
|                                         | Intangibles                                                         |   |        | 9,141  |      |   |        | 10,326 | 
|                                         | Other                                                               |   |        | 8,883  |      |   |        | 9,232  | 
|                                         |                                                                     |   |        |        |      |   |        |       
|Total gross deferred tax assets          |                                                                     |   | 76,419 |        |      |   | 78,773 |       
|Less: Valuation allowance                |                                                                     |   | 64,245 |        |      |   | 66,829 |       
|                                         |                                                                     |   |        |        |      |   |        |       
|Deferred tax assets                      |                                                                     | $ | 12,174 |        |      | $ | 11,944 |       
|                                         |                                                                     |   |        |        |      |   |        |       
|Deferred tax liabilities:                |                                                                     |   |        |        |      |   |        |       
|                                         | Property and equipment, due principally to
depreciation differences |   | $      | 3,162  |      |   | $      | 3,142  | 
|                                         | Other                                                               |   |        | 7,154  |      |   |        | 6,038  | 
|                                         |                                                                     |   |        |        |      |   |        |       
|Total gross deferred tax liabilities (a) |                                                                     |   | 10,316 |        |      |   | 9,180  |       
|                                         |                                                                     |   |        |        |      |   |        |       
|Net deferred tax assets                  |                                                                     | $ | 1,858  |        |      | $ | 2,764  |       
|                                         |                                                                     |   |        |        |      |   |        |       

F-16



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|   |  | (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, 2001, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $101 million which are
available to offset future federal taxable income, if any, expiring in
the years 2008 through 2021. At June 30, 2001 the Company had foreign tax
credit carry forwards of approximately $6.6 million and alternative
minimum tax credit (AMT) carry forwards of approximately $0.9 million.
Foreign tax credits have expiration dates ranging from 2001 to 2005. AMT
credits are available to be carried forward indefinitely and may be
utilized against regular U.S. corporate tax to the extent it does not
exceed computed AMT calculations.
|  
|6. |  | SUPPLEMENTAL CASH FLOW INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The following supplemental information is related to the consolidated statements of cash flows. The
Company recorded the following significant non-cash items for the years ended June 30, 1999, 2000
and 2001 (in 000s):                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                                                                              |  |      |       |      |  |      |        |  |  |   |        | 
|--------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                                                              |  | 1999 |       | 2000 |  | 2001
|                                                                                              |  |      |       |      |  |     
|Reclassify inventory to property, plant and equipment and
leased gaming equipment             |  | $    | 9,613 |      |  | $    | 16,174 |  |  | $ | 15,466 | 
|Dividends for Series E and Series B Special Stock                                             |  |      | 1,697 |      |  |      | 442    |  |  |   |       | 
|Translation rate adjustment                                                                   |  |      | 1,940 |      |  |      | 5,505  |  |  |   | 5,763  | 
|Reclassify other assets to property, plant and equipment                                      |  |      | 444   |      |  |      | 242    |  |  |   | 526    | 
|Reclassify receivables to other assets                                                        |  |      | 376   |      |  |      |       |  |  |   |       | 
|Deferred gain on sale/leaseback transaction                                                   |  |      | 1,057 |      |  |      | 1,546  |  |  |   |       | 
|Reclassify excess costs over net assets of acquired business
to property, plant and equipment |  |      |      |      |  |      | 500    |  |  |   |       | 
|Conversion of Series E Special Stock to Common Stock                                          |  |      |      |      |  |      | 11,198 |  |  |   | 4,612  | 



|   |  | Payments for interest expense in fiscal years, 1999, 2000 and 2001 were
approximately $31.6 million, $34.0 million and $35.4 million,
respectively. Payments for income taxes, net of refunds received, in
fiscal years 1999, 2000 and 2001 were approximately $3.3 million, $0.5
million and $(0.1) 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 $250 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, 1999, 2000 and 2001 was
$1.0 million for each year. Total royalty expense for the Company for the
years ended June 30, 1999, 2000 and 2001 was $1.9 million, $3.4 million
and $3.5 million, respectively. In addition, the Company has obtained the
rights to certain game ideas and intellectual property that call for
payment of royalties based on either fixed amounts or variable amounts
based on game performance.

F-17



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | 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, 2001 are (in
000s):
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |                     |   |                      |        |      |   |        |        |      |   |        |        |            |   |        |       |  |   |        |       |  |   |        |        |  |   |        |        | 
|--------------------- | ------------------- | - | -------------------- | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ | ---------- | - | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                      |                     |   | Years ended June 30,
|                      |                     |   |                     
|                      |                     |   | 2002                 |        | 2003 |   | 2004   |        | 2005 |   | 2006   |        | Thereafter |   | Total 
|                      |                     |   |                      |        |      |   |        |        |      |   |        |        |            |   |       
|Minimum rentals       |                     | $ | 19,183               |        |      | $ | 15,600 |        |      | $ | 12,278 |        |            | $ | 10,881 |       |  | $ | 10,019 |       |  | $ | 22,312 |        |  | $ | 90,273 |       
|Total sublease income |                     |   | (1,843               | )      |      |   | (1,854 | )      |      |   | (1,629 | )      |            |   | (1,208 | )     |  |   | (736   | )     |  |   | (1,994 | )      |  |   | (9,264 | )     
|                      |                     |   |                      |        |      |   |        |        |      |   |        |        |            |   |        |       |  |   |        |       |  |   |        |        |  |   |        |       
|                      | Net minimum rentals |   | $                    | 17,340 |      |   | $      | 13,746 |      |   | $      | 10,649 |            |   | $      | 9,673 |  |   | $      | 9,283 |  |   | $      | 20,318 |  |   | $      | 81,009 | 
|                      |                     |   |                      |        |      |   |        |        |      |   |        |        |            |   |        |       |  |   |        |       |  |   |        |        |  |   |        |       



| |  | Operating lease rental expense, including contingent lease rentals, for years ended June 30, 1999, 2000 and 2001 was as
follows (in 000s):
| |  | -------------------------------------------------------------------------------------------------------------------------------------------

|                       |  |      |         |      |  |      |         |   |  |   |         |  
|---------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                       |  | 1999 |         | 2000 |  | 2001
|                       |  |      |         |      |  |     
|Minimum rentals        |  | $    | 17,147  |      |  | $    | 27,322  |   |  | $ | 31,664  |  
|Contingent rentals     |  |      | 105,568 |      |  |      | 120,877 |   |  |   | 130,542 |  
|                       |  |      |         |      |  |      |         |   |  |   |         |  
|                       |  |      | 122,715 |      |  |      | 148,199 |   |  |   | 162,206 |  
|Sublease rental income |  |      | (1,574  | )    |  |      | (1,416  | ) |  |   | (1,667  | )
|                       |  |      |         |      |  |      |         |   |  |   |         |  
|                       |  | $    | 121,141 |      |  | $    | 146,783 |   |  | $ | 160,539 |  
|                       |  |      |         |      |  |      |         |   |  |   |         |  



|   |  | During fiscal 2000, Bally Wulff increased the amount of tax reserves by
$0.5 million (to a total reserve of $0.8 million) as a result of
developments in ongoing quadrennial audits of Wulffs tax returns for the
years 1992 through 1995. The German tax authorities have not yet issued
the final assessment from their quadrennial audits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On September 25, 1995, BGII was named as a defendant in a class action
lawsuit filed in Federal District Court in Nevada, by Larry Schreirer on
behalf of himself and all others similarly situated. The plaintiffs filed
suit against BGII and approximately 45 other defendants. Each defendant
is involved in the gaming business as a gaming machine manufacturer,
distributor, or casino operator. The class action lawsuit arises out of
alleged fraudulent marketing and operation of casino video poker machines
and electronic slot machines. The plaintiffs allege that the defendants
actions constitute violations of the Racketeer Influenced and Corrupt
Organizations Act (RICO) and give rise to claims of common law fraud and
unjust enrichment. The plaintiffs allege that the defendants have engaged
in a course of fraudulent and misleading conduct intended to induce
people into playing their gaming machines based on a false belief
concerning how those machines actually operate as well as the extent to
which there is actually an opportunity to win on any given play. The
plaintiffs are seeking monetary damages in excess of $1.0 billion, and
are asking that any damage awards be trebled under applicable Federal
law. Management believes the plaintiffs lawsuit to be without merit. The
Company is vigorously pursuing all legal defenses available to it.
|  
|   |  | The Company is also a party to various lawsuits relating to routine
matters incidental to its business. Management does not believe that the
outcome of such litigation, including the matters above, in the
aggregate, will have a material adverse effect on the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-18



