10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2004

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from      to

Commission File Number 0-4281

ALLIANCE GAMING CORPORATION

(Exact name of registrant as specified in its charter)

NEVADA	88-0104066
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
6601 S. Bermuda Rd.
Las Vegas, Nevada	89119
(Address of principal executive offices)	(Zip Code)

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

Registrant’s internet:  www.alliancegaming.com

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act).

Yes  ý   No  o

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.

ý  Yes   o  No

The number of shares of Common Stock, $0.10 par value, outstanding as of January 31, 2005, according to the records of the registrant’s registrar and transfer agent was 51,088,700.

INDEX

PART I.		FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of December 31, 2004 and June 30, 2004		3
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2004 and 2003		4
	Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended December 31, 2004 and 2003		4
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended December 31, 2004		5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2004 and 2003		6
	Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.	Controls and Procedures		36
PART II.		OTHER INFORMATION
Item 1.	Legal Proceedings		37
Item 4.	Submission of Matters to a Vote of Security Holders		37
Item 6.	Exhibits		38
SIGNATURES			39

2

PART I

ALLIANCE GAMING CORPORATION

 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

($ In 000’s except share and per share data)

	As of
	December 31, 2004			June 30, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	27,964		$	172,726
Accounts and notes receivable, net of allowance for doubtful accounts of $14,399 and $9,722	103,601			129,779
Inventories	72,462			61,135
Deferred tax assets, net	19,982			20,054
Other current assets	19,580			12,420
Total current assets	243,589			396,114
Long-term investments (restricted)	8,542			2,528
Long-term receivables, net of allowance of $12 and $12	8,757			12,518
Net investment in leases	12,626			5,614
Leased gaming equipment, net of accumulated depreciation of $40,814 and $31,105	44,273			46,634
Property, plant and equipment, net of accumulated depreciation and amortization of $30,164 and $23,127	76,654			75,838
Goodwill, net	177,961			136,989
Intangible assets, net of accumulated amortization of $14,968 and $12,489	59,474			63,623
Assets of discontinued operations held for sale	—			4,442
Other assets, net	15,286			6,354
Total assets	$	647,162		$	750,654
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	30,478		$	37,515
Accrued liabilities	60,991			51,469
Jackpot liabilities	10,076			12,075
Income taxes payable	—			7,233
Current maturities of long-term debt	5,040			5,866
Liabilities of discontinued operations held for sale	—			4,337
Total current liabilities	106,585			118,495
Long-term debt, net of current maturities	348,540			423,089
Deferred tax liabilities	90			849
Other liabilities	6,985			6,092
Minority interest	1,163			1,326
Total liabilities	463,363			549,851
Stockholders’ equity:
Special stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 115 shares issued and outstanding	12			12
Common stock, $.10 par value; 100,000,000 shares authorized; 51,552,000 and 51,426,000 shares issued	5,158			5,145
Treasury stock at cost, 526,600 and 513,000 shares	(665		)	(501		)
Deferred compensation	(7,858		)	(6,500		)
Additional paid-in capital	196,872			194,040
Accumulated other comprehensive income	1,518			1,524
Retained earnings (accumulated deficit)	(11,238		)	7,083
Total stockholders’ equity	183,799			200,803
Total liabilities and stockholders’ equity	$	647,162		$	750,654

See accompanying notes to unaudited condensed consolidated financial statements.

3

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ In 000s, except share and per share amounts)

	Three Months Ended December 31,						Six Months Ended December 31,
	2004			2003			2004			2003
Revenues:
Gaming equipment and systems	$	100,933		$	96,319		$	205,010		$	184,787
Casino operations	12,769			12,312			25,605			25,067
	113,702			108,631			230,615			209,854
Costs and expenses:
Cost of gaming equipment and systems	53,337			38,780			104,173			72,017
Cost of casino operations	4,589			4,884			9,391			9,887
Selling, general and administrative	41,051			21,548			84,706			50,613
Research and development	10,358			9,440			22,130			15,403
Restructuring charge	—			—			1,435			—
Depreciation and amortization	12,020			6,445			22,861			12,467
	121,355			81,097			244,696			160,387
Operating income (loss)	(7,653		)	27,534			(14,081		)	49,467
Other income (expense)
Interest income	318			83			798			126
Interest expense	(3,750		)	(3,869		)	(7,712		)	(9,598		)
Minority interest	(1,145		)	(541		)	(1,644		)	(1,027		)
Refinancing / bank amendment charges	(564		)	—			(564		)	(12,293		)
Other, net	375			(545		)	528			(899		)
Income (loss) from continuing operations before income taxes	(12,419		)	22,662			(22,675		)	25,776
Income tax expense (benefit)	(4,879		)	8,444			(8,730		)	9,710
Income (loss) from continuing operations	(7,540		)	14,218			(13,945		)	16,066
Income (loss) from discontinued operations	15			4,526			(4,376		)	8,706
Net income (loss)	$	(7,525	)	$	18,744		$	(18,321	)	$	24,772
Basic earnings (loss) per share:
Continuing operations	$	(0.15	)	$	0.29		$	(0.27	)	$	0.32
Discontinued operations	—			0.09			(0.09		)	0.18
Total	$	(0.15	)	$	0.38		$	(0.36	)	$	0.50
Diluted earnings (loss) per share:
Continuing operations	$	(0.15	)	$	0.28		$	(0.27	)	$	0.32
Discontinued operations	—			0.09			(0.09		)	0.17
Total	$	(0.15	)	$	0.37		$	(0.36	)	$	0.49
Weighted average common shares outstanding	51,010			49,741			50,988			49,660
Weighted average diluted common and common share equivalents outstanding	51,010			50,930			50,988			50,814

See accompanying notes to unaudited condensed consolidated financial statements.

4

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

($ In 000s)

	Common Stock			Series E Special		Treasury			Deferred Compen-			Additional Paid-In		Accum- ulated Other Compre- hensive Income			Retained Earnings (Accum- ulated			Total Stock- holders’
	Shares	Dollars		Stock		Stock			sation			Capital		(Loss)			Deficit)			Equity
Balances at June 30, 2004	51,426	$	5,145	$	12	$	(501	)	$	(6,500	)	$	194,040	$	1,524		$	7,083		$	200,803
Net loss	—	—		—		—			—			—		—			(18,321		)	(18,321		)
Foreign currency translation adjustment	—	—		—		—			—			—		(6		)	—			(6		)
Total comprehensive income	—	—		—		—			—			—		—			—			(18,327		)
Restricted stock units issued	—	—		—		—			(1,900		)	1,900		—			—			—
Restricted stock units amortization	—	—		—		—			542			—		—			—			542
Repurchase of common stock for treasury	—	—		—		(164		)	—			—		—			—			(164		)
Shares issued upon exercise of stock options	126	13		—		—			—			696		—			—			709
Tax benefit of employee stock option exercises	—	—		—		—			—			236		—			—			236
Balances at December 31, 2004	51,552	$	5,158	$	12	$	(665	)	$	(7,858	)	$	196,872	$	1,518		$	(11,238	)	$	183,799

See accompanying notes to unaudited condensed consolidated financial statements.

5

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ In 000s)

	Six Months Ended December 31,
	2004			2003
Cash flows from operating activities of continuing operations:
Net income (loss)	$	(18,321	)	$	24,772
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of continuing operations:
(Income) loss from discontinued operations	4,376			(8,706		)
Depreciation and amortization	22,861			12,467
Stock-based compensation	542			—
Refinancing / bank amendment charges	564			12,293
Deferred income taxes	(687		)	10,433
Provision for losses on receivables	5,154			526
Inventory and other discontinued asset write-downs	14,088			—
Other	(11,605		)	(1,099		)
Change in operating assets and liabilities, net of effects of business acquired:
Accounts and notes receivable	17,138			(2,019		)
Inventories	(17,456		)	(2,493		)
Other current assets	(4,336		)	(1,023		)
Accounts payable	(7,169		)	(2,072		)
Accrued liabilities and jackpot liabilities	(12,853		)	(2,924		)
Net cash provided by (used in) operating activities of continuing operations	(7,704		)	40,155
Cash flows from investing activities of continuing operations:
Advances of notes receivable due from Sierra Design Group	—			(61,025		)
Additions to property, plant and equipment	(5,531		)	(3,815		)
Additions to leased gaming equipment	(18,183		)	(15,957		)
Additions to other long-term assets	(1,521		)	(10,414		)
Acquisitions, net of cash acquired	(12,000		)	(3,879		)
Proceeds from sale of net assets of discontinued operations	1,911			16,500
Net cash used in investing activities of continuing operations	(35,324		)	(78,590		)
Cash flows from financing activities of continuing operations:
Capitalized debt issuance costs	(1,038		)	(6,954		)
Premium paid on early redemption of debt	—			(5,399		)
Proceeds from the issuance of long-term debt	—			350,000
Net change in revolving credit facility	—			70,000
Payoff of debt due to sale of net assets of discontinued operations	(101,618		)	(337,625		)
Reduction of long-term debt	(2,050		)	(1,349		)
Re-purchase of treasury shares	(164		)	—
Proceeds from exercise of stock options	945			2,907
Net cash provided by (used in) financing activities of continuing operations	(103,925		)	71,580
Effect of exchange rates changes on cash	487			130
Cash provided by discontinued operations	1,704			95
Cash and cash equivalents:
Increase for the period	(144,762		)	33,370
Balance, beginning of period	172,726			38,884
Balance, end of period	$	27,964		$	72,254

See accompanying notes to unaudited condensed consolidated financial statements.

6

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Principles of presentation and consolidation

The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations and cash flows of Alliance Gaming Corporation and its subsidiaries (“Alliance” or the “Company”) for the respective periods presented.  The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or the year as a whole. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company’s annual report on Form 10-K for the year ended June 30, 2004.

The accompanying consolidated financial statements include the accounts of Alliance Gaming Corporation and its wholly owned and partially owned, controlled subsidiaries. The Company consolidates Rainbow Casino Vicksburg Partnership (“RCVP”) and records minority interest expense to reflect the portion of the earnings of RCVP attributable to the minority shareholders.The Company is the general partner of RCVP, the partnership that operates the Rainbow Casino. Pursuant to transactions consummated in March 1995, the Rainbow Corporation, which was the former general partner of RCVP, became a limited partner entitled to receive 10% (which amount increases to 20% of such amount when annual revenues exceed $35.0 million but only on such incremental amount) of the net available cash flows after debt service and other items, as defined, payable quarterly through December 31, 2010. The Company holds the remaining economic interest in the partnership.

For Video Services, Inc. (“VSI”), the Company owned 100% of the voting stock and was entitled to receive 71% of dividends declared by VSI, if any, at such time that dividends were declared. The sale of VSI was completed during the quarter ended December 31, 2004 for a realized gain of $0.8 million, net of tax (included in discontinued operations).

All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year financial statements to conform to the current year presentation, and to present Rail City as discontinued operations for all periods presented.

Recently Issue Accounting Pronouncements

In December 2004, the FASB issued Statement 123(R) which revised FASB No. 123.  Statement 123(R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees for reporting periods beginning after June 15, 2005. The first reporting period for the Company will be the quarter ended September 30, 2005, and the Company is currently evaluating the impact of the adoption, however the pro forma impact is reflected in footnote 2.

In November 2004 the FASB issued Statement 151 which revised ARB 43, Chapter 4, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, wasted material (spoilage). This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  The Company does not believe this accounting pronouncement will have a material impact on its financial condition or results of operations.

2.STOCK-BASED COMPENSATION

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 the date of grant, no compensation expense is recognized.

As provided under Financial Accounting Standards Board No. 123 “Accounting for Stock-Based Compensation” (“FASB No. 123”), companies may continue to account for employee stock-based compensation under APB 25, but are required to disclose historical pro-forma net income and earnings per share that would have resulted from the use of the fair value method described in FASB No. 123.

In December 2002, the FASB issued FASB No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. This Statement amends FASB No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of FASB No. 123 and APB Opinion No. 28 “Interim Financial Reporting” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-

7

based employee compensation and the effect of the method used on reported results. Under fair value method, compensation costs are measured using an options pricing model and are amortized over the estimated life of the option, which is generally three to ten years, with option forfeitures accounted for at the time of the forfeiture, and all amounts are reflected net of tax.

The historical and pro forma net income (assuming an after-tax charge for stock-based compensation) and related per share data are as follows (in 000s, except per share data):

	Three Months Ended December 31,						Six Months Ended December 31,
	2004			2003			2004			2003
Net income (loss)
As reported	$	(7,525	)	$	18,744		$	(18,321	)	$	24,772
Stock-based compensation under FASB No. 123, net of tax	(1,701		)	(1,021		)	(3,263		)	(1,893		)
Pro forma net income (loss)	$	(9,226	)	$	17,723		$	(21,584	)	$	22,879
Earnings per share:
Basic– As reported	$	(0.15	)	$	0.38		$	(0.36	)	$	0.50
Basic– Pro forma	$	(0.18	)	$	0.36		$	(0.42	)	$	0.46
Diluted– As reported	$	(0.15	)	$	0.37		$	(0.36	)	$	0.49
Diluted– Pro forma	$	(0.18	)	$	0.35		$	(0.42	)	$	0.45

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

	Three Months Ended December 31,				Six Months Ended December 31,
	2004		2003		2004		2003
Risk-fee interest rate (weighted average)	3.5	%	3.5	%	3.5	%	3.5	%
Expected volatility	0.35		0.26		0. 35		0.26
Expected dividend yield	0		0		0		0
Expected life	3-10 years		3-10 years		3-10 years		3-10 years

The resulting fair values applied to the options granted were $4.39 and $3.14 per share for the quarter ended December 31, 2004 and December 31, 2003, respectively and were $5.06 and $3.10 for the six months ended December 31, 2004 and 2003, respectively.

3.DISCONTINUED OPERATIONS

The Company has completed several divestitures in accordance with our plan to sell our “non-core” businesses, which was a strategy announced in July 2003. In July 2003, we completed the sale of Bally Wulff to a private equity investor.  Since the net assets of Bally Wulff were written down to the estimated sale price in June 2003, no additional gain or loss was recorded upon the closing of the sale. In May 2004, we completed the sale of Rail City Casino to The Sands Resort. On June 30, 2004, the Company completed the sale of United Coin Machine Co. (“UCMC”). On October 15, 2004 the Company completed the sale of its interest in VSI to Churchill Downs Incorporated and received proceeds of approximately $2.0 million and realized a gain of $0.8 million, net of tax.

The results of these discontinued operations are presented net of applicable income taxes in discontinued operations  in the accompanying consolidated statements of operations.

8

Operating results for the discontinued operations for the three and six month periods ended December 31, 2004 include VSI, while the results for the three and six month periods ended December 31, 2003 include UCMC, VSI, and Rail City.  Summary operating results are as follows (in 000s):

	Three Months Ended December 31,					Six Months Ended December 31,
	2004			2003		2004			2003
Net revenues	$	559		$	64,179	$	4,514		$	123,533
Operating income (loss)	(129		)	7,947		358			14,746
Income tax expense (benefit)	(38		)	2,437		(2,516		)	4,724
Income (loss) from discontinued operations	$	15		$	4,526	$	(4,376	)	$	8,706

4.OTHER CURRENT ASSETS

Other current assets consist of the following (in 000s):

	December 31, 2004		June 30, 2004
Prepaid taxes	$	3,889	$	814
Prepaid royalty	3,126		2,623
Refundable deposits	1,883		3,229
Games on trial	3,088		2,608
Deferred cost of revenue	3,974		208
Prepaid licensing and intellectual fees	685		1,090
Prepaid insurance	1,122		592
Prepaid other expense	1,813		1,256
Total current assets	$	19,580	$	12,420

The decrease in refundable deposits of $1.3 million is a result of units purchased from other manufacturers for which the deposit has now been applied to the account payable.  The increase in deferred costs of $3.7 million is due to shipments of games, primarily to the European market with F.O.B. destination terms, which will not be recognized as revenue until the third quarter of fiscal year 2005.

5.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 consist of the following (in 000s):

	December 31, 2004		June 30, 2004
Raw materials	$	24,377	$	26,050
Work-in-process	4,956		3,324
Finished goods	43,129		31,761
Total	$	72,462	$	61,135

The Company performs detailed inventory valuation procedures at least quarterly. This process includes examining the carrying values of new and used gaming devices, parts and ancillary equipment in comparison to the current fair market values for such equipment (less costs to sell or dispose).  Some of the factors involved in this analysis include the overall levels of our inventories, the current and projected sales levels for such products, the projected markets for such products both domestically and internationally, the costs required to sell the products including refurbishment costs and importation costs for international shipments, and the overall projected demand for products once the next generation of products are scheduled for release.

The Company has faced declining demand for its video products.  During the quarter ended September 30, 2004, the Company decided that its legacy V7 video platform would no longer be supported,

9

and the remaining used game inventory for such products was targeted for immediate disposal, resulting in a write down of $3.0 million.  The inventory of new games for this product line was targeted for sale at reduced prices, which were still above the carrying value less cost to sell and therefore were not written down.

During the quarter ended December 31, 2004, management completed a three year business planning process.  In accordance with this plan, significant development efforts were redirected to the Alpha-based video platform and products.  The Company also made its existing EVO video games upgradeable to Alpha when approved in each market. The remaining used EVO inventory has been targeted for sale primarily in non-domestic markets, which traditionally have lower price points for used games and have higher importation and delivery costs, resulting in significantly lower net realizable values.  The capitalized regulatory approval costs for the EVO and legacy video platform were determined to no longer be recoverable, and were also written off.

During the quarter ended December 31, 2004, the Company consolidated several warehouses into one central warehouse, with the intent to reduce warehouse rental costs.  As part of this consolidation, certain used games and related ancillary equipment including signs, were identified for immediate destruction, scrap, or salvage and this process has continued into the March 2005 period.

As a result of the decision to move to the new video platform, the targeting of used equipment for non-domestic markets, and the consolidation of warehouses leading to accelerated disposals, the Company wrote down its inventory and related assets by a total of $11.1 million during the quarter ended December 31, 2004, and such write downs for the six months ended December 31, 2004 totaled $14.1 million. These charges are included in the cost of gaming equipment and systems in the statement of operations.

The Company continues to take certain used games on trade as part of new game sales, and therefore additional write-downs may be necessary in future periods depending on a number of factors impacting the future demand for such used products and the ultimate net values realized.

6.PROPERTY, PLANT AND EQUIPMENT AND LEASED GAMING EQUIPMENT

Property, plant and equipment is stated at cost and depreciated over the estimated useful lives or lease term, 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 life ranging from 3-4 years.

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

Property, plant and equipment consist of the following (in 000s):

	December 31, 2004			June 30, 2004
Land and land improvements	$	12,827		$	19,086
Buildings and leasehold improvements	37,735			29,937
Gaming equipment	33,160			29,121
Furniture, fixtures and equipment	23,096			20,821
Less accumulated depreciation and amortization	(30,164		)	(23,127		)
Total property, plant and equipment, net	$	76,654		$	75,838
Leased gaming equipment	$	85,087		$	77,739
Less accumulated depreciation	(40,814		)	(31,105		)
Total leased gaming equipment, net	$	44,273		$	46,634

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7.INTANGIBLE ASSETS AND GOODWILL

In July 2001, the Company adopted FASB No. 142 “Goodwill and Other Intangible Assets”, which requires companies to cease amortizing goodwill and certain intangible assets with indefinite useful lives.  Instead, goodwill and intangible assets deemed to have indefinite useful lives are to be reviewed for impairment annually at the reporting unit level (Gaming equipment and systems, and casino operations).  There was no impairment of goodwill upon adoption of FASB No. 142.   There was no impairment charged to goodwill in the six months ended December 31, 2004 or 2003.

The Company evaluates the carrying value of goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.  Indicators that could trigger an impairment review include changes in legal, regulatory, or economic factors, market conditions or operational performance.  Impairment is measured as the difference between the carrying amount and the fair value of the intangible assets and is recognized as a component of income from operations.

Intangibles

Intangible assets excluding discontinued operations consist of the following (in 000s):

		December 31, 2004							June 30, 2004
	Wt. Avg. Useful life (Years)	Gross Carrying Amount		Accum- ulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accum- ulated Amortization			Net Carrying Amount
Computer software	3	$	8,996	$	(2,622	)	$	6,374	$	8,963	$	(1,498	)	$	7,465
Computer software from acquisitions	9	11,700		(4,030		)	7,670		11,700		(3,380		)	8,320
License rights	3-5	1,774		(777		)	997		2,745		(1,979		)	766
Capitalized regulatory approval costs	3	3,638		(1,043		)	2,595		4,767		(833		)	3,934
CRM project	5	3,290		(1,237		)	2,053		3,039		(1,046		)	1,993
PLM project	5	1,843		(102		)	1,741		1,585		—			1,585
Trademarks	5	6,688		(431		)	6,257		6,688		(288		)	6,400
Patents	13	9,470		(608		)	8,862		9,470		(243		)	9,227
Non-compete agreements	6	275		(38		)	237		275		(15		)	260
Customer relationships	5	740		(123		)	617		740		(49		)	691
Core technology	8	5,445		(567		)	4,878		5,445		(227		)	5,218
Deferred financing costs	6	7,385		(1,656		)	5,729		6,910		(1,017		)	5,893
Contracts	10	12,100		(1,016		)	11,084		12,100		(411		)	11,689
Other intangibles	7	1,098		(718		)	380		1,685		(1,503		)	182
Total		$	74,442	$	(14,968	)	$	59,474	$	76,112	$	(12,489	)	$	63,623

Amortization expense totaled $2.6 million and $1.4 million for the three months ended December 31, 2004 and 2003, respectively.  Amortization expense totaled $4.6 million and $2.7 million for the six months ended December 31, 2004 and 2003, respectively.  Computer software amortization expense totaled $1.1 million and $0.8 million for the three months ended December 31, 2004 and 2003, respectively.  Computer software amortization totaled $1.6 million and $1.4 million for the six months ended December 31, 2004 and 2003, respectively.