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| |  | At June 30, 2001 net accounts and notes receivable by region as a
percentage of total net receivables are as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------

|                                  |  |             |      |               |  |            |      |            |  |       |     |   |  |  |     |   |  |  |       |  
|--------------------------------- |  | ----------- | ---- | ------------- |  | ---------- | ---- | ---------- |  | ----- | --- | - |  |  | --- | - |  |  | ----- | -
|                                  |  | Gaming      |      | Wall Machines |  |            |      |            |  |       |     |   |  |  |     |  
|                                  |  | Equipment   |      | and Amusement |  | Route      |      | Casino     |  |       |     |  
|                                  |  | and Systems |      | Games         |  | Operations |      | Operations |  | Total
|                                  |  |             |      |               |  |            |      |            |  |      
|Germany                           |  |             | 0.7  | %             |  |            | 36.3 | %          |  |       |    | % |  |  |    | % |  |  | 37.0  | %
|Other international jurisdictions |  |             | 15.3 |               |  |            |     |            |  |       |    |   |  |  |    |   |  |  | 15.3  |  
|Nevada                            |  |             | 10.0 |               |  |            | 0.7  |            |  |       | 8.7 |   |  |  | 0.3 |   |  |  | 19.7  |  
|Others individually less than 5%  |  |             | 27.3 |               |  |            |     |            |  |       |    |   |  |  | 0.7 |   |  |  | 28.0  |  
|                                  |  |             |      |               |  |            |      |            |  |       |     |   |  |  |     |   |  |  |       |  
|                                  |  |             | 53.3 | %             |  |            | 37.0 | %          |  |       | 8.7 | % |  |  | 1.0 | % |  |  | 100.0 | %
|                                  |  |             |      |               |  |            |      |            |  |       |     |   |  |  |     |   |  |  |       |  



|   |  | Receivables from emerging market customers contain increased risk factors
compared to receivables at the Bally Wulff entities or other traditional
markets for Bally Gaming and Systems.                                                                                                                                                                                                                                                                                                                                                   
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|9. |  | SEGMENT AND GEOGRAPHICAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The Company operates in four business segments: (i) Gaming Equipment and
Systems 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 (in 000s):                                                                                                                                                                                                                                                                                                                                                   

|                            |                                   |   |                      |         |      |   |         |         |   |   |         |         |  
|--------------------------- | --------------------------------- | - | -------------------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                            |                                   |   | Years Ended June 30,
|                            |                                   |   |                     
|                            |                                   |   | 1999                 |         | 2000 |   | 2001   
|                            |                                   |   |                      |         |      |   |        
|Revenues:                   |                                   |   |                      |         |      |   |         |         |   |   |         |        
|                            | Gaming Equipment and Systems      |   | $                    | 127,810 |      |   | $       | 135,180 |   |   | $       | 160,890 |  
|                            | Wall Machines and Amusement Games |   |                      | 90,834  |      |   |         | 68,952  |   |   |         | 72,228  |  
|                            | Route Operations                  |   |                      | 175,854 |      |   |         | 202,480 |   |   |         | 221,505 |  
|                            | Casino Operations                 |   |                      | 60,691  |      |   |         | 68,053  |   |   |         | 73,499  |  
|                            |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Total revenues              |                                   | $ | 455,189              |         |      | $ | 474,665 |         |   | $ | 528,122 |        
|                            |                                   |   |                      |         |      |   |         |         |   |   |         |        
|                            | Intersegment revenues:            |   |                      |         |      |   |         |         |   |   |         |         |  
|                            | Gaming Equipment and Systems      |   | $                    | 751     |      |   | $       | 19,914  |   |   | $       | 8,226   |  
|                            | Wall Machines and Amusement Games |   |                      | 413     |      |   |         | 232     |   |   |         | 59      |  
|                            | Route Operations                  |   |                      |        |      |   |         |        |   |   |         |        |  
|                            | Casino Operations                 |   |                      |        |      |   |         |        |   |   |         |        |  
|                            |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Total intersegment revenues |                                   | $ | 1,164                |         |      | $ | 20,146  |         |   | $ | 8,285   |        
|                            |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Operating income (loss):    |                                   |   |                      |         |      |   |         |         |   |   |         |        
|                            | Gaming Equipment and Systems      |   | $                    | 5,779   |      |   | $       | (693    | ) |   | $       | 27,039  |  
|                            | Wall Machines and Amusement Games |   |                      | 5,334   |      |   |         | (4,219  | ) |   |         | 4,904   |  
|                            | Route Operations                  |   |                      | 14,586  |      |   |         | 15,162  |   |   |         | 15,482  |  
|                            | Casino Operations                 |   |                      | 19,348  |      |   |         | 23,805  |   |   |         | 25,258  |  
|                            | Corporate/other                   |   |                      | (19,724 | )    |   |         | (13,204 | ) |   |         | (18,316 | )
|                            |                                   |   |                      |         |      |   |         |         |   |   |         |        
|Total operating income      |                                   | $ | 25,323               |         |      | $ | 20,851  |         |   | $ | 54,367  |        
|                            |                                   |   |                      |         |      |   |         |         |   |   |         |        

F-19



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                    |                                   |   |                      |         |      |   |         |         |  |   |         |         | 
|----------------------------------- | --------------------------------- | - | -------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                    |                                   |   | Years Ended June 30,
|                                    |                                   |   |                     
|                                    |                                   |   | 1999                 |         | 2000 |   | 2001   
|                                    |                                   |   |                      |         |      |   |        
|Identifiable assets:                |                                   |   |                      |         |      |   |         |         |  |   |        
|                                    | Gaming Equipment and Systems      |   | $                    | 153,183 |      |   | $       | 145,051 |  |   | $       | 153,961 | 
|                                    | Wall Machines and Amusement Games |   |                      | 87,620  |      |   |         | 76,235  |  |   |         | 66,043  | 
|                                    | Route Operations                  |   |                      | 62,487  |      |   |         | 62,946  |  |   |         | 74,415  | 
|                                    | Casino Operations                 |   |                      | 44,592  |      |   |         | 48,043  |  |   |         | 47,737  | 
|                                    | Corporate/other                   |   |                      | 8,425   |      |   |         | 19,012  |  |   |         | 38,041  | 
|                                    |                                   |   |                      |         |      |   |         |         |  |   |         |         | 
|Total identifiable assets           |                                   | $ | 356,307              |         |      | $ | 351,287 |         |  | $ | 380,197 |        
|                                    |                                   |   |                      |         |      |   |         |         |  |   |         |         | 
|Capital expenditures:               |                                   |   |                      |         |      |   |         |         |  |   |         |        
|                                    | Gaming Equipment and Systems      |   | $                    | 2,587   |      |   | $       | 3,226   |  |   | $       | 2,696   | 
|                                    | Wall Machines and Amusement Games |   |                      | 1,129   |      |   |         | 515     |  |   |         | 480     | 
|                                    | Route Operations                  |   |                      | 5,476   |      |   |         | 3,993   |  |   |         | 5,592   | 
|                                    | Casino Operations                 |   |                      | 2,414   |      |   |         | 5,112   |  |   |         | 2,904   | 
|                                    | Corporate/other                   |   |                      | 149     |      |   |         | 166     |  |   |         | 30      | 
|                                    |                                   |   |                      |         |      |   |         |         |  |   |         |         | 
|Total capital expenditures          |                                   | $ | 11,755               |         |      | $ | 13,012  |         |  | $ | 11,702  |        
|                                    |                                   |   |                      |         |      |   |         |         |  |   |         |         | 
|Depreciation and amortization:      |                                   |   |                      |         |      |   |         |         |  |   |         |        
|                                    | Gaming Equipment and Systems      |   | $                    | 4,020   |      |   | $       | 7,862   |  |   | $       | 8,835   | 
|                                    | Wall Machines and Amusement Games |   |                      | 4,816   |      |   |         | 5,776   |  |   |         | 5,555   | 
|                                    | Route Operations                  |   |                      | 10,274  |      |   |         | 9,341   |  |   |         | 9,496   | 
|                                    | Casino Operations                 |   |                      | 2,324   |      |   |         | 2,149   |  |   |         | 2,300   | 
|                                    | Corporate/other                   |   |                      | 1,670   |      |   |         | 1,660   |  |   |         | 1,559   | 
|                                    |                                   |   |                      |         |      |   |         |         |  |   |         |         | 
|Total depreciation and amortization |                                   | $ | 23,104               |         |      | $ | 26,788  |         |  | $ | 27,745  |        
|                                    |                                   |   |                      |         |      |   |         |         |  |   |         |         | 



| |  | The Company has operations based primarily in Germany and the United
States. The German operations customers are a diverse group of
operators of wall machines and amusement games at arcades, hotels,
restaurants and taverns, primarily in Germany. Gaming Equipment and
Systems customers are primarily casinos and gaming machine distributors
in the United States and abroad. Receivables of the German operations
and Gaming Equipment and Systems are generally collateralized by the
related equipment. See Concentration of Credit Risk.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The table below presents information as to the Companys revenues,
operating income, identifiable assets capital expenditures and
depreciation and amortization by geographic region (in 000s):                                                                                                                                                                                                                                                                                                                                                      

|                         |               |   |                      |         |      |   |         |         |   |   |         |         | 
|------------------------ | ------------- | - | -------------------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | 
|                         |               |   | Years Ended June 30,
|                         |               |   |                     
|                         |               |   | 1999                 |         | 2000 |   | 2001   
|                         |               |   |                      |         |      |   |        
|Revenues:                |               |   |                      |         |      |   |         |         |   |   |         |        
|                         | United States |   | $                    | 347,348 |      |   | $       | 384,788 |   |   | $       | 441,944 | 
|                         | Germany       |   |                      | 100,939 |      |   |         | 79,330  |   |   |         | 79,110  | 
|                         | Other foreign |   |                      | 6,902   |      |   |         | 10,547  |   |   |         | 7,068   | 
|                         |               |   |                      |         |      |   |         |         |   |   |         |        
|Total revenues           |               | $ | 455,189              |         |      | $ | 474,665 |         |   | $ | 528,122 |        
|                         |               |   |                      |         |      |   |         |         |   |   |         |        
|Operating income (loss): |               |   |                      |         |      |   |         |         |   |   |         |        
|                         | United States |   | $                    | 22,329  |      |   | $       | 32,561  |   |   | $       | 46,974  | 
|                         | Germany       |   |                      | 3,451   |      |   |         | (4,994  | ) |   |         | 5,080   | 
|                         | Other foreign |   |                      | (457    | )    |   |         | (6,716  | ) |   |         | 2,313   | 
|                         |               |   |                      |         |      |   |         |         |   |   |         |        
|Total operating income   |               | $ | 25,323               |         |      | $ | 20,851  |         |   | $ | 54,367  |        
|                         |               |   |                      |         |      |   |         |         |   |   |         |        