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

Period Ending December 31,	Amount
2005	$	5,197
2006	10,463
2007	8,919
2008	6,600
2009	5,887
Thereafter	22,408
Total	$	59,474

11

Goodwill

The changes in the carrying amount of goodwill are as follows (in 000s):

Balance as of June 30, 2004	$	136,989
Acquired goodwill	40,558
Foreign currency translation adjustment	414
Balance as of December 31, 2004	$	177,961

On December 30, 2004 the Company amended the Sierra Design Group (“SDG”) stock purchase agreement originally dated March 3, 2004.  The amendment terminates the contingent consideration payable over the next three years (“the earnout”) which could have totaled $95 million (payable in cash and stock) depending on the achievement of certain SDG financial performance targets.  The consideration for the termination of the earnout consisted of a one-time cash payment of $12 million paid to the group of former SDG stakeholders and the delivery of a $28 million unsecured promissory note to that same group of individuals, payable over five years with interest at LIBOR + 2%.  The $40 million of total consideration paid to terminate the earnout, and related expenses has been treated as additional consideration paid for the stock of SDG, and therefore has been recorded as goodwill.

The purchase agreement for MindPlay LLC calls for future contingent consideration (“earnouts”) to be paid to its former principals, as more fully described in footnote 14. The MindPlay earnout is payable based on future revenues and gross margins from the sale of MindPlay products.  No amounts have yet been paid pursuant to this earnout.

8.ACCRUED LIABILITIES AND JACKPOT LIABILITIES

Accrued liabilities consist of the following (in 000s):

	December 31, 2004		June 30, 2004
Payroll and related costs	$	9,754	$	11,905
Interest	1,713		1,265
Professional and consulting fees	4,281		3,102
Deferred revenues, sales and use taxes	10,942		5,113
Regulatory approval cost accruals	1,389		652
Royalties, rebates, direct mail coupons	8,541		7,390
Customer deposits	5,748		9,896
Acquisition related accruals	3,906		3,806
Divestiture related accruals	561		4,377
Litigation accruals	9,360		—
Severance accruals	637		—
Other	4,159		3,963
Subtotal	60,991		51,469
Jackpots accrued not yet awarded	10,076		12,075
Total accrued liabilities	$	71,067	$	63,544

The Company recognizes liability for jackpot expense for the cost to fund these jackpots in the future.  Generally winners may elect to receive a single lump sum payment or may opt to receive payments in equal installments over a specified period of time.  The most recent history pattern indicates that approximately 85% of winners will elect the single payment option.

The Company funds jackpot installment payments through qualifying U.S. government or agency securities.  The present value of the outstanding progressive jackpot liabilities is computed based upon the payment stream discounted at the applicable discount rate.

12

The increase in litigation accruals of $9.4 million is primarily a result of the patent litigation discussed in the Commitments and Contingencies section of this report.

9.LONG-TERM INVESTMENTS (RESTRICTED)

Pursuant to various state gaming regulations, certain cash accounts are maintained to ensure availability of funds to pay wide-area progressive jackpot awards, which totaled approximately $12.8 million at December 31, 2004 and which are included in cash and cash equivalents in the accompanying balance sheets.  In addition, the Company purchases U.S. Treasury Strip securities for the benefit of jackpot winners who elect to receive annual or weekly installment payments. These securities are presented as restricted investments in the accompanying consolidated balance sheets, and totaled $8.5 million and $2.5 million as of December 31, 2004 and June 30, 2004, respectively.

10.LONG-TERM DEBT

Long-term debt consisted of the following (in 000s):

	December 31, 2004		June 30, 2004
Term Loan facility	$	317,507	$	350,000
Revolving credit facility	—		70,000
Other, generally unsecured	36,073		8,955
	353,580		428,955
Less current maturities	5,040		5,866
Long-term debt, less current maturities	$	348,540	$	423,089

In December 2004, the Company amended its senior loan agreement.  The amendment provides for an increase in the maximum allowable leverage ratio (currently 4.25x), a reduction in the revolver from $125 million to $75 million which is currently unborrowed, and an increase in the term loan interest rate to LIBOR + 3.00%.  The LIBOR rate at December 31, 2004 was 2.65%.  The fee incurred for the amendment totaled approximately $1.0 million, which has been capitalized and will be amortized over the life of the amended loan agreement, and the Company recorded a pre-tax charge of $0.6 million to write-off a portion of the previously deferred financing costs.

The Company’s bank credit agreement, as amended, contains several financial covenants including maximum leverage ratio, minimum cash flow (as that term is defined in the agreement) and fixed charge coverage ratio.  The credit agreement also contains a number of maintenance covenants and 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 December 31, 2004, the Company is in compliance with the covenants, including the leverage ratio which is currently 3.9x.  Pursuant to the recent amendment, the leverage ratio maximum is scheduled to increase to 4.50x and to 4.75x as of March 31, 2005 and June 30, 2005, respectively.

The other debt totaling approximately $36.1 million as of December 31, 2004, consists primarily of the debt owed to the former principals of SDG, Micro Clever Consulting, and MindPlay, totaling $28.0 million, $1.3 million and $4.0 million respectively.  The loans are due at various dates between 2005 and 2009 and bear rates of interest between LIBOR plus 2% (5.7% as of December 31, 2004) and 6%, and are generally unsecured.

13

In September 2003, the Company refinanced its senior bank debt credit facility and recorded a pre-tax charge totaling $12.3 million.  This charge includes a $5.0 million charge for the early extinguishment of the Company’s subordinated notes, $7.0 million for the non-cash write-off of deferred financing costs and $0.3 million in fees and expenses.

11.EARNINGS PER SHARE

The following computation of basic and diluted earnings (loss) per share from continuing operations, and income (loss) applicable to common shares are as follows (in 000s except per share amounts):

	Three Months Ended December 31,					Six Months Ended December 31,
	2004			2003		2004			2003
Net income (loss) from continuing operations	$	(7,540	)	$	14,218	$	(13,945	)	$	16,066
Net income (loss) from discontinued operations	15			4,526		(4,376		)	8,706
Net income (loss)	$	(7,525	)	$	18,744	$	(18,321	)	$	24,772
Weighted average common shares outstanding	51,010			49,741		50,988			49,660
Effect of dilutive securities	—			1,189		—			1,154
Weighted average common and dilutive shares outstanding	51,010			50,930		50,988			50,814
Earnings (loss) per basic share:
Income (loss) from continued operations	$	(0.15	)	$	0.29	$	(0.27	)	$	0.32
Income (loss) from discontinued operation	0.00			0.09		(0.09		)	0.18
	$	(0.15	)	$	0.38	$	(0.36	)	$	0.50
Earnings (loss) per diluted share:
Income (loss) from continued operations	$	(0.15	)	$	0.28	$	(0.27	)	0.32
Income (loss) from discontinued operation	0.00			0.09		(0.09		)	0.17
	$	(0.15	)	$	0.37	$	(0.36	)	$	0.49

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

	Three Months Ended December 31,		Six Months Ended December 31,
	2004	2003	2004	2003
Stock options	3,519	3	3,378	56
Warrants	100	—	100	—
	3,619	3	3,478	56

For the three and six month periods ended December 31, 2004, a total of 1.2 million in-the-money options and 0.5 million restricted stock units were also excluded from the dilutive earnings per share calculation as they are antidilutive given the reported net loss for these periods.

During the quarter ended December 31, 2004 the Company granted an additional 156,507 restricted stock units valued at $1.9 million.  The restricted stock units vest on October 1, 2010; however, vesting could be accelerated under certain circumstances.  The $1.9 million has been deferred, and will be amortized as compensation expense over three years.

12.SEGMENTS AND GEOGRAPHICAL INFORMATION

The Company currently operates in two business segments (exclusive of the business segments included in discontinued operations): (i) Gaming Equipment and Systems which designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines, and (ii) Casino Operations which currently owns and operates a casino in Vicksburg, Mississippi. The accounting policies of these segments are consistent with Company’s policies for the Consolidated Financial Statements.

The table below presents information as to the Company’s revenues and operating income by segment (in 000s):

14

	Three Months Ended December 31,						Six Months Ended December 31,
	2004			2003			2004			2003
Revenues:
Gaming Equipment and Systems	$	100,933		$	96,319		$	205,010		$	184,787
Casino Operations	12,769			12,312			25,605			25,067
Total revenues	$	113,702		$	108,631		$	230,615		209,854
Intersegment revenues:
Gaming Equipment and Systems	$	84		$	212		$	256		$	341
Operating income (loss):
Gaming Equipment and Systems	$	(6,840	)	$	27,217		$	(11,327	)	$	48,575
Casino Operations	4,082			3,814			7,878			7,828
Corporate/other	(4,895		)	(3,497		)	(10,632		)	(6,936		)
Total operating income (loss)	$	(7,653	)	$	27,534		$	(14,081	)	$	49,467

The Company has operations based primarily in the United States with sales and distribution offices in Europe and South America.

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 000s):

	Three Months Ended December 31,					Six Months Ended December 31,
	2004			2003		2004			2003
Revenues
United States	$	106,589		$	97,728	$	218,271		$	190,340
Germany	1,482			5,762		2,658			11,794
Other foreign	5,631			5,141		9,686			7,720
Total revenues	$	113,702		$	108,631	$	230,615		$	209,854
Operating income (loss)
United States	$	(5,772	)	$	25,814	$	(13,168	)	$	48,693
Germany	(924		)	926		(401		)	1,024
Other foreign	(957		)	794		(512		)	(250		)
Total operating income (loss)	$	(7,653	)	$	27,534	$	(14,081	)	$	49,467

13.SUPPLEMENTAL CASH FLOW INFORMATION

The following supplemental information is related to the consolidated statements of cash flows (in 000s).

	Six Months Ended December 31,
	2004		2003
Cash paid for interest	$	7,271	$	15,227
Cash paid for income taxes	3,057		1,638
Non-cash investing and financing transactions:
Reclassify property, plant and equipment to inventory	$	3,423	$	2,517
Unfavorable translation rate adjustment	$	493	$	(2,524	)
Note payable issued in acquisition	$	28,000	$	—

15

14. RESTRUCTURING CHARGE

The Company undertook an extensive review of its operations and accordingly reduced its workforce which resulted in a restructuring charge and related accrued liability totaling $1.4 million as of and for the quarter ended September 30, 2004.  As of December 31, 2004, no additional restructuring charges have been incurred; however, additional staff reductions made subsequent to December 31, 2004 are intended to further this expense reduction effort and will result in an additional restructuring charge to be reported in the subsequent quarter.  The balance of the accrued liability for unpaid severance costs totaled $0.6 million as of December 31, 2004.

15.COMMITMENTS AND CONTINGENCIES

On February 19, 2004, the Company completed the acquisition of MindPlay LLC.  Additional consideration may become payable in cash over the next 13 years upon the MindPlay business unit achieving certain significant revenue and gross margin targets.  The additional consideration that may become payable will be recorded as an additional cost of the acquired entity.

In June and July 2004, purported class actions were filed against Alliance Gaming Corporation and its officers, Robert Miodunski (the Company’s former Chief Executive Officer), Robert Saxton, Mark Lerner, and Steven Des Champs, in the Federal District Court for the District of Nevada.  The nearly identical complaints allege violations of the Securities Exchange Act of 1934 stemming from the revision of earnings guidance, and declines in the stock price.  The plaintiffs’ motions to consolidate the cases and appoint lead plaintiff counsel are pending and are customary in such cases.  The next step will be for the plaintiffs to file a consolidated complaint.  The Company believes the lawsuits are without merit and intends to vigorously defend the action.  In addition, in July 2004 two derivative lawsuits were filed in Nevada state court against the members of the board of directors and the officers listed above.  The Company is named as a nominal defendant in the derivative lawsuits as the claims are purportedly asserted for the benefit of the Company.  These lawsuits assert claims for breach of fiduciary duty and waste of corporate assets arising out of the same events as those giving rise to the class actions described above.  These two cases have also been consolidated, and a consolidated complaint has been filed.  The defendants’ motions to dismiss or to stay were heard in January 2005 and taken under submission by the court.

In February 2005, the Securities and Exchange Commission (the “SEC”) requested documents and information regarding matters  related to the allegations in the class actions and similar matters.  Management is cooperating fully with the SEC in this matter.

A lawsuit filed against the Company in August 2004 by Shuffle Master, Inc. in the U.S. District Court, District of Nevada, alleging infringement of various patents is in the discovery phase.  A patent infringement lawsuit filed against the Company in December 2004 by IGT in the U.S. District Court, District of Nevada, is in the pleadings phase.  The Company is vigorously defending both lawsuits.

In September 2004, a federal district court jury entered a $7.4 million verdict against the Company in a suit filed by Action Gaming, Inc., and IGT. The suit alleged that the multi-hand video poker game deployed by the Company’s former subsidiary, United Coin Machine Co., infringed the plaintiffs’ patents. The district court had ruled on summary judgment that the game does not infringe the patents. However, the court left to the jury the question whether the use of “autohold,” a specific, optional feature of the game, caused it to infringe under the “doctrine of equivalents,” a doctrine of patent law. After a two-week trial, the jury determined that the game with the autohold option enabled did infringe under the doctrine of equivalents and awarded damages accordingly. The feature has been disabled on all affected games in the field, and the decision permits continued deployment of the game as long as the autohold feature is not included. The Company is pursuing various remedies and has posted a cash bond totaling $7.4 million to stay payment of the judgment pending post-trial motions and appeal. The cash bond is included in other non-current assets and the accrued liability is included in accrued liabilities in the accompanying balance sheet.  The expense for this charge is included in discontinued operations in the accompanying statement of operations.

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, in the aggregate, will have a material adverse effect on the Company’s financial position or results of operations.

Management believes that cash flows from current operating activities and the limited availability under the revolving credit facility will provide the Company with sufficient capital resources and liquidity.  At December 31, 2004 the Company had no significant material purchase commitments for capital expenditures.

16.UNAUDITED CONSOLIDATING FINANCIAL STATEMENTS

The following unaudited condensed consolidating financial statements are presented to provide certain financial information regarding guaranteeing and non-guaranteeing subsidiaries in relation to the Company’s bank credit agreement. The financial information presented includes Alliance Gaming Corporation (the “Parent”), its wholly-owned guaranteeing subsidiaries (“Guaranteeing Subsidiaries”), and the non-guaranteeing subsidiaries the Rainbow Casino Vicksburg Partnership, L.P. (dba Rainbow Casino) and the Company’s non-domestic subsidiaries (together the “Non-Guaranteeing Subsidiaries”). The notes to the unaudited consolidating financial statements should be read in conjunction with these unaudited consolidating financial statements.

16

UNAUDITED CONSOLIDATING BALANCE SHEETS

December 31, 2004

(In 000s)

	Parent			Guaranteeing Subsidiaries		Non- Guaranteeing Subsidiaries			Reclass- ifications and Eliminations			Alliance Gaming Corporation and Subsidiaries
ASSETS
Current assets:
Cash and cash equivalents	$	18,992		$	1,196	$	7,776		$	—		$	27,964
Accounts and notes receivable, net	1,730			85,649		16,901			(679		)	103,601
Inventories, net	—			63,789		8,787			(114		)	72,462
Deferred tax assets, net	1,461			18,521		—			—			19,982
Other current assets	4,063			14,297		1,220			—			19,580
Total current assets	26,246			183,452		34,684			(793		)	243,589
Long-term investment (restricted)	—			8,542		—			—			8,542
Long-term receivables, net	263,626			6,449		22			(261,340		)	8,757
Net investment in leases	—			12,626		—			—			12,626
Leased gaming equipment, net	—			48,216		(3,943		)	—			44,273
Property, plant and equipment, net	74			33,508		43,072			—			76,654
Goodwill, net	(900		)	160,273		18,588			—			177,961
Intangible assets, net	5,732			49,279		4,463			—			59,474
Investments in subsidiaries	362,983			69,363		—			(432,346		)	—
Deferred tax assets, net	6,102			—		—			(6,102		)	—
Other assets, net	(109,868		)	144,035		(18,850		)	(31		)	15,286
	$	553,995		$	715,743	$	78,036		$	(700,612	)	$	647,162
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,101		$	28,042	$	1,335		$	—		$	30,478
Accrued liabilities	16,560			39,570		5,582			(721		)	60,991
Jackpot liabilities	—			9,950		126			—			10,076
Current maturities of long-term debt	3,175			1,865		—			—			5,040
Total current liabilities	20,836			79,427		7,043			(721		)	106,585
Long term debt, net	346,332			263,548		—			(261,340		)	348,540
Deferred tax liabilities	—			4,557		1,635			(6,102		)	90
Other liabilities	2,574			4,411		—			—			6,985
Minority interest	454			709		—			—			1,163
Total liabilities	370,196			352,652		8,678			(268,163		)	463,363
Commitments and contingencies
Stockholders’ equity:
Special stock Series E	12			—		—			—			12
Common stock	5,158			109		1,027			(1,136		)	5,158
Treasury stock	(665		)	—		—			—			(665		)
Deferred compensation	(7,858		)	—		—			—			(7,858		)
Additional paid-in capital	196,872			299,667		31,959			(331,626		)	196,872
Accumulated other comprehensive income (loss)	1,518			1,521		3,448			(4,969		)	1,518
Retained earnings (accumulated deficit)	(11,238		)	61,794		32,924			(94,718		)	(11,238		)
Total stockholders’ equity	183,799			363,091		69,358			(432,449		)	183,799
	$	553,995		$	715,743	$	78,036		$	(700,612	)	$	647,162

See accompanying unaudited note.

17

UNAUDITED CONSOLIDATING BALANCE SHEETS

June 30, 2004

(In 000s)

	Parent			Guaranteeing Subsidiaries		Non- Guaranteeing Subsidiaries			Reclass- ifications and Eliminations			Alliance Gaming Corporation and Subsidiaries
ASSETS
Current assets:
Cash and cash equivalents	$	155,347		$	7,742	$	9,637		—			$	172,726
Accounts and notes receivable, net	1,806			110,693		17,984			(704		)	129,779
Inventories, net	—			55,125		6,161			(151		)	61,135
Deferred tax assets, net	1,461			18,593		—			—			20,054
Other current assets	744			10,531		1,145			—			12,420
Total current assets	159,358			202,684		34,927			(855		)	396,114
Long-term investment (restricted)	—			2,528		—			—			2,528
Long-term receivables, net	254,862			9,789		22			(252,155		)	12,518
Net investment in leases	—			5,614		—			—			5,614
Leased gaming equipment, net	—			50,664		(4,030		)	—			46,634
Property, plant and equipment, net	70			33,299		42,469			—			75,838
Goodwill, net	(900		)	119,715		18,174			—			136,989
Intangible assets, net	5,899			52,958		4,766			—			63,623
Investments in subsidiaries	345,560			74,234		—			(419,794		)	—
Deferred tax assets, net	5,342			—		—			(5,342		)	—
Assets of discontinued operations held for sale	39			—		4,403			—			4,442
Other assets, net	(122,036		)	143,833		(15,443		)	—			6,354
	$	648,194		$	695,318	$	85,288		$	(678,146	)	$	750,654
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	974		$	34,017	$	2,524		—			$	37,515
Accrued liabilities	9,744			37,391		5,052			(718		)	51,469
Jackpot liabilities	—			11,934		141			—			12,075
Income taxes payable	5,538			1,140		555			—			7,233
Current maturities of long-term debt	3,313			2,553		—			—			5,866
Liabilities of discontinued operations held for sale	3,185			—		1,152			—			4,337
Total current liabilities	22,754			87,035		9,424			(718		)	118,495
Long term debt, net	420,687			254,391		—			(251,989		)	423,089
Deferred tax liabilities	—			4,556		1,635			(5,342		)	849
Other liabilities	2,624			3,468		—			—			6,092
Minority interest	1,326			—		—			—			1,326
Total liabilities	447,391			349,450		11,059			(258,049		)	549,851
Commitments and contingencies
Stockholders’ equity:
Special stock Series E	12			—		—			—			12
Common stock	5,145			109		1,027			(1,136		)	5,145
Treasury stock	(501		)	—		—			—			(501		)
Deferred compensation	(6,500		)	—		—			—			(6,500		)
Additional paid-in capital	194,040			260,813		33,415			(294,228		)	194,040
Accum . other comprehensive inc (loss)	1,524			1,527		2,713			(4,240		)	1,524
Retained earnings (accumulated deficit)	7,083			83,419		37,074			(120,493		)	7,083
Total stockholders’ equity	200,803			345,868		74,229			(420,097		)	200,803
	$	648,194		$	695,318	$	85,288		$	(678,146	)	$	750,654

See accompanying unaudited note.