F-20



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                    |               |   |                      |         |      |   |         |         |  |   |         |         | 
|----------------------------------- | ------------- | - | -------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                    |               |   | Years Ended June 30,
|                                    |               |   |                     
|                                    |               |   | 1999                 |         | 2000 |   | 2001   
|                                    |               |   |                      |         |      |   |        
|Identifiable assets:                |               |   |                      |         |      |   |         |         |  |   |         |        
|                                    | United States |   | $                    | 248,470 |      |   | $       | 255,454 |  |   | $       | 298,251 | 
|                                    | Germany       |   |                      | 103,687 |      |   |         | 91,800  |  |   |         | 77,234  | 
|                                    | Other foreign |   |                      | 4,150   |      |   |         | 4,033   |  |   |         | 4,712   | 
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Total identifiable assets           |               | $ | 356,307              |         |      | $ | 351,287 |         |  | $ | 380,197 |        
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Capital expenditures:               |               |   |                      |         |      |   |         |         |  |   |         |        
|                                    | United States |   | $                    | 10,314  |      |   | $       | 12,348  |  |   | $       | 11,213  | 
|                                    | Germany       |   |                      | 1,141   |      |   |         | 521     |  |   |         | 483     | 
|                                    | Other foreign |   |                      | 300     |      |   |         | 143     |  |   |         | 6       | 
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Total capital expenditures          |               | $ | 11,755               |         |      | $ | 13,012  |         |  | $ | 11,702  |        
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Depreciation and amortization:      |               |   |                      |         |      |   |         |         |  |   |         |        
|                                    | United States |   | $                    | 17,437  |      |   | $       | 19,818  |  |   | $       | 22,047  | 
|                                    | Germany       |   |                      | 4,998   |      |   |         | 5,924   |  |   |         | 5,681   | 
|                                    | Other Foreign |   |                      | 669     |      |   |         | 1,046   |  |   |         | 17      | 
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        
|Total depreciation and amortization |               | $ | 23,104               |         |      | $ | 26,788  |         |  | $ | 27,745  |        
|                                    |               |   |                      |         |      |   |         |         |  |   |         |        



|10. |  | INTERIM FINANCIAL INFORMATION (Unaudited)                                                                                                                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Following is the unaudited quarterly results of the Company for the years
ended June 30, 2000 and 2001 (adjusted for the August 21, 2001
two-for-one stock split). This information is not covered by the Report
of Independent Public Accountants (in 000s, except per share data).

|                                |  |      |         |  |         |   |         |   |       |   |         |   |  |   |         |   |  |  | 
|------------------------------- |  | ---- | ------- |  | ------- | - | ------- | - | ----- | - | ------- | - |  | - | ------- | - |  |  | 
|                                |  |      |         |  | Quarter
|                                |  |      |         |  |        
|                                |  |      |         |  | First   |   | Second  |   | Third |   | Fourth 
|                                |  |      |         |  |         |   |         |   |       |   |        
|                                |  | 2000 |         |  |         |   |         |   |       |   |         |   |  |   |         |   |  | 
|Revenues                        |  | $    | 116,427 |  |         | $ | 113,693 |   |       | $ | 116,651 |   |  | $ | 127,894 |  
|Operating income                |  |      | 8,397   |  |         |   | 2,445   |   |       |   | 1,056   |   |  |   | 8,953   |  
|Net income (loss)               |  |      | 445     |  |         |   | (7,176  | ) |       |   | (9,090  | ) |  |   | 786     |  
|Basic income (loss) per share   |  | $    | 0.02    |  |         | $ | (0.35   | ) |       | $ | (0.45   | ) |  | $ | 0.04    |  
|Diluted income (loss) per share |  | $    | 0.02    |  |         | $ | (0.35   | ) |       | $ | (0.45   | ) |  | $ | 0.04    |  
|                                |  |      | 2001    |  |         |   |         |   |       |   |         |   |  |   |         |   |  |  | 
|Revenues                        |  | $    | 119,115 |  |         | $ | 130,339 |   |       | $ | 138,469 |   |  | $ | 140,199 |  
|Operating income                |  |      | 13,131  |  |         |   | 15,158  |   |       |   | 16,142  |   |  |   | 9,936   |  
|Net income (loss)               |  |      | 3,365   |  |         |   | 5,509   |   |       |   | 6,820   |   |  |   | (1,212  | )
|Basic income (loss) per share   |  | $    | 0.17    |  |         | $ | 0.27    |   |       | $ | 0.33    |   |  | $ | (0.06   | )
|Diluted income (loss) per share |  | $    | 0.16    |  |         | $ | 0.26    |   |       | $ | 0.32    |   |  | $ | (0.05   | )

F-21



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | NEW ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141, Business Combinations (FASB
No. 141) and No. 142, Goodwill and Other Intangible Assets (FASB No. 142).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | FASB No. 141 establishes accounting and reporting standards for business combinations and the related issues of allocations of purchase price to
assets and liabilities acquired. The Company does not expect that the implementation of FASB No. 141 to have a material impact on the financial
condition or results of operations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | FASB No. 142 revises the existing accounting standards for both goodwill and intangible assets. Pursuant to the early adoption rules, the
Company intends to adopt the provisions of FASB No. 142 effective July 1, 2001. Accordingly, the Company has six months from the adoption date
to perform certain impairment tests for the goodwill recorded for each of its reporting units, and has until June 30, 2002 to measure an
impairment loss, if any. Pursuant to the transition rules, any impairment charge recognized as a result of the initial assessment would be
recognized as a change in accounting principle. Pursuant to FASB No. 142, amortization of existing goodwill will cease as of July 1, 2001,
however the Company will continue to perform tests of potential impairment of goodwill on an annual basis. The Company does not currently
believe that the initial impairment test will result in an impairment charge, although there can be no assurance that such a charge will not
result form the analysis yet to be performed. Goodwill amortization expense totaled approximately $1.4 million for the year ended June 30,
2001.
|   
|12. |  | CONSOLIDATING FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | The following consolidating financial statements are presented to provide
certain financial information regarding guaranteeing and non-guaranteeing
subsidiaries in relation to the Companys Senior Subordinated Notes which
were issued in August 1997. The financial information presented includes
Alliance Gaming Corporation (the Parent) and its wholly-owned
guaranteeing subsidiaries (together the Parent and Guaranteeing
Subsidiaries), and the non-guaranteeing subsidiaries Video Services,
Inc., United Gaming Rainbow, BGI Australia Pty. Limited, Bally Gaming de
Puerto Rico, Inc., and Alliance Automaten GmbH & Co. KG (the subsidiary
that holds the Companys German interests) (together the
Non-Guaranteeing Subsidiaries). The notes to consolidating financial
statements should be read in conjunction with these consolidating
financial statements.                                                                                                                                                                                                                                                                         

F-22



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS
June 30, 2000
(In 000s)
ASSETS