18

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended December 31, 2004

(In 000s)

	Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclass- ifications And Eliminations			Alliance Gaming Corporation and Subsidiaries
Revenues:
Gaming equipment and systems	$	—		$	98,324		$	7,113		$	(4,504	)	$	100,933
Casino operations	—			—			13,955			(1,186		)	12,769
	—			98,324			21,068			(5,690		)	113,702
Costs and expenses:
Cost of gaming equipment and systems	—			52,896			5,169			(4,728		)	53,337
Cost of casino operations	—			—			4,589			—			4,589
Selling, general and administrative	4,564			29,738			7,934			(1,185		)	41,051
Research and development costs	—			10,269			89			—			10,358
Depreciation and amortization	330			10,603			1,087			—			12,020
	4,894			103,506			18,868			(5,913		)	121,355
Operating income (loss)	(4,894		)	(5,182		)	2,200			223			(7,653		)
Earnings in consolidated subsidiaries	(8,512		)	879			—			7,633			—
Other income (expense):
Interest income	4,875			66			69			(4,692		)	318
Interest expense	(3,672		)	(4,767		)	(3		)	4,692			(3,750		)
Rainbow royalty	1,592			—			(1,592		)	—			—
Minority interest	(430		)	(715		)	—			—			(1,145		)
Refinancing / bank amendment charges	(564		)	—			—			—			(564		)
Other, net	533			20			(178		)	—			375
Income (loss) from cont oper before income taxes	(11,072		)	(9,699		)	496			7,856			(12,419		)
Income tax expense (benefit)	(3,532		)	(963		)	(384		)	—			(4,879		)
Net income (loss) from continuing operations	(7,540		)	(8,736		)	880			7,856			(7,540		)
Income (loss) from discontinued operations	15			(310		)	(49		)	359			15
Net income (loss)	$	(7,525	)	$	(9,046	)	$	831		$	8,215		$	(7,525	)

See accompanying unaudited note.

19

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended December 31, 2003

(In 000s)

	Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclass- ifications and Eliminations			Alliance Gaming Corporation and Subsidiaries
Revenues:
Gaming equipment and systems	$	—		$	92,361		$	10,902		$	(6,944	)	$	96,319
Casino operations	—			—			13,758			(1,446		)	12,312
	—			92,361			24,660			(8,390		)	108,631
Costs and expenses:
Cost of gaming equipment and systems	—			39,293			6,371			(6,884		)	38,780
Cost of casino operations	—			—			4,884			—			4,884
Selling, general and administrative	3,124			13,023			6,847			(1,446		)	21,548
Research and development costs	—			9,287			153			—			9,440
Depreciation and amortization	373			5,196			876			—			6,445
	3,497			66,799			19,131			(8,330		)	81,097
Operating income (loss)	(3,497		)	25,562			5,529			(60		)	27,534
Earnings in consolidated subsidiaries	25,005			3,156			—			(28,161		)	—
Other income (expense):
Interest income	3,107			5			3			(3,032		)	83
Interest expense	(3,805		)	(3,081		)	(15		)	3,032			(3,869		)
Rainbow royalty	1,541			—			(1,541		)	—			—
Minority interest	(541		)	—			—			—			(541		)
Other, net	126			(190		)	(481		)	—			(545		)
Income (loss) from cont oper before income taxes	21,936			25,452			3,495			(28,221		)	22,662
Income tax expense (benefit)	7,718			387			339			—			8,444
Net income (loss) from continuing operations	14,218			25,065			3,156			(28,221		)	14,218
Income (loss) from discontinued operations	4,526			4,526			420			(4,946		)	4,526
Net income (loss)	$	18,744		$	29,591		$	3,576		$	(33,167	)	$	18,744

See accompanying unaudited note.

20

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended December 31, 2004

(In 000s)

	Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclass- ifications and Eliminations			Alliance Gaming Corporation and Subsidiaries
Revenues:
Gaming equipment and systems	$	—		$	201,418		$	12,344		$	(8,752	)	$	205,010
Casino operations	—			—			28,213			(2,608		)	25,605
	—			201,418			40,557			(11,360		)	230,615
Costs and expenses:
Cost of gaming equipment and systems	—			105,098			7,862			(8,787		)	104,173
Cost of casino operations	—			—			9,391			—			9,391
Selling, general and administrative	8,544			62,877			15,893			(2,608		)	84,706
Research and development costs	—			21,938			192			—			22,130
Restructuring charge	1,435			—			—			—			1,435
Depreciation and amortization	653			20,072			2,136			—			22,861
	10,632			209,985			35,474			(11,395		)	244,696
Operating income (loss)	(10,632		)	(8,567		)	5,083			35			(14,081		)
Earnings in consolidated subsidiaries	(15,112		)	2,328			—			12,784			—
Other income (expense):
Interest income	9,882			74			193			(9,351		)	798
Interest expense	(7,557		)	(9,500		)	(6		)	9,351			(7,712		)
Rainbow royalty	3,205			—			(3,205		)	—			—
Minority interest	(929		)	(715		)	—			—			(1,644		)
Refinancing / bank amendment charge	(564		)	—			—			—			(564		)
Other, net	673			(24		)	(121		)	—			528
Income (loss) from continuing operations before income taxes	(21,034		)	(16,404		)	1,944			12,819			(22,675		)
Income tax expense (benefit)	(7,089		)	(1,257		)	(384		)	—			(8,730		)
Net income (loss) from continuing operations	(13,945		)	(15,147		)	2,328			12,819			(13,945		)
Income (loss) from discontinued operations	(4,376		)	261			261			(522		)	(4,376		)
Net income (loss)	$	(18,321	)	$	(14,886	)	$	2,589		$	12,297		$	(18,321	)

See accompanying unaudited note.

21

UNAUDITED CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended December 31, 2003

(In 000s)

	Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclass- ifications and Eliminations			Alliance Gaming Corporation and Subsidiaries
Revenues:
Gaming equipment and systems	$	—		$	177,370		$	19,514		$	(12,097	)	$	184,787
Casino operations	—			—			27,997			(2,930		)	25,067
	—			177,370			47,511			(15,027		)	209,854
Costs and expenses:
Cost of gaming equipment and systems	—			71,981			11,956			(11,920		)	72,017
Cost of casino operations	—			—			9,887			—			9,887
Selling, general and administrative	6,057			34,235			13,251			(2,930		)	50,613
Research and development costs	—			15,028			375			—			15,403
Depreciation and amortization	879			9,865			1,723			—			12,467
	6,936			131,109			37,192			(14,850		)	160,387
Operating income (loss)	(6,936		)	46,261			10,319			(177		)	49,467
Earnings in consolidated subsidiaries	44,757			5,725			—			(50,482		)	—
Other income (expense):
Interest income	6,177			5			8			(6,064		)	126
Interest expense	(9,466		)	(6,165		)	(31		)	6,064			(9,598		)
Rainbow royalty	3,134			—			(3,134		)	—			—
Minority interest	(1,027		)	—			—			—			(1,027		)
Refinancing / bank amendment charges	(12,293		)	—			—			—			(12,293		)
Other, net	235			(387		)	(747		)	—			(899		)
Income (loss) from continuing operations before income taxes	24,581			45,439			6,415			(50,659		)	25,776
Income tax expense (benefit)	8,515			505			690			—			9,710
Net income (loss) from continuing operations	16,066			44,934			5,725			(50,659		)	16,066
Income (loss) from discontinued operations	8,706			8,706			730			(9,436		)	8,706
Net income (loss)	$	24,772		$	53,640		$	6,455		$	(60,095	)	$	24,772

See accompanying unaudited note.

22

UNAUDITED CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended December 31, 2004

(000s)

	Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclass- ifications and Elimi- nations			Alliance Gaming Corporation and Subsidiaries
Cash flows from operating activities of continuing operations:
Net income (loss)	$	(18,321	)	$	(14,886	)	$	2,589		$	12,297		$	(18,321	)
Adjustments to reconcile net income (loss) to net cash provided By (used in) operating activities of continuing operations:
(Income) loss from discontinued operations	4,376			(261		)	(261		)	522			4,376
Depreciation and amortization	653			20,072			2,136			—			22,861
Stock–based compensation	542			—			—			—			542
Refinancing / bank amendment charges	564			—			—			—			564
Deferred income taxes	(760		)	73			—			—			(687		)
Provision for losses on receivables	—			5,028			126			—			5,154
Inventory and other discontinued assets write-downs	—			14,088			—			—			14,088
Other	(9,699		)	(1,203		)	(703		)	—			(11,605		)
Change in operating assets and liabilities, net of effects of business acquired:
Accounts and notes receivable	665			15,647			1,017			(191		)	17,138
Intercompany accounts	(8,369		)	17,550			3,407			(12,588		)	—
Inventories	—			(14,826		)	(2,593		)	(37		)	(17,456		)
Other current assets	(430		)	(3,833		)	(73		)	—			(4,336		)
Accounts payable	125			(6,105		)	(1,189		)	—			(7,169		)
Accrued liabilities and jackpot liabilities	(4,846		)	(7,967		)	(37		)	(3		)	(12,853		)
Net cash provided by (used in) operating activities of continuing operations	(35,500		)	23,377			4,419			—			(7,704		)
Cash flows from investing activities of continuing operations:
Additions to property, plant and equipment	(16		)	(3,426		)	(2,089		)	—			(5,531		)
Additions to leased gaming equipment	—			(18,183		)	—			—			(18,183		)
Additions to other long-term assets	—			(1,526		)	5			—			(1,521		)
Acquisitions, net of cash acquired	—			(12,000		)	—			—			(12,000		)
Proceeds from sale of net assets of discontinued operations	1,911			—			—			—			1,911
Net cash provided by (used in) investing activities of continuing operations	1,895			(35,135		)	(2,084		)	—			(35,324		)
Cash flows from financing activities of continuing operations:
Capitalized debt issuance costs	(1,038		)	—			—			—			(1,038		)
Payoff of debt due to sale of net assets of discontinued operations	(101,618		)	—			—			—			(101,618		)
Reduction of long-term debt	(875		)	(1,175		)	—			—			(2,050		)
Re-purchase of treasury shares	(164		)	—			—			—			(164		)
Proceeds from exercise of stock options and warrants	945			—			—			—			945
Dividends received (paid)	—			4,837			(4,837		)	—			—
Net cash provided by (used in) financing activities of continuing operations	(102,750		)	3,662			(4,837		)	—			(103,925		)
Effect of exchange rate changes on cash	—			—			487			—			487
Cash provided by discontinued operations	—			1,550			154			—			1,704
Cash and cash equivalents:
Increase for the period	(136,355		)	(6,546		)	(1,861		)	—			(144,762		)
Balance, beginning of period	155,347			7,742			9,637			—			172,726
Balance, end of period	$	18,992		$	1,196		$	7,776		$	—		$	27,964

See accompanying unaudited note.

23

UNAUDITED CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended December 31, 2003

(000s)

	Parent			Guaranteeing Subsidiaries			Non- Guaranteeing Subsidiaries			Reclass- ifications and Elimi- nations			Alliance Gaming Corporation and Subsidiaries
Cash flows from operating activities of continuing operations:
Net income (loss)	$	24,772		$	53,640		$	6,455		$	(60,095	)	$	24,772
Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations:
(Income) loss from discontinued operations	(8,706		)	(8,706		)	(730		)	9,436			(8,706		)
Depreciation and amortization	879			9,865			1,723			—			12,467
Refinancing charge	12,293			—			—			—			12,293
Deferred income taxes	8,671			1,762			—			—			10,433
Provision for losses on receivables	—			505			21			—			526
Other	(99		)	(1,006		)	6			—			(1,099		)
Change in operating assets and liabilities, net of effects of business acquired:
Accounts and notes receivable	(1,436		)	(492		)	2			(93		)	(2,019		)
Intercompany accounts	(16,285		)	(35,946		)	1,716			50,515			—
Inventories	—			(2,155		)	(515		)	177			(2,493		)
Other current assets	(440		)	(588		)	5			—			(1,023		)
Accounts payable	(1,035		)	(1,345		)	308			—			(2,072		)
Accrued liabilities and jackpot liabilities	(8,377		)	4,556			837			60			(2,924		)
Net cash provided by operating activities of continuing operations	10,237			20,090			9,828			—			40,155
Cash flows from investing activities of continuing operations:
Advances of notes receivable due from Sierra Design Group	(61,025		)	—			—			—			(61,025		)
Additions to property, plant and equipment	(19		)	(1,365		)	(2,431		)	—			(3,815		)
Additions to leased gaming equipment	—			(14,081		)	(1,876		)	—			(15,957		)
Additions to other long-term assets	(5,974		)	(4,504		)	64			—			(10,414		)
Acquisitions, net of cash acquired	—			(3,879		)	—			—			(3,879		)
Proceeds from sale of net assets of discontinued operations	16,500			—			—			—			16,500
Net cash used in investing activities of continuing operations	(50,518		)	(23,829		)	(4,243		)	—			(78,590		)
Cash flows from financing activities of continuing operations:
Capitalized debt issuance costs	(6,954		)	—			—			—			(6,954		)
Premium paid on early redemption of debt	(5,399		)	—			—			—			(5,399		)
Proceeds from issuance of long-term debt	350,000			—			—			—			350,000
Net change of revolving credit facility	70,000			—			—			—			70,000
Payoff of debt due to sale of net assets of discontinued operations	(337,625		)	—			—			—			(337,625		)
Reduction of long-term debt	(495		)	(842		)	(12		)	—			(1,349		)
Proceeds from exercise of stock options and warrants	2,907			—			—			—			2,907
Dividends received (paid)	—			6,380			(6,380		)	—			—
Net cash provided by (used in) financing activities of continuing operations	72,434			5,538			(6,392		)	—			71,580
Effect of exchange rate changes on cash	—			—			130			—			130
Cash provided by discontinued operations	—			(938		)	1,033			—			95
Cash and cash equivalents:
Increase for the period	32,153			861			356			—			33,370
Balance, beginning of period	12,730			18,036			8,118			—			38,884
Balance, end of period	$	44,883		$	18,897		$	8,474		$	—		$	72,254

See accompanying unaudited note.

24

Debt and Revolving Credit Facility

Long-term debt and lines of credit at December 31, 2004 consist of the following (in 000s):

	Parent		Guaranteeing Subsidiaries		Reclass- ifications and Eliminations			Alliance Gaming Corporation and Subsidiaries
Term Loan Facility	$	317,507	$	—	$	—		$	317,507
Intercompany notes payable	—		261,340		(261,340		)	—
Other, generally unsecured	32,000		4,073		—			36,073
	349,507		265,413		(261,340		)	353,580
Less current maturities	3,175		1,865		—			5,040
Long-term debt, less current maturities	$	346,332	$	263,548	$	(261,340	)	$	348,540

Long-term debt and lines of credit at June 30, 2004 consist of the following (in 000s):

	Parent		Guaranteeing Subsidiaries		Reclass- ifications and Eliminations			Alliance Gaming Corporation and Subsidiaries
Term Loan Facility	$	350,000						$	350,000
Revolving credit facility	70,000							70,000
Intercompany notes payable			251,989		(251,989		)
Other, generally unsecured	4,000		4,955					8,955
	424,000		256,944		(251,989		)	428,955
Less current maturities	3,313		2,553		—			5,866
Long-term debt, less current maturities	$	420,687	$	254,391	$	(251,989	)	$	423,089

25

ALLIANCE GAMING CORPORATION

FORM 10-Q

December 31, 2004

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain matters in this Form 10-Q and our other filings with the Securities and Exchange Commission, including, without limitation, certain matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Quantitative and Qualitative Disclosures about Market Risk, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created thereby.  Those statements reflect the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, future events and financial trends affecting the Company.

Forward-looking statements are typically identified by the words “believes,” “expects,” “anticipates,” and similar expressions.  In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements.  Readers are cautioned that any such forward-looking statements are not guarantees of future performance and that matters referred to in such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, among other things, the impact of competition and uncertainties concerning such matters as the Company’s ability to service debt, product development, customer financing, sales to non-traditional gaming markets, foreign operations, dependence on key personnel, the ability to integrate future acquisitions, strict regulation by gaming authorities, the outcome of pending litigation matters including the pending securities class actions, gaming taxes, currency fluctuations and market risk.  The Company undertakes no obligation to publicly update or revise these forward-looking statements because of new information, future events or otherwise.

Introduction

Operating under the name Bally Gaming and Systems, the Company is a worldwide leader of designing, manufacturing and distributing traditional and nontraditional gaming machines, having marketed over 100,000 gaming machines during the past five years, and computerized monitoring systems for gaming facilities.  The Bally Gaming and Systems business unit consists of three divisions: Game sales, System sales and Gaming operations. The Company also owns and operates a dockside casino in Vicksburg, Mississippi, which has approximately 12 table games and approximately 930 gaming devices (“Casino Operations”). Further information about our business units is contained in the notes to the Consolidated Financial Statements (“Segments and Geographical Information”) and in our annual report filed on Form 10-K.

The Company recognizes revenue from the following sources:  sales of gaming machines, operation of wide-area progressive systems and lease of gaming machines, sales of computerized monitoring systems and related recurring hardware and software maintenance revenue, and from casino operations.  The Company often accepts used machines as trade-ins toward the purchase of new gaming equipment. These trade-ins are negotiated at the time of sale for that transaction only, and there are no provisions for rights to future trade-ins contained in the purchase agreement for the new gaming equipment.  The traded-in gaming machine is accounted for as a discount to the contracted selling price of a new gaming machine.

Our most significant expenses are (1) cost of sales, (2) research and development expenses, (3) advertising and promotional expenses and (4) administrative expenses.  The Company strives to control these expenses by working closely with division unit leaders and by centralizing functions such as finance, accounting, legal, human resources and management information systems.  The Company also uses its market presence and purchasing power to negotiate favorable rates with vendors and suppliers.

Our research and development costs are driven by the development cycle for hardware which varies between a few months for minor revisions to more than a year for major design changes or for changes made by various slot

26

manufacturers with which our product must communicate and be physically integrated. Software development results in (i) periodic product releases that include new features that extend and enhance casino enterprise systems; (ii) periodic maintenance releases that enable casino operators to correct problems or improve the usability of the system; and (iii) documentation needed to install and use the system.

Depreciation and amortization expense for tangible and intangible assets have historically been significant factors in determining our overall profitability.  Based on intangible assets currently held by us and the allocation of the aggregate purchase price of acquisitions completed during the year ended June 30, 2004, the Company expects the total amortization expense incurred will increase in fiscal year 2005 compared to fiscal year 2004.

Basis of Presentation

Our results include the accounts of Alliance Gaming Corporation, and its wholly-owned and partially-owned, controlled subsidiaries.

Results of Operations

Bally Gaming and Systems

Summary financial results and operating statistics (dollars in millions):

	Three Months Ended December 31,					Increase/			%		Six Months Ended December 31,					Increase/			%
	2004			2003		(Decrease)			Change		2004			2003		(Decrease)			Change
Revenues
Game sales	$	46.1		$	49.6	$	(3.5	)	(7	)%	$	97.5		$	92.3	$	5.2		6	%
System sales	24.2			30.7		(6.5		)	(21	)%	43.6			60.7		(17.1		)	(28	)%
Gaming operations	30.6			16.0		14.6			91	%	63.9			31.8		32.1			101	%
Total revenues	$	100.9		$	96.3	$	4.6		5	%	$	205.0		$	184.8	$	20.2		11	%
Gross Margin
Game sales	$	4.2		$	23.2	$	(19.0	)	(82	)%	$	17.1		$	42.9	$	(25.8	)	(60	)%
System sales	18.9			22.9		(4.0		)	(17	)%	34.7			46.7		(12.0		)	(26	)%
Gaming operations	24.6			11.4		13.2			115	%	49.0			23.2		25.8			111	%
Total gross margin	$	47.7		$	57.5	$	(9.8	)	(17	)%	$	100.8		$	112.8	$	(12.0	)	(11	)%
Selling, general and administrative	33.2			15.5		17.7			114	%	69.4			38.6		30.8			80	%
Research and development costs	10.4			9.4		1.0			11	%	22.1			15.4		6.7			44	%
Depreciation and amortization	10.9			5.4		5.5			102	%	20.6			10.2		10.4			102	%
Operating inc (loss)	$	(6.8	)	$	27.2	$	(34.0	)	(125	)%	$	(11.3	)	$	48.6	$	(59.9	)	(123	)%

27

	Three months Ended December 31,				Increase/			%		Six months Ended December 31,				Increase/			%
	2004		2003		(Decrease)			Change		2004		2003		(Decrease)			Change
Operating Statistics:
New Gaming Devices Sold	3,123		4,359		(1,236		)	(28	)%	5,863		7,689		(1,826		)	(24	)%
Original Equipment Mfg. (“OEM”) Units Sold	34		242		(208		)	(86	)%	1,954		2,105		(151		)	(7	)%
New Unit average selling price - (Excluding OEM)	$	10,682	$	9,050	$	1,632		18	%	$	10,547	$	8,782	$	1,765		20	%
Game monitoring units installed base	281,000		244,000		37,000			15	%
Casino management systems-installed base	220		199		21			11	%
System managed cashless games	109,000		44,000		65,000			148	%
End of period installed base:
Wide-area progressive	1,746		1,840		(94		)	(5	)%
Daily-fee games	8,768		3,103		5,665			183	%
Centrally determined games	17,725		—		17,725			100	%

Segment revenues increased, and gross margin decreased, in the second quarter and the first six months of fiscal year 2005 as a result of the following:

•Bally Game Sales revenue decreased as a result of the following:

•Total unit sales declined due to a general slow down of the traditional Class III replacement cycle for casinos and the lack of new casino openings in the current quarter as well as a declining demand for our video game products. The decline in games sales was partially offset by an increase in average selling price to $10,682 which reflects the sale of higher priced Class II and centrally determined games.