|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |          |         |          |  | 
|----------------------------------------------------------- | --------------------------------------- | --------------------------------------- | ------------------------- | ------------------------------------------------- | ------- | ------------ | ------- | ------------ | ------ | -------- | -------- | ------------ | ------- | ----------- | ------- | -------- | ------- | -------- |  | 
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |          |         | Alliance
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |          |         | Gaming  
|                                                            |                                         |                                         |                           |                                                   |         | Parent and   |         | Non-         |        |          |          |              |         | Corporation
|                                                            |                                         |                                         |                           |                                                   |         | Guaranteeing |         | Guaranteeing |        | Elimina- |          | and         
|                                                            |                                         |                                         |                           |                                                   |         | Subsidiaries |         | Subsidiaries |        | tions    |          | Subsidiaries
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |             
|Current assets:                                             |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            | Cash and cash equivalents               |                                         | $                         | 19,528                                            |         |              | $       | 12,516       |        |          | $        |             |         |             | $       | 32,044   |        
|                                                            | Short-term investments                  |                                         |                           |                                                  |         |              |         | 2,000        |        |          |          |             |         |             |         | 2,000    |        
|                                                            | Accounts and notes receivable, net      |                                         |                           | 44,889                                            |         |              |         | 41,603       |        |          |          | (4,048       | )       |             |         | 82,444   |        
|                                                            | Inventories, net                        |                                         |                           | 18,452                                            |         |              |         | 13,567       |        |          |          |             |         |             |         | 32,019   |        
|                                                            | Other current assets                    |                                         |                           | 8,831                                             |         |              |         | 2,367        |        |          |          |             |         |             |         | 11,198   |        
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                         | Total current assets      |                                                   |         | 91,700       |         |              |        | 72,053   |          |              |         | (4,048      | )       |          |         | 159,705  | 
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|Long-term notes receivable, net                             |                                         |                                         | 104,342                   |                                                   |         |              | 942     |              |        |          | (101,241 | )            |         |             | 4,043   |         
|Leased equipment, net                                       |                                         |                                         | 9,618                     |                                                   |         |              | 7,341   |              |        |          |         |              |         |             | 16,959  |         
|Property, plant and equipment, net                          |                                         |                                         | 42,152                    |                                                   |         |              | 34,671  |              |        |          |         |              |         |             | 76,823  |         
|Excess of costs over net assets of acquired
businesses, net |                                         |                                         | 37,845                    |                                                   |         |              | 17,149  |              |        |          |         |              |         |             | 54,994  |         
|Intangible assets, net                                      |                                         |                                         | 21,567                    |                                                   |         |              | 283     |              |        |          |         |              |         |             | 21,850  |         
|Investments in subsidiaries                                 |                                         |                                         | 70,933                    |                                                   |         |              |        |              |        |          | (70,933  | )            |         |             |        |         
|Deferred tax assets, net                                    |                                         |                                         | 9,288                     |                                                   |         |              | 2,886   |              |        |          |         |              |         |             | 12,174  |         
|Other assets, net                                           |                                         |                                         | 30,137                    |                                                   |         |              | (21,486 | )            |        |          | (3,912   | )            |         |             | 4,739   |         
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         | $                                       | 417,582                   |                                                   |         | $            | 113,839 |              |        | $        | (180,134 | )            |         | $           | 351,287 |         
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                         |                           | LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY) |         |              |         |             
|Current liabilities:                                        |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            | Accounts payable                        |                                         | $                         | 8,232                                             |         |              | $       | 2,135        |        |          | $        |             |         |             | $       | 10,367   |        
|                                                            | Accrued liabilities                     |                                         |                           | 20,743                                            |         |              |         | 12,707       |        |          |          | (1,127       | )       |             |         | 32,323   |        
|                                                            | Current maturities of long-term debt    |                                         |                           | 4,488                                             |         |              |         | 3,498        |        |          |          | (6,950       | )       |             |         | 1,036    |        
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                         | Total current liabilities |                                                   |         | 33,463       |         |              |        | 18,340   |          |              |         | (8,077      | )       |          |         | 43,726   | 
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|Long term debt, net                                         |                                         |                                         | 421,328                   |                                                   |         |              | 23,897  |              |        |          | (101,202 | )            |         |             | 344,023 |         
|Other liabilities                                           |                                         |                                         | 12,225                    |                                                   |         |              | 879     |              |        |          | (132     | )            |         |             | 12,972  |         
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                         | Total liabilities         |                                                   |         | 467,016      |         |              |        | 43,116   |          |              |         | (109,411    | )       |          |         | 400,721  | 
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|Minority interest                                           |                                         |                                         | 1,361                     |                                                   |         |              |        |              |        |          |         |              |         |             | 1,361   |         
|Commitments and contingencies                               |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|Stockholders equity (deficiency):                          |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            | Series E Special Stock                  |                                         |                           | 4,624                                             |         |              |         |             |        |          |          |             |         |             |         | 4,624    |        
|                                                            | Common Stock                            |                                         |                           | 1,034                                             |         |              |         | 17,832       |        |          |          | (17,832      | )       |             |         | 1,034    |        
|                                                            | Treasury stock                          |                                         |                           | (508                                              | )       |              |         |             |        |          |          |             |         |             |         | (508     | )      
|                                                            | Additional paid-in capital              |                                         |                           | 141,130                                           |         |              |         | 7,862        |        |          |          | (7,862       | )       |             |         | 141,130  |        
|                                                            | Accumulated other comprehensive loss    |                                         |                           | (21,790                                           | )       |              |         | (21,810      | )      |          |          | 21,810       |         |             |         | (21,790  | )      
|                                                            | Retained earnings (accumulated deficit) |                                         |                           | (175,285                                          | )       |              |         | 66,839       |        |          |          | (66,839      | )       |             |         | (175,285 | )      
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         | Total stockholders equity (deficiency) |                           |                                                   | (50,795 | )            |         |              | 70,723 |          |          |              | (70,723 | )           |         |          | (50,795 | )       
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         | $                                       | 417,582                   |                                                   |         | $            | 113,839 |              |        | $        | (180,134 | )            |         | $           | 351,287 |         
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         

See accompanying unaudited notes.

F-23



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |          |         |          |  | 
|----------------------------------------------------------- | --------------------------------------- | --------------------------------------- | ------------------------- | ------------------------------------------------- | ------- | ------------ | ------- | ------------ | ------ | -------- | -------- | ------------ | ------- | ----------- | ------- | -------- | ------- | -------- |  | 
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |          |         | Alliance
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |          |         | Gaming  
|                                                            |                                         |                                         |                           |                                                   |         | Parent and   |         | Non-         |        |          |          |              |         | Corporation
|                                                            |                                         |                                         |                           |                                                   |         | Guaranteeing |         | Guaranteeing |        | Elimina- |          | and         
|                                                            |                                         |                                         |                           |                                                   |         | Subsidiaries |         | Subsidiaries |        | tions    |          | Subsidiaries
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |             
|Current assets:                                             |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            | Cash and cash equivalents               |                                         | $                         | 41,502                                            |         |              | $       | 13,343       |        |          | $        |             |         |             | $       | 54,845   |        
|                                                            | Accounts and notes receivable, net      |                                         |                           | 58,769                                            |         |              |         | 37,769       |        |          |          | (17,169      | )       |             |         | 79,369   |        
|                                                            | Inventories, net                        |                                         |                           | 24,555                                            |         |              |         | 10,527       |        |          |          |             |         |             |         | 35,082   |        
|                                                            | Other current assets                    |                                         |                           | 8,178                                             |         |              |         | 2,636        |        |          |          |             |         |             |         | 10,814   |        
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                         | Total current assets      |                                                   |         | 133,004      |         |              |        | 64,275   |          |              |         | (17,169     | )       |          |         | 180,110  | 
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|Long-term notes receivable, net                             |                                         |                                         | 53,162                    |                                                   |         |              | 433     |              |        |          | (52,162  | )            |         |             | 1,433   |         
|Leased equipment, net                                       |                                         |                                         | 16,374                    |                                                   |         |              | 6,303   |              |        |          |         |              |         |             | 22,677  |         
|Property, plant and equipment, net                          |                                         |                                         | 54,399                    |                                                   |         |              | 34,013  |              |        |          |         |              |         |             | 88,412  |         
|Excess of costs over net assets of acquired
businesses, net |                                         |                                         | 35,547                    |                                                   |         |              | 13,967  |              |        |          |         |              |         |             | 49,514  |         
|Intangible assets, net                                      |                                         |                                         | 22,096                    |                                                   |         |              | 116     |              |        |          |         |              |         |             | 22,212  |         
|Investments in subsidiaries                                 |                                         |                                         | 84,228                    |                                                   |         |              |        |              |        |          | (84,228  | )            |         |             |        |         
|Deferred tax assets, net                                    |                                         |                                         | 10,137                    |                                                   |         |              | 1,807   |              |        |          |         |              |         |             | 11,944  |         
|Other assets, net                                           |                                         |                                         | 10,167                    |                                                   |         |              | (6,638  | )            |        |          | 366      |              |         |             | 3,895   |         
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         | $                                       | 419,114                   |                                                   |         |              | 114,276 |              |        | $        | (153,193 | )            |         | $           | 380,197 |         
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                         |                           | LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY) |         |              |         |             
|Current liabilities:                                        |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            | Accounts payable                        |                                         | $                         | 17,118                                            |         |              | $       | 2,413        |        |          | $        |             |         |             | $       | 19,531   |        
|                                                            | Accrued liabilities                     |                                         |                           | 37,648                                            |         |              |         | 9,999        |        |          |          | (669         | )       |             |         | 46,978   |        
|                                                            | Current maturities of long-term debt    |                                         |                           | 488                                               |         |              |         | 16,955       |        |          |          | (16,511      | )       |             |         | 932      |        
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                         | Total current liabilities |                                                   |         | 55,254       |         |              |        | 29,367   |          |              |         | (17,180     | )       |          |         | 67,441   | 
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|Long term debt, net                                         |                                         |                                         | 391,032                   |                                                   |         |              | 132     |              |        |          | (51,996  | )            |         |             | 339,168 |         
|Other liabilities                                           |                                         |                                         | 10,733                    |                                                   |         |              | 760     |              |        |          |         |              |         |             | 11,493  |         
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         |                                         | Total liabilities         |                                                   |         | 457,019      |         |              |        | 30,259   |          |              |         | (69,176     | )       |          |         | 418,102  | 
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|Minority interest                                           |                                         |                                         | 1,300                     |                                                   |         |              |        |              |        |          |         |              |         |             | 1,300   |         
|Commitments and contingencies                               |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|Stockholders equity (deficiency):                          |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            | Series E Special Stock                  |                                         |                           | 12                                                |         |              |         |             |        |          |          |             |         |             |         | 12       |        
|                                                            | Common Stock                            |                                         |                           | 2,178                                             |         |              |         | 17,832       |        |          |          | (17,832      | )       |             |         | 2,178    |        
|                                                            | Treasury stock                          |                                         |                           | (501                                              | )       |              |         |             |        |          |          |             |         |             |         | (501     | )      
|                                                            | Additional paid-in capital              |                                         |                           | 147,828                                           |         |              |         | 7,862        |        |          |          | (7,862       | )       |             |         | 147,828  |        
|                                                            | Accumulated other comprehensive loss    |                                         |                           | (27,919                                           | )       |              |         | (27,939      | )      |          |          | 27,939       |         |             |         | (27,919  | )      
|                                                            | Retained earnings (accumulated deficit) |                                         |                           | (160,803                                          | )       |              |         | 86,262       |        |          |          | (86,262      | )       |             |         | (160,803 | )      
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         | Total stockholders equity (deficiency) |                           |                                                   | (39,205 | )            |         |              | 84,017 |          |          |              | (84,017 | )           |         |          | (39,205 | )       
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         
|                                                            |                                         | $                                       | 419,114                   |                                                   |         | $            | 114,276 |              |        | $        | (153,193 | )            |         | $           | 380,197 |         
|                                                            |                                         |                                         |                           |                                                   |         |              |         |              |        |          |          |              |         |             |         |         

See accompanying unaudited notes.