•Bally Systems revenue decreased primarily as a result of:

• Decreased hardware and software sales due to the lack of new property openings in the current quarter.

•Recurring hardware and software maintenance revenues increased resulting from the larger base of installed units, which now stands at approximately 281,000 in 220 casinos world-wide.  Service revenue also increased due to demand for system implementation and promotions services.

•Gaming Operations revenues increased as a result of:

•Growth in our installed base of daily fee games primarily driven by the placements to the New York and Rhode Island Lotteries, as well as the growth in our Class II and centrally determined games.

•Inclusion of the installed base of units as part of the SDG acquisition.

• Gross margin decreased as a result of the following:

•Game sales gross margin declined primarily due to inventory and related asset write-downs of $3.0 million and $11.1 million for the first and second quarters of fiscal 2005, respectively. (See discussion listed Inventory write-down which follows later in this section.)  Without these charges the gross margin was 33% and 31%, for the three and six month periods ended December 31, 2004 respectively, which reflects the lower margin received on certain Class II and central determination games in exchange for a recurring link fee.  Additionally, the lower volume of sales has resulted in the poor absorption of factory overhead.  The Company believes that if unit sales and placements increase, the gross margin will be positively impacted and could

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return to 35% to 40% level or above in the future, but there can be no assurances that this level will be achieved.

•Systems gross margin improvement is reflective of the higher proportion of high margin software maintenance and service revenues.

•Gaming operations gross margin increased as a result of a higher mix of daily fee games and the decline in the frequency of WAP jackpots awarded during the current quarter.

•Selling, general and administrative expenses increased in the second quarter and the first six months of fiscal 2005 as a result of the following:

•The addition of the Class II and central determination operations.

•Increased legal expense as a result of higher patent and litigation costs.

•Higher field service related costs due to our increase in the base of installed games under gaming operations.

•Increase in the provision for doubtful accounts receivable of $2.6 million and $4.4 million for the three and six month periods ended December 31, 2004, respectively.  This increase includes a charge for a large customer who recently declared bankruptcy, as well as an increase in the accounts receivable reserve as the receivable base has aged slightly compared to a year ago.

•Research and development costs increased as a result of the increased investment in the development of the Alpha game platform and related game content, and sustaining development of multiple existing game platforms and systems.

•Depreciation and amortization increased as a result of the following:

•Increase in acquisition-related intangible assets.

•Increase in the base of installed recurring revenue games from 4,943 units in the prior year to 10,514 units.

•Increase in operating capital expenditures relative to new technology initiatives.

Rainbow Casino Operations

Summary financial results and operating statistics (dollars in millions):

	Three months ended December 31,				Increase/		%		Six months ended December 31,				Increase/		%
	2004		2003		(Decrease)		Change		2004		2003		(Decrease)		Change
Revenue	$	12.8	$	12.3	$	0.5	4	%	$	25.6	$	25.1	$	0.5	2	%
Gross Margin	$	8.2	$	7.4	$	0.8	10	%	$	16.2	$	15.2	$	1.0	7	%
Selling, general and administrative	3.3		2.9		0.4		14	%	6.7		6.0		0.7		12	%
Depreciation and amortization	0.8		0.7		0.1		14	%	1.6		1.4		0.2		14	%
Operating income	$	4.1	$	3.8	$	0.3	8	%	$	7.9	$	7.8	$	0.1	1	%
Operating Statistics:
Average No. - Gaming Devices	930		910		20		2	%
Average No. - Table Games	12		12		—		—	%

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•Rainbow Casino revenues have increased at a pace slightly better than the market due to enhanced marketing programs.

•Gross margin increased as a result of decreases in certain operating costs.  Cost of casino revenue includes gaming taxes, rental costs and direct labor including payroll taxes and benefits.

•The overall selling, general and administrative expenses increased as a result of increases in casino promotional expenses.

Parent Company and other unallocated income (expense)

Summary financial results (dollars in millions):

	Three Months Ended December 31,						Increase/			%		Six Months Ended December 31,						Increase/			%
	2004			2003			(Decrease)			Change		2004			2003			(Decrease)			Change
General and administrative	$	4.6		$	3.1		$	1.5		48	%	$	10.0		$	6.0		$	4.0		65	%
Depreciation and amortization	0.3			0.4			(0.1		)	(25	)%	0.6			0.9			(0.3		)	(27	)%
Total Parent company expense	$	4.9		$	3.5		$	1.4		40	%	$	10.6		$	6.9		$	3.7		53	%
Other income (expense):
Interest income	$	0.3		$	0.1		$	0.2		200	%	$	0.8		$	0.1		$	0.7		700	%
Interest expense	(3.8		)	(3.9		)	(0.1		)	(3	)%	(7.7		)	(9.6		)	(1.9		)	(20	)%
Minority interest	(1.1		)	(0.5		)	0.6			112	%	(1.6		)	(1.0		)	0.6			60	%
Refinancing / bank amendment charges	(0.6		)	—			(0.6		)	—		(0.6		)	(12.3		)	11.7			95	%
Other, net	0.4			(0.6		)	1.0			168	%	0.5			(0.9		)	1.4			(159	)%
Total other income (expense)	$	(4.8	)	$	(4.9	)	$	(0.1	)	(2	)%	$	(8.6	)	$	(23.7	)	$	15.1		(64	)%
Income tax expense (benefit)	$	(4.9	)	$	8.4		$	(13.3	)	(158	)%	$	(8.7	)	$	9.7		$	(18.4	)	(190	)%

General and administrative expenses increased primarily as a result of:

•Increase in payroll and related expense primarily due to restricted stock units granted and severance benefits offset by reallocation of corporate employees to Bally Gaming and Systems business segment.

•Increase in litigation and general legal costs of approximately $0.8 million relative to protection of our patents and class action law suits.

•Increase in professional fees relative to Sarbanes-Oxley implementations.  The Company expects these additional costs to continue through fiscal 2005 and 2006.

• Increase in general liability and director and officer insurance costs.  Such increases in insurance costs are expected to continue in fiscal 2005.

•Other income (expense) decreased as a result of the prior year refinancing, which resulted in a charge of $12.3 million (consisting of a $5.0 million charge for the early extinguishment of the Company’s subordinated notes, $7.0 million for the non-cash write off of deferred financing costs, and $0.3 million in fees and expenses).

•Our effective income tax rate for the six month period ended December 31, 2004 was 39% compared to 38% in the prior year period.

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Discontinued Operations

On October 15, 2004, the Company completed the sale of our interest in VSI to Churchill Downs Incorporated. The net proceeds received totaled approximately $2.0 million, resulting in a gain of $0.8 million, net of tax,  and is included in discontinued operations on the statement of operations.  During the quarter ended December 31, 2004, the Company accrued $2.0 million for various contingencies related to the sale of its discontinued operations.

Inventory write-down

The Company performs detailed inventory valuation procedures at least quarterly. This process includes examining the carrying values of new and used gaming devices, parts and ancillary equipment in comparison to the current fair market values for such equipment (less costs to sell or dispose). Some of the factors involved in this analysis include the overall levels of our inventories, the current and projected sales levels for such products, the projected markets for such products both domestically and internationally, the costs required to sell the products including refurbishment costs and importation costs for international shipments, and the overall projected demand for products once the next generation of products are scheduled for release.

The Company has faced declining demand for its video products. During the quarter ended September 30, 2004, the Company decided that its legacy V7 video platform would no longer be supported and the remaining used game inventory for such products was targeted for immediate disposal, resulting in a write-down of $3.0 million. The remaining inventory of new games for this product line was targeted for sale at reduced prices, which were still above the carrying value less costs to sell and therefore were not written down.

During the quarter ended December 31, 2004, management completed a three year business planning process. In accordance with this plan, significant development efforts were redirected to the Alpha-based video platform and products. The Company also made its existing EVO video games upgradeable to Alpha when approved in each market. The remaining used EVO inventory has been targeted for sale primarily in non-domestic markets, which traditionally have lower price points for used games and have higher importation and delivery costs, resulting in significantly lower net realizable values. The capitalized regulatory approval costs for the EVO and legacy video platform were determined to no longer be recoverable, and were also written off.

During the quarter ended December 31, 2004, the Company also consolidated several warehouses into one central warehouse, with the intent to reduce warehouse rental costs. As part of this consolidation, certain used games and related ancillary equipment including signs, were identified for immediate destruction, scrap, or salvage, and this process continued into the March 2005 period.

As a result of the decision to move to the new video platform, the targeting of used equipment for non-domestic markets, and the consolidation of warehouses leading to accelerated disposals, the Company wrote down its inventory and related assets by a total of $11.1 million during the quarter ended December 31, 2004, and such write downs for the six months ended December 31, 2004 totaled $14.1 million. The Company continues to take certain used games on trade as part of new game sales, and therefore additional write downs may be necessary in future periods depending on a number of factors impacting the future demand for such products and the ultimate net values realized.