F-24



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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
|                                              |                                           |   |              |         |              |   |          |        |             
|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                         |   |              | 14,311  |              |   |          | 46,380 |              |   |             |       |   |   |          | 60,691  |  
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                              |                                           |   | 292,504      |         |              |   | 171,657  |        |              |   | (8,972      | )      |   |   | 455,189  |        
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|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       |   |              | 76,741  |              |   |          | 41,895 |              |   |             | (333   | ) |   |          | 118,303 |  
|                                              | Depreciation and amortization             |   |              | 14,996  |              |   |          | 8,108  |              |   |             |       |   |   |          | 23,104  |  
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                              |                                           |   | 291,551      |         |              |   | 147,287  |        |              |   | (8,972      | )      |   |   | 429,866  |        
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|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  | )      
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        

See accompanying unaudited notes.

F-25



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

Year ended June 30, 2000
(In 000s)

|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |         |  
|--------------------------------------------- | ----------------------------------------- | - | ------------ | ------- | ------------ | - | -------- | ------ | ------------ | - | ----------- | ------- | - | - | -------- | ------- | -
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   | Alliance
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   | Gaming  
|                                              |                                           |   | Parent and   |         | Non-         |   |          |        |              |   | Corporation
|                                              |                                           |   | Guaranteeing |         | Guaranteeing |   | Elimina- |        | and         
|                                              |                                           |   | Subsidiaries |         | Subsidiaries |   | tions    |        | Subsidiaries
|                                              |                                           |   |              |         |              |   |          |        |             
|Revenues:                                     |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              | Gaming equipment and systems              |   | $            | 132,261 |              |   | $        | 20,926 |              |   | $           | (18,007 | ) |   |          | 135,180 |  
|                                              | Wall machines and amusement games         |   |              |        |              |   |          | 69,122 |              |   |             | (170    | ) |   |          | 68,952  |  
|                                              | Route operations                          |   |              | 183,244 |              |   |          | 19,236 |              |   |             |        |   |   |          | 202,480 |  
|                                              | Casino operations                         |   |              | 17,410  |              |   |          | 50,643 |              |   |             |        |   |   |          | 68,053  |  
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              |                                           |   | 332,915      |         |              |   | 159,927  |        |              |   | (18,177     | )       |   |   | 474,665  |        
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|Costs and expenses:                           |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              | Cost of gaming equipment and systems      |   |              | 74,445  |              |   |          | 19,070 |              |   |             | (18,007 | ) |   |          | 75,508  |  
|                                              | Cost of wall machines and amusement games |   |              |        |              |   |          | 43,301 |              |   |             |        |   |   |          | 43,301  |  
|                                              | Cost of route operations                  |   |              | 148,587 |              |   |          | 12,475 |              |   |             |        |   |   |          | 161,062 |  
|                                              | Cost of casino operations                 |   |              | 8,932   |              |   |          | 19,001 |              |   |             |        |   |   |          | 27,933  |  
|                                              | Selling, general and administrative       |   |              | 63,810  |              |   |          | 38,100 |              |   |             | (170    | ) |   |          | 101,740 |  
|                                              | Research and development                  |   |              | 12,642  |              |   |          | 2,676  |              |   |             |        |   |   |          | 15,318  |  
|                                              | Depreciation and amortization             |   |              | 17,942  |              |   |          | 8,846  |              |   |             |        |   |   |          | 26,788  |  
|                                              | Unusual items, net                        |   |              | (1,891  | )            |   |          | 4,055  |              |   |             |        |   |   |          | 2,164   |  
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              |                                           |   | 324,467      |         |              |   | 147,524  |        |              |   | (18,177     | )       |   |   | 453,814  |        
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|Operating income                              |                                           |   | 8,448        |         |              |   | 12,403   |        |              |   |            |         |   |   | 20,851   |        
|Earnings in consolidated subsidiaries         |                                           |   | 2,402        |         |              |   |         |        |              |   | (2,402      | )       |   |   |         |        
|Other income (expense):                       |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|                                              | Interest income                           |   |              | 571     |              |   |          | 537    |              |   |             | (643    | ) |   |          | 465     |  
|                                              | Interest expense                          |   |              | (32,829 | )            |   |          | (1,933 | )            |   |             | 643     |   |   |          | (34,119 | )
|                                              | Rainbow royalty                           |   |              | 6,173   |              |   |          | (6,173 | )            |   |             |        |   |   |          |        |  
|                                              | Minority interest                         |   |              | (2,155  | )            |   |          |       |              |   |             |        |   |   |          | (2,155  | )
|                                              | Other, net                                |   |              | 1,406   |              |   |          | (482   | )            |   |             |        |   |   |          | 924     |  
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|Income (loss) before income taxes             |                                           |   | (15,984      | )       |              |   | 4,352    |        |              |   | (2,402      | )       |   |   | (14,034  | )      
|Income tax (provision) benefit                |                                           |   | 949          |         |              |   | (1,950   | )      |              |   |            |         |   |   | (1,001   | )      
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        
|Net income (loss) applicable to common shares |                                           | $ | (15,035      | )       |              | $ | 2,402    |        |              | $ | (2,402      | )       |   | $ | (15,035  | )      
|                                              |                                           |   |              |         |              |   |          |        |              |   |             |         |   |   |          |        

See accompanying unaudited notes.

F-26



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS
Year ended June 30, 2001
(In 000s)

|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |         |  
|--------------------------------------- | ----------------------------------------- | - | ------------ | ------- | ------------ | - | -------- | ------ | ------------ | - | ----------- | ------ | - | - | -------- | ------- | -
|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   | Alliance
|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   | Gaming  
|                                        |                                           |   | Parent and   |         | Non-         |   |          |        |              |   | Corporation
|                                        |                                           |   | Guaranteeing |         | Guaranteeing |   | Elimina- |        | and         
|                                        |                                           |   | Subsidiaries |         | Subsidiaries |   | tions    |        | Subsidiaries
|                                        |                                           |   |              |         |              |   |          |        |             
|Revenues:                               |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                        | Gaming equipment and systems              |   | $            | 154,919 |              |   | $        | 13,950 |              |   | $           | (7,979 | ) |   |          | 160,890 |  
|                                        | Wall machines and amusement games         |   |              |        |              |   |          | 72,228 |              |   |             |       |   |   |          | 72,228  |  
|                                        | Route operations                          |   |              | 205,105 |              |   |          | 16,400 |              |   |             |       |   |   |          | 221,505 |  
|                                        | Casino operations                         |   |              | 18,950  |              |   |          | 54,549 |              |   |             |       |   |   |          | 73,499  |  
|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                        |                                           |   | 378,974      |         |              |   | 157,127  |        |              |   | (7,979      | )      |   |   | 528,122  |        
|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|Costs and expenses:                     |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                        | Cost of gaming equipment and systems      |   |              | 76,212  |              |   |          | 9,190  |              |   |             | (7,979 | ) |   |          | 77,423  |  
|                                        | Cost of wall machines and amusement games |   |              |        |              |   |          | 39,243 |              |   |             |       |   |   |          | 39,243  |  
|                                        | Cost of route operations                  |   |              | 167,518 |              |   |          | 10,585 |              |   |             |       |   |   |          | 178,103 |  
|                                        | Cost of casino operations                 |   |              | 10,671  |              |   |          | 21,870 |              |   |             |       |   |   |          | 32,541  |  
|                                        | Selling, general and administrative       |   |              | 63,479  |              |   |          | 35,156 |              |   |             |       |   |   |          | 98,635  |  
|                                        | Research and development                  |   |              | 11,028  |              |   |          | 2,548  |              |   |             |       |   |   |          | 13,576  |  
|                                        | Depreciation and amortization             |   |              | 19,809  |              |   |          | 7,936  |              |   |             |       |   |   |          | 27,745  |  
|                                        | Unusual items, net                        |   |              | 6,489   |              |   |          |       |              |   |             |       |   |   |          | 6,489   |  
|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                        |                                           |   | 355,206      |         |              |   | 126,528  |        |              |   | (7,979      | )      |   |   | 473,755  |        
|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|Operating income                        |                                           |   | 23,768       |         |              |   | 30,599   |        |              |   |            |        |   |   | 54,367   |        
|Earnings in consolidated subsidiaries   |                                           |   | 32,466       |         |              |   |         |        |              |   | (32,466     | )      |   |   |         |        
|Other income (expense):                 |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|                                        | Interest income                           |   |              | 794     |              |   |          | 693    |              |   |             | (444   | ) |   |          | 1,043   |  
|                                        | Interest expense                          |   |              | (33,187 | )            |   |          | (2,064 | )            |   |             | 444    |   |   |          | (34,807 | )
|                                        | Rainbow royalty                           |   |              | 6,590   |              |   |          | (6,590 | )            |   |             |       |   |   |          |        |  
|                                        | Minority interest                         |   |              | (2,165  | )            |   |          |       |              |   |             |       |   |   |          | (2,165  | )
|                                        | Other, net                                |   |              | (11,933 | )            |   |          | 11,752 |              |   |             |       |   |   |          | (181    | )
|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|Income before income taxes              |                                           |   | 16,333       |         |              |   | 34,390   |        |              |   | (32,466     | )      |   |   | 18,257   |        
|Income tax (provision) benefit          |                                           |   | 1,313        |         |              |   | (1,924   | )      |              |   |            |        |   |   | (611     | )      
|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|Net income before extraordinary item    |                                           |   | 17,646       |         |              |   | 32,466   |        |              |   | (32,466     | )      |   |   | 17,646   |        
|Extraordinary loss, without tax benefit |                                           |   | (3,164       | )       |              |   |         |        |              |   |            |        |   |   | (3,164   | )      
|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        
|Net income applicable to common shares  |                                           | $ | 14,482       |         |              | $ | 32,466   |        |              | $ | (32,466     | )      |   | $ | 14,482   |        
|                                        |                                           |   |              |         |              |   |          |        |              |   |             |        |   |   |          |        

See accompanying unaudited notes.

F-27



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |         |   |          |       | 
|--------------------------------------- | -------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | --------------------------------------------------- | - | ------------ | ------- | ------------ | - | -------- | ------ | ------------ | - | ----------- | ------ | ------- | - | -------- | ----- | 
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |         |   | Alliance
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |         |   | Gaming  
|                                        |                                                                                                    |  |                                                     |                                                     |   | Parent and   |         | Non-         |   |          |        |              |   | Corporation
|                                        |                                                                                                    |  |                                                     |                                                     |   | Guaranteeing |         | Guaranteeing |   | Elimina- |        | and         
|                                        |                                                                                                    |  |                                                     |                                                     |   | Subsidiaries |         | Subsidiaries |   | tions    |        | Subsidiaries
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |             
|Cash flows from operating activities:   |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|                                        | Net income (loss)                                                                                  |  | $                                                   | (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 assets                                                                   |  |                                                     | 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  |  
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        

See accompanying unaudited notes.

F-28



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS
Year ended June 30, 2000
(In 000s)

|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |         |   |          |        |  
|--------------------------------------- | -------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | --------------------------------------------------- | - | ------------ | ------- | ------------ | - | -------- | ------ | ------------ | - | ----------- | ------ | ------- | - | -------- | ------ | -
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |         |   | Alliance
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |         |   | Gaming  
|                                        |                                                                                                    |  |                                                     |                                                     |   | Parent and   |         | Non-         |   |          |        |              |   | Corporation
|                                        |                                                                                                    |  |                                                     |                                                     |   | Guaranteeing |         | Guaranteeing |   | Elimina- |        | and         
|                                        |                                                                                                    |  |                                                     |                                                     |   | Subsidiaries |         | Subsidiaries |   | tions    |        | Subsidiaries
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |             
|Cash flows from operating activities:   |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|                                        | Net income (loss)                                                                                  |  | $                                                   | (15,035                                             | ) |              | $       | 2,402        |   |          | $      | (2,402       | ) |             | $      | (15,035 | )
|                                        | Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities: |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |         |  
|                                        |                                                                                                    |  | Depreciation and amortization                       |                                                     |   | 17,942       |         |              |   | 8,846    |        |              |   |            |        |         |   | 26,788   |       
|                                        |                                                                                                    |  | Amortization of debt discounts                      |                                                     |   | 52           |         |              |   |         |        |              |   |            |        |         |   | 52       |       
|                                        |                                                                                                    |  | Write down of other assets                          |                                                     |   | 411          |         |              |   |         |        |              |   |            |        |         |   | 411      |       
|                                        |                                                                                                    |  | (Gain) loss on sale of assets                       |                                                     |   | (4,152       | )       |              |   | (6       | )      |              |   |            |        |         |   | (4,158   | )     
|                                        |                                                                                                    |  | Provision for losses on receivables                 |                                                     |   | 5,077        |         |              |   | 2,850    |        |              |   |            |        |         |   | 7,927    |       
|                                        |                                                                                                    |  | Other                                               |                                                     |   | 395          |         |              |   | (154     | )      |              |   | 110         |        |         |   | 351      |       
|                                        | Net change in operating assets and liabilities:                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |         |  
|                                        |                                                                                                    |  | Accounts and notes receivable                       |                                                     |   | (8,935       | )       |              |   | 4,427    |        |              |   | 4,638       |        |         |   | 130      |       
|                                        |                                                                                                    |  | Inventories                                         |                                                     |   | 992          |         |              |   | (4,437   | )      |              |   |            |        |         |   | (3,445   | )     
|                                        |                                                                                                    |  | Other current assets                                |                                                     |   | (335         | )       |              |   | (1,576   | )      |              |   |            |        |         |   | (1,911   | )     
|                                        |                                                                                                    |  | Intercompany accounts                               |                                                     |   | 275          |         |              |   | 5,037    |        |              |   | (5,312      | )      |         |   |         |       
|                                        |                                                                                                    |  | Accounts payable                                    |                                                     |   | (6,451       | )       |              |   | (419     | )      |              |   |            |        |         |   | (6,870   | )     
|                                        |                                                                                                    |  | Accrued liabilities                                 |                                                     |   | (6,961       | )       |              |   | (432     | )      |              |   | 194         |        |         |   | (7,199   | )     
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|                                        |                                                                                                    |  |                                                     | Net cash provided by (used in) operating activities |   |              | (16,725 | )            |   |          | 16,538 |              |   |             | (2,772 | )       |   |          | (2,959 | )
|Cash flows from investing activities:   |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|                                        | Additions to property, plant and equipment                                                         |  |                                                     | (6,883                                              | ) |              |         | (6,129       | ) |          |        |             |   |             |        | (13,012 | )
|                                        | Proceeds from disposal of assets                                                                   |  |                                                     | 4,263                                               |   |              |         | 53           |   |          |        |             |   |             |        | 4,316   |  
|                                        | Proceeds from sale/leaseback transaction                                                           |  |                                                     | 3,169                                               |   |              |         |             |   |          |        |             |   |             |        | 3,169   |  
|                                        | Additions to long-term assets                                                                      |  |                                                     | (4,305                                              | ) |              |         |             |   |          |        |             |   |             |        | (4,305  | )
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|                                        |                                                                                                    |  | Net cash used in investing activities               |                                                     |   | (3,756       | )       |              |   | (6,076   | )      |              |   |            |        |         |   | (9,832   | )     
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|Cash flows from financing activities:   |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|                                        | Proceeds from long-term debt                                                                       |  |                                                     |                                                    |   |              |         |             |   |          |        |             |   |             |        |        |  
|                                        | Reduction of long-term debt                                                                        |  |                                                     | (5,939                                              | ) |              |         | (3,300       | ) |          |        | 2,772        |   |             |        | (6,467  | )
|                                        | Net change in credit lines                                                                         |  |                                                     | 29,750                                              |   |              |         | 4,911        |   |          |        |             |   |             |        | 34,661  |  
|                                        | Purchase of common stock for treasury                                                              |  |                                                     |                                                    |   |              |         |             |   |          |        |             |   |             |        |        |  
|                                        | Proceeds from exercise of stock options and warrants                                               |  |                                                     | 10                                                  |   |              |         |             |   |          |        |             |   |             |        | 10      |  
|                                        | Dividends received (paid)                                                                          |  |                                                     | 10,948                                              |   |              |         | (10,948      | ) |          |        |             |   |             |        |        |  
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|                                        |                                                                                                    |  | Net cash provided by (used in) financing activities |                                                     |   | 34,769       |         |              |   | (9,337   | )      |              |   | 2,772       |        |         |   | 28,204   |       
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|Effect of exchange rate changes on cash |                                                                                                    |  |                                                    |                                                     |   |              | (299    | )            |   |          |       |              |   |             | (299   | )      
|Cash and cash equivalents:              |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|                                        | Increase for period                                                                                |  |                                                     | 14,288                                              |   |              |         | 826          |   |          |        |             |   |             |        | 15,114  |  
|                                        | Balance, beginning of period                                                                       |  |                                                     | 5,240                                               |   |              |         | 11,690       |   |          |        |             |   |             |        | 16,930  |  
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        
|                                        | Balance, end of period                                                                             |  | $                                                   | 19,528                                              |   |              | $       | 12,516       |   |          | $      |             |   |             | $      | 32,044  |  
|                                        |                                                                                                    |  |                                                     |                                                     |   |              |         |              |   |          |        |              |   |             |        |        

See accompanying unaudited notes.

F-29



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS

|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |          |        |          |        | 
|--------------------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ------ | ------------ | ------ | ------------ | ------ | -------- | ------ | ------------ | ------- | ----------- | ------ | -------- | ------ | -------- | ------ | 
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |          |        | Alliance
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |          |        | Gaming  
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        | Parent and   |        | Non-         |        |          |        |              |         | Corporation
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        | Guaranteeing |        | Guaranteeing |        | Elimina- |        | and         
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        | Subsidiaries |        | Subsidiaries |        | tions    |        | Subsidiaries
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |             
|Cash flows from operating activities:   |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         
|                                        |                                                                                                    | Net income (loss)                               |                                                     | $                                                   | 14,482 |              |        | $            | 32,466 |          |        | $            | (32,466 | )           |        | $        | 14,482 |         
|                                        | Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities: |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |          |       
|                                        |                                                                                                    |                                                 | Depreciation and amortization                       |                                                     |        | 19,809       |        |              |        | 7,936    |        |              |         |            |        |          |        | 27,745   |       
|                                        |                                                                                                    |                                                 | Amortization of debt discounts                      |                                                     |        | 154          |        |              |        |         |        |              |         |            |        |          |        | 154      |       
|                                        |                                                                                                    |                                                 | Write down of other assets                          |                                                     |        | 117          |        |              |        |         |        |              |         |            |        |          |        | 117      |       
|                                        |                                                                                                    |                                                 | Extraordinary item                                  |                                                     |        | 3,164        |        |              |        |         |        |              |         |            |        |          |        | 3,164    |       
|                                        |                                                                                                    |                                                 | (Gain) loss on sale of assets                       |                                                     |        | 948          |        |              |        | (140     | )      |              |         |            |        |          |        | 808      |       
|                                        |                                                                                                    |                                                 | Provision for losses on receivables                 |                                                     |        | 2,387        |        |              |        | 1,438    |        |              |         |            |        |          |        | 3,825    |       
|                                        |                                                                                                    |                                                 | Other                                               |                                                     |        | 784          |        |              |        | 944      |        |              |         | 132         |        |          |        | 1,860    |       
|                                        |                                                                                                    | Net change in operating assets and liabilities: |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |          |        |         
|                                        |                                                                                                    |                                                 | Accounts and notes receivable                       |                                                     |        | 2,029        |        |              |        | (5,370   | )      |              |         | 550         |        |          |        | (2,791   | )     
|                                        |                                                                                                    |                                                 | Inventories                                         |                                                     |        | (17,785      | )      |              |        | (2,201   | )      |              |         |            |        |          |        | (19,986  | )     
|                                        |                                                                                                    |                                                 | Other current assets                                |                                                     |        | 653          |        |              |        | 1,586    |        |              |         |            |        |          |        | 2,239    |       
|                                        |                                                                                                    |                                                 | Intercompany accounts                               |                                                     |        | (13,654      | )      |              |        | (14,671  | )      |              |         | 28,325      |        |          |        |         |       
|                                        |                                                                                                    |                                                 | Accounts payable                                    |                                                     |        | 8,886        |        |              |        | 490      |        |              |         |            |        |          |        | 9,376    |       
|                                        |                                                                                                    |                                                 | Accrued liabilities                                 |                                                     |        | 16,951       |        |              |        | (1,550   | )      |              |         | 458         |        |          |        | 15,859   |       
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         
|                                        |                                                                                                    |                                                 |                                                     | Net cash provided by (used in) operating activities |        |              | 38,925 |              |        |          | 20,928 |              |         |             | (3,001 | )        |        |          | 56,852 | 
|Cash flows from investing activities:   |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         
|                                        | Additions to property, plant and equipment                                                         |                                                 |                                                     | (8,602                                              | )      |              |        | (3,100       | )      |          |        |             |         |             |        | (11,702  | )     
|                                        | Acquisition of assets formerly under operating leases                                              |                                                 |                                                     | (13,040                                             | )      |              |        |             |        |          |        |             |         |             |        | (13,040  | )     
|                                        | Proceeds from disposal of assets                                                                   |                                                 |                                                     | 258                                                 |        |              |        |             |        |          |        |             |         |             |        | 258      |       
|                                        | Proceeds from sale/leaseback transaction                                                           |                                                 |                                                     |                                                    |        |              |        |             |        |          |        |             |         |             |        |         |       
|                                        | Additions to long-term assets                                                                      |                                                 |                                                     | (3,297                                              | )      |              |        |             |        |          |        |             |         |             |        | (3,297   | )     
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         
|                                        |                                                                                                    |                                                 | Net cash used in investing activities               |                                                     |        | (24,681      | )      |              |        | (3,100   | )      |              |         |            |        |          |        | (27,781  | )     
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         
|Cash flows from financing activities:   |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         
|                                        | Capitalized debt issuance costs                                                                    |                                                 |                                                     | (6,969                                              | )      |              |        |             |        |          |        |             |         |             |        | (6,969   | )     
|                                        | Proceeds from issuance of long-term debt                                                           |                                                 |                                                     | 190,000                                             |        |              |        |             |        |          |        |             |         |             |        | 190,000  |       
|                                        | Payoff debt from refinancing                                                                       |                                                 |                                                     | (166,058                                            | )      |              |        |             |        |          |        |             |         |             |        | (166,058 | )     
|                                        | Reduction of long-term debt                                                                        |                                                 |                                                     | (2,344                                              | )      |              |        | (3,468       | )      |          |        | 3,001        |         |             |        | (2,811   | )     
|                                        | Net change in credit lines                                                                         |                                                 |                                                     | (23,179                                             | )      |              |        | (124         | )      |          |        |             |         |             |        | (23,303  | )     
|                                        | Purchase of common stock for treasury                                                              |                                                 |                                                     | (436                                                | )      |              |        |             |        |          |        |             |         |             |        | (436     | )     
|                                        | Proceeds from exercise of stock options and warrants                                               |                                                 |                                                     | 3,673                                               |        |              |        |             |        |          |        |             |         |             |        | 3,673    |       
|                                        | Dividends received (paid)                                                                          |                                                 |                                                     | 13,042                                              |        |              |        | (13,042      | )      |          |        |             |         |             |        |         |       
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         
|                                        |                                                                                                    |                                                 | Net cash provided by (used in) financing activities |                                                     |        | 7,729        |        |              |        | (16,634  | )      |              |         | 3,001       |        |          |        | (5,904   | )     
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         
|Effect of exchange rate changes on cash |                                                                                                    |                                                 |                                                    |                                                     |        |              | (366   | )            |        |          |       |              |         |             | (366   | )       
|Cash and cash equivalents:              |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         
|                                        | Increase for period                                                                                |                                                 |                                                     | 21,973                                              |        |              |        | 828          |        |          |        |             |         |             |        | 22,801   |       
|                                        | Balance, beginning of period                                                                       |                                                 |                                                     | 19,528                                              |        |              |        | 12,516       |        |          |        |             |         |             |        | 32,044   |       
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         
|                                        | Balance, end of period                                                                             |                                                 | $                                                   | 41,501                                              |        |              | $      | 13,344       |        |          | $      |             |         |             | $      | 54,845   |       
|                                        |                                                                                                    |                                                 |                                                     |                                                     |        |              |        |              |        |          |        |              |         |             |        |         

See accompanying unaudited notes.

F-30



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 2000 and 2001

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, 2001 consist of the following (in 000s):

|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  |          |         | 
|------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | -------- | ------ | ------------ |  | ----------- | -------- | - |  | -------- | ------- | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  | Alliance
|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  | Gaming  
|                                                                    |  | Parent and   |         | Non-         |  |          |        |              |  | Corporation
|                                                                    |  | Guaranteeing |         | Guaranteeing |  | Elimina- |        | and         
|                                                                    |  | Subsidiaries |         | Subsidiaries |  | tions    |        | Subsidiaries
|                                                                    |  |              |         |              |  |          |        |             
|10% Senior Subordinated Notes due
2007, net of unamortized discount |  | $            | 149,505 |              |  | $        |       |              |  | $           |         |   |  | $        | 149,505 | 
|Term Loan Facility                                                  |  |              | 190,000 |              |  |          |        |              |  |             |          |   |  |          | 190,000 | 
|Revolving Credit Facility                                           |  |              |        |              |  |          |       |              |  |             |         |   |  |          |        | 
|Intercompany notes payable                                          |  |              | 161,996 |              |  |          | 16,511 |              |  |             | (178,507 | ) |  |          |        | 
|Other                                                               |  |              | 20      |              |  |          | 575    |              |  |             |         |   |  |          | 595     | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  |          |         | 
|                                                                    |  |              | 501,521 |              |  |          | 17,086 |              |  |             | (178,507 | ) |  |          | 340,100 | 
|Less current maturities                                             |  |              | 489     |              |  |          | 16,954 |              |  |             | (16,511  | ) |  |          | 932     | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  |          |         | 
|Long-term debt, less current
maturities                             |  | $            | 501,032 |              |  | $        | 132    |              |  | $           | (161,996 | ) |  | $        | 339,168 | 
|                                                                    |  |              |         |              |  |          |        |              |  |             |          |   |  |          |         | 

Long-term debt and lines of credit at June 30, 2000 consist of the following (in 000s):

|                                                                    |                            |   |              |        |              |   |          |   |              |   |             |   |  |   |          |        | 
|------------------------------------------------------------------- | -------------------------- | - | ------------ | ------ | ------------ | - | -------- | - | ------------ | - | ----------- | - |  | - | -------- | ------ | 
|                                                                    |                            |   |              |        |              |   |          |   |              |   |             |   |  |   | Alliance
|                                                                    |                            |   |              |        |              |   |          |   |              |   |             |   |  |   | Gaming  
|                                                                    |                            |   | Parent and   |        | Non-         |   |          |   |              |   | Corporation
|                                                                    |                            |   | Guaranteeing |        | Guaranteeing |   | Elimina- |   | and         
|                                                                    |                            |   | Subsidiaries |        | Subsidiaries |   | tions    |   | Subsidiaries
|                                                                    |                            |   |              |        |              |   |          |   |             
|10% Senior Subordinated Notes due
2007, net of unamortized discount |                            | $ | 149,351      |        |              | $ |         |   |              | $ |            |   |  | $ | 149,351  |       
|Term loan facilities:                                               |                            |   |              |        |              |   |          |   |              |   |             |   |  |   |          |       
|                                                                    | Tranche B Term Loan        |   |              | 70,641 |              |   |          |  |              |   |             |  |  |   |          | 70,641 | 
|                                                                    | Tranche C Term Loan        |   |              | 37,776 |              |   |          |  |              |   |             |  |  |   |          | 37,776 | 
|                                                                    | Delayed Draw Term Facility |   |              | 23,789 |              |   |          |  |              |   |             |  |  |   |          | 23,789 | 
|Revolving Credit Facility                                           |                            |   | 40,000       |        |              |   | 22,360   |   |              |   |            |   |  |   | 62,360   |       
|Intercompany notes payable                                          |                            |   | 104,256      |        |              |   | 3,939    |   |              |   | (108,195    | ) |  |   |         |       
|Other                                                               |                            |   |             |        |              |   | 1,142    |   |              |   |            |   |  |   | 1,142    |       
|                                                                    |                            |   |              |        |              |   |          |   |              |   |             |   |  |   |          |       
|                                                                    |                            |   | 425,813      |        |              |   | 27,441   |   |              |   | (108,195    | ) |  |   | 345,059  |       
|Less current maturities                                             |                            |   | 8,508        |        |              |   | 3,498    |   |              |   | (10,970     | ) |  |   | 1,036    |       
|                                                                    |                            |   |              |        |              |   |          |   |              |   |             |   |  |   |          |       
|Long-term debt, less current
maturities                             |                            | $ | 417,305      |        |              | $ | 23,943   |   |              | $ | (97,225     | ) |  | $ | 344,023  |       
|                                                                    |                            |   |              |        |              |   |          |   |              |   |             |   |  |   |          |       

F-31



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

The federal, foreign and state income tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities as
of June 30, 2000 are as follows (in 000s):

|                                      |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |        | 
|------------------------------------- | ------------------------------------------------------------------- | - | ------------ | ------ | ------------ | - | -------- | ----- | ------------ | - | ----------- | - |  | - | -------- | ------ | 
|                                      |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   | Alliance
|                                      |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   | Gaming  
|                                      |                                                                     |   | Parent and   |        | Non-         |   |          |       |              |   | Corporation
|                                      |                                                                     |   | Guaranteeing |        | Guaranteeing |   | Elimina- |       | and         
|                                      |                                                                     |   | Subsidiaries |        | Subsidiaries |   | tions    |       | Subsidiaries
|                                      |                                                                     |   |              |        |              |   |          |       |             
|Deferred tax assets:                  |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|                                      | Net operating loss carry forwards                                   |   | $            | 30,281 |              |   | $        |      |              |   | $           |  |  |   | $        | 30,281 | 
|                                      | Foreign tax credit carry forwards                                   |   |              | 6,639  |              |   |          |      |              |   |             |  |  |   |          | 6,639  | 
|                                      | Inventory obsolescence reserves                                     |   |              | 2,243  |              |   |          | 499   |              |   |             |  |  |   |          | 2,742  | 
|                                      | Bad debt reserves                                                   |   |              | 3,861  |              |   |          | 2,438 |              |   |             |  |  |   |          | 6,299  | 
|                                      | Accruals not currently deductible
for tax purposes                  |   |              | 3,827  |              |   |          | 25    |              |   |             |  |  |   |          | 3,852  | 
|                                      | Refinancing costs being amortized
for tax purposes                  |   |              | 8,582  |              |   |          |      |              |   |             |  |  |   |          | 8,582  | 
|                                      | Intangibles                                                         |   |              | 9,143  |              |   |          | (2    | )            |   |             |  |  |   |          | 9,141  | 
|                                      | Other                                                               |   |              | 1,624  |              |   |          | 7,259 |              |   |             |  |  |   |          | 8,883  | 
|                                      |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Total gross deferred tax assets       |                                                                     |   | 66,200       |        |              |   | 10,219   |       |              |   |             |   |  |   | 76,419   |       
|Less: Valuation allowance             |                                                                     |   | (56,912      | )      |              |   | (7,333   | )     |              |   |            |   |  |   | (64,245  | )     
|                                      |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Deferred tax assets                   |                                                                     | $ | 9,288        |        |              | $ | 2,886    |       |              | $ |            |   |  | $ | 12,174   |       
|                                      |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Deferred tax liabilities:             |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|                                      | Property and equipment, principally
due to depreciation differences |   | $            | 3,219  |              |   | $        | (57   | )            |   | $           |  |  |   | $        | 3,162  | 
|                                      | Other                                                               |   |              | 6,706  |              |   |          | 448   |              |   |             |  |  |   |          | 7,154  | 
|                                      |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Total gross deferred tax liabilities  |                                                                     |   | 9,925        |        |              |   | 391      |       |              |   |            |   |  |   | 10,316   |       
|                                      |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Net deferred tax assets (liabilities) |                                                                     | $ | (637         | )      |              | $ | 2,495    |       |              | $ |            |   |  | $ | 1,858    |       
|                                      |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       

F-32



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The federal, foreign and state income tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities as
of June 30, 2001 are as follows (in 000s):

|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |        | 
|------------------------------------ | ------------------------------------------------------------------- | - | ------------ | ------ | ------------ | - | -------- | ----- | ------------ | - | ----------- | - |  | - | -------- | ------ | 
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   | Alliance
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   | Gaming  
|                                     |                                                                     |   | Parent and   |        | Non-         |   |          |       |              |   | Corporation
|                                     |                                                                     |   | Guaranteeing |        | Guaranteeing |   | Elimina- |       | and         
|                                     |                                                                     |   | Subsidiaries |        | Subsidiaries |   | tions    |       | Subsidiaries
|                                     |                                                                     |   |              |        |              |   |          |       |             
|Deferred tax assets:                 |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|                                     | Net operating loss carry forwards                                   |   | $            | 35,235 |              |   | $        |      |              |   | $           |  |  |   | $        | 35,235 | 
|                                     | Foreign tax credit carry forwards                                   |   |              | 6,639  |              |   |          |      |              |   |             |  |  |   |          | 6,639  | 
|                                     | Inventory obsolescence reserves                                     |   |              | 2,322  |              |   |          | 466   |              |   |             |  |  |   |          | 2,788  | 
|                                     | Bad debt reserves                                                   |   |              | 2,843  |              |   |          | 2,438 |              |   |             |  |  |   |          | 5,281  | 
|                                     | Accruals not currently deductible
for tax purposes                  |   |              | 2,774  |              |   |          | 18    |              |   |             |  |  |   |          | 2,792  | 
|                                     | Refinancing costs being amortized
for tax purposes                  |   |              | 6,480  |              |   |          |      |              |   |             |   |  |   |          | 6,480  | 
|                                     | Intangibles                                                         |   |              | 10,324 |              |   |          | 2     |              |   |             |  |  |   |          | 10,326 | 
|                                     | Other                                                               |   |              | 2,349  |              |   |          | 6,883 |              |   |             |  |  |   |          | 9,232  | 
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Total gross deferred tax assets      |                                                                     |   | 68,966       |        |              |   | 9,807    |       |              |   |             |   |  |   | 78,773   |        | 
|Less: Valuation allowance            |                                                                     |   | (58,829      | )      |              |   | (8,000   | )     |              |   |            |   |  |   | (66,829  | )     
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Deferred tax assets                  |                                                                     | $ | 10,137       |        |              | $ | 1,807    |       |              | $ |            |   |  | $ | 11,944   |       
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Deferred tax liabilities:            |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|                                     | Property and equipment, principally
due to depreciation differences |   | $            | 3,142  |              |   | $        |      |              |   | $           |  |  |   | $        | 3,142  | 
|                                     | Other                                                               |   |              | 5,708  |              |   |          | 330   |              |   |             |  |  |   |          | 6,038  | 
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Total gross deferred tax liabilities |                                                                     |   | 8,850        |        |              |   | 330      |       |              |   |            |   |  |   | 9,180    |       
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       
|Net deferred tax assets              |                                                                     | $ | 1,287        |        |              | $ | 1,477    |       |              | $ |            |   |  | $ | 2,764    |       
|                                     |                                                                     |   |              |        |              |   |          |       |              |   |             |   |  |   |          |       

F-33



---



##### Table of Contents



ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|13. |  | RESERVES AND ALLOWANCES                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The following tables represent the activity for each of the fiscal years
ended June 30, 1999, 2000 and 2001 for each of the valuation reserve and
allowance accounts (in 000s):

|                                 |  |              |        |           |  |            |       |      |  |   |        |            |  |   |        | 
|-------------------------------- |  | ------------ | ------ | --------- |  | ---------- | ----- | ---- |  | - | ------ | ---------- |  | - | ------ | 
|                                 |  | Balance at   |        |           |  |            |       |      |  |   |        | Balance at
|                                 |  | Beginning of |        |           |  |            |       |      |  |   |        | End of    
|                                 |  | Year         |        | Additions |  | Deductions |       | Year
|                                 |  |              |        |           |  |            |       |     
|Allowance for doubtful accounts: |  |              |        |           |  |            |       |      |  |   |        |            |  |   |        | 
|Year ended June 30, 2001         |  | $            | 20,208 |           |  | $          | 9,411 |      |  | $ | 13,618 |            |  | $ | 16,001 | 
|Year ended June 30, 2000         |  |              | 13,696 |           |  |            | 7,405 |      |  |   | 893    |            |  |   | 20,208 | 
|Year ended June 30, 1999         |  |              | 13,041 |           |  |            | 3,817 |      |  |   | 3,162  |            |  |   | 13,696 | 
|Inventory valuation allowance:   |  |              |        |           |  |            |       |      |  |   |        |            |  |   |        | 
|Year ended June 30, 2001         |  | $            | 6,660  |           |  | $          | 9,133 |      |  | $ | 9,200  |            |  | $ | 6,593  | 
|Year ended June 30, 2000         |  |              | 7,077  |           |  |            | 2,837 |      |  |   | 3,254  |            |  |   | 6,660  | 
|Year ended June 30, 1999         |  |              | 6,797  |           |  |            | 2,273 |      |  |   | 1,993  |            |  |   | 7,077  | 
|Other assets valuation reserve:  |  |              |        |           |  |            |       |      |  |   |        |            |  |   |        | 
|Year ended June 30, 2001         |  | $            | 1,813  |           |  | $          | 38    |      |  | $ | 25     |            |  | $ | 1,826  | 
|Year ended June 30, 2000         |  |              | 3,468  |           |  |            |      |      |  |   | 1,655  |            |  |   | 1,813  | 
|Year ended June 30, 1999         |  |              | 3,488  |           |  |            |      |      |  |   | 20     |            |  |   | 3,468  | 

F-34