Liquidity and Capital Resources

As of December 31, 2004, cash and cash equivalents totaled $28.0 million.  In addition net working capital was approximately $137 million (excluding assets and liabilities of discontinued operations), a decrease of approximately $145 million from June 30, 2004, which is explained in the working capital section below.  Consolidated cash and cash equivalents at December 31, 2004 include approximately $2.7 million of cash utilized in our Casino Operations that is held in vaults, cages or change banks. Additionally, pursuant to various state gaming regulations, certain cash accounts are maintained to ensure availability of funds to pay wide-area progressive jackpot awards, which totaled approximately $12.8 million at December 31, 2004.  In addition, the Company purchases U.S. Treasury Strip securities for the benefit of jackpot winners who elect to receive annual or weekly installment payments. These securities are presented as restricted investments in the accompanying consolidated balance sheets, and totaled $8.5 million and $2.5 million as of December 31, 2004 and June 30, 2004, respectively.

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The sale of Rail City was completed in May 2004 and the sale of UCMC was completed in June 2004. As a result of the sale of these assets, the terms of our bank loan agreement (the “Loan Agreement”) required the use of approximately 50% of the net proceeds (as defined in the agreement) to reduce the term loan and revolver principal balances on a pro rata basis. Accordingly, in August 2004 the Company made an initial reduction in our term loan of $31.6 million and the revolver was paid down from $70.0 million to zero.

During December 2004, the Company amended its Loan Agreement.  The amendment provides for an increase in the maximum allowable leverage ratio (currently 4.25x the trailing four quarter’s EBITDA, as defined in the Loan Agreement), a reduction in the revolver from $125 million to $75 million, and an increase in the term loan interest rate to LIBOR + 3.00%. The fee incurred for the amendment totaled approximately $1.0 million. The Company is currently in compliance with its covenants consisting of leverage ratio, fixed charges coverage ratio, and minimum EBITDA (as that term is defined in the Loan Agreement).  As of December 31, 2004, the Company’s leverage ratio was 3.9x.  Pursuant to the recent amendment, the leverage ratio maximum is scheduled to increase to 4.50x and to 4.75x as of March 31, 2005 and June 30, 2005, respectively.

Management believes that cash flows from current operating activities and the availability under the revolving credit facility will provide the Company with sufficient capital resources and liquidity.  Given the current leverage ratio, the Company had approximately $18 million of availability on its revolving credit facility as of December 31, 2004, which increased to approximately $40 million beginning on January 1, 2005, resulting from the 25 basis point increase in the maximum leverage ratio referred to above.  Continued access to the revolving credit facility will require the Company to increase its EBITDA (as defined in the Loan Agreement) to levels in excess of those generated in the six-month period ended December 31, 2004.  At December 31, 2004, there were no material commitments for capital expenditures.

Working Capital

The following table presents the components of consolidated working capital at December 31, 2004 and June 30, 2004, excluding assets and liabilities of discontinued operations (dollars in 000s):

	December 31, 2004		June 30, 2004		Change
Current assets:
Cash and cash equivalents	$	27,964	$	172,726	$	(144,762	)
Accounts and notes receivable	103,601		129,779		(26,178		)
Inventories	72,462		61,135		11,327
Deferred tax assets	19,982		20,054		(72		)
Other current assets	19,580		12,420		7,160
Total current assets	243,589		396,114		(152,525		)
Current liabilities:
Accounts payable	30,478		37,515		(7,037		)
Jackpot liabilities	10,076		12,075		(1,999		)
Accrued liabilities	60,991		51,469		9,522
Taxes payable	—		7,233		(7,233		)
Current maturities of long-term debt	5,040		5,866		(826		)
Total current liabilities	106,585		114,158		(7,573		)
Net working capital	$	137,004	$	281,956	$	(144,952	)

For the six month period ended December 31, 2004, working capital, excluding cash, changed less than $0.2 million on a net basis.  The decrease in cash of $144.7 million was driven by the $101.6 million of sale proceeds used to pay down our term loans in accordance with the Loan Agreement, as well as cash used to deploy wide-area and daily-fee gaming devices.

The other fluctuations contributing to changes in working capital were:

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•A net decrease in accounts and notes receivable resulting from the overall reduction in game and systems sales.

•An increase in inventory due to the acquisition of games for the central determination markets, as well as inventory for the new line of video products.

•An increase in other assets as a result of the following:

•Increase in deferred costs due to shipments of games to the European market that will not be installed until the second quarter of 2005.

•Increase in prepaid taxes and prepaid royalties.

•An increase in accrued liabilities primarily as a result of the following:

•An accrual of $7.4 million for damages awarded to Action Gaming and IGT for patent infringement.

Cash Flow

During the six months ended December 31, 2004, cash flows used in operating activities totaled $8.2 million as a result of:

•Reported net loss of $(18.2) million, which includes certain non-cash charges.

•Increases in inventory of $17.5 million.

•Timing of receivables collections.

•Timing of payments made for accounts payable and jackpot liabilities.

During the six months ended December 31, 2004, cash flows used in investing activities totaled $35.3 million due to the following:

•Capital expenditures of $5.5 million.

•Costs incurred to produce participation games totaling $18.2 million.

•Additions to other long-term assets of $1.5 million.

•SDG earnout buyout of $12 million.

During the six months ended December 31, 2004, $103.4 million of cash was used in financing activities of continuing operations resulting from:

•Pay down on the term loan and revolver of $101.6 million.

•Principal payments on other long term debt totaling $2.1 million.

•Cash provided from exercise of stock options of $0.9 million.

•Cash used for the Loan Agreement amendment fees totaling $1.0 million.

Contractual Commitments

A description of the Company’s contractual commitments can be found in Item 7 of the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.  For a more extensive discussion of the Company’s contractual commitments, see note 15 “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements in the Company’s 2004 Annual Report on Form 10-K for the year ended June 30, 2004.

Critical Accounting Policies and Estimates

The Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America. Certain of our accounting policies, including valuations utilized in asset impairment tests, acquisitions accounting, revenue recognition, allowance for doubtful accounts, capitalized costs, reserves for inventory,

33

and deferred tax reserves require the Company to apply significant judgment in defining the appropriate assumptions for calculating financial estimates. These judgments are subject to an inherent degree of uncertainty. There can be no assurance that the actual results will not differ from our estimates.

A description of the Company’s critical accounting policies and estimates can be found in Item 7 of the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.  For a more extensive discussion of the Company’s accounting policies, see Note 1, “Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements in the Company’s 2004 Annual Report on Form 10-K for the year ended June 30, 2004.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Currency Rate Fluctuations

Revenues and results of operations derived from our non-U.S. subsidiaries are denominated in their local currencies and are affected by changes in the relative values of non-U.S. currencies and the U.S. dollar.  Most of the currencies in countries in which we have foreign operations were strengthened versus the U.S. dollar, which resulted in assets and liabilities denominated in local currencies being translated into more 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. We constantly assess these risks and have established policies and practices designed to protect against the adverse effects of these and other potential exposures. Although we do not anticipate any material losses in these risk areas, no assurances can be made that material losses will not be incurred in these areas in the future.

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

The results of the sensitivity analysis at December 31, 2004, are as follows:

Interest Rate Risk:

The Company had total debt of approximately $353.6 million, consisting primarily of the new $317.5 million outstanding term loan, the SDG earnout buyout of $28.0 million and other debt of approximately $8.1 million.  The bank facility borrowings each have a term of six months at which time the interest rate is subject to adjustment to the then current rate. 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 $3.5 million annually on a pre-tax basis.

Foreign Currency Exchange Rate Risk:

Our foreign subsidiaries generally use their domestic currency as their functional currency. A 10% fluctuation in the exchange rates of these currencies against the U.S. dollar would result in a corresponding change in annual earnings reported in the consolidated group of approximately $0.2 million net of tax.

Estimates:

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

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ITEM 4.CONTROLS AND PROCEDURES

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

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PART II

ITEM 1.Legal Proceedings

In September 2004, a federal district court jury entered a $7.4 million verdict against the Company in a suit filed by Action Gaming, Inc., and IGT. The suit alleged that the multi-hand video poker game deployed by the Company’s former subsidiary, United Coin Machine Co., infringed the plaintiffs’ patents. The district court had ruled on summary judgment that the game does not infringe the patents. However, the court left to the jury the question whether the use of “autohold,” a specific, optional feature of the game, caused it to infringe under the “doctrine of equivalents,” a doctrine of patent law. After a two-week trial, the jury determined that the game with the autohold option enabled did infringe under the doctrine of equivalents and awarded damages accordingly. The feature has been disabled on all affected games in the field, and the decision permits continued deployment of the game as long as the autohold feature is not included. The Company is pursuing various remedies and has posted a cash bond to stay payment of the judgment pending post-trial motions and appeal.

In June and July 2004, purported class actions were filed against Alliance Gaming Corporation and its officers, Robert Miodunski (the Company’s former Chief Executive Officer), Robert Saxton, Mark Lerner, and Steven Des Champs, in the Federal District Court for the District of Nevada.  The nearly identical complaints allege violations of the Securities Exchange Act of 1934 stemming from the revision of earnings guidance, and declines in the stock price.  The plaintiffs’ motions to consolidate the cases and appoint lead plaintiff counsel are pending and are customary in such cases.  The next step will be for the plaintiffs to file a consolidated complaint.  The Company believes the lawsuits are without merit and intends to vigorously defend the action.  In addition, in July 2004 two derivative lawsuits were filed in Nevada state court against the members of the board of directors and the officers listed above.  The Company is named as a nominal defendant in the derivative lawsuits as the claims are purportedly asserted for the benefit of the Company.  These lawsuits assert claims for breach of fiduciary duty and waste of corporate assets arising out of the same events as those giving rise to the class actions described above. These two cases have also been consolidated, and a consolidated complaint has been filed.  The defendants’ motions to dismiss or to stay were heard in January 2005 and taken under submission by court.

In February 2005, the Securities and Exchange Commission (the “SEC”) requested documents and information regarding matters related to the allegations in the class actions and similar matters.  Management is cooperating fully with the SEC in this matter.

A lawsuit filed against the Company in August 2004 by Shuffle Master, Inc. in the U.S. District Court of Nevada, alleging infringement of various patents is in the discovery phase.  A patent infringement lawsuit filed against the Company in December 2004 by IGT in the U.S. District Court of Nevada, is in the pleadings phase.  The Company is vigorously defending both lawsuits.

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

ITEM 4.  Submission of Matters to a Vote of Security Holders

On December 8, 2004, the Company held its annual shareholders meeting at which the shareholders were asked to vote on the election of two directors and the approval of an amendment to the Company’s Amended and Restated 2001 Long Term Incentive Plan  (the “Plan”) to increase the number of shares that can be issued under the Plan.  Of the 51,003,578 shares outstanding, 38,324,440 were voted for and 5,774,287 withheld from Mr. Jacques Andre: and 40,497,293 were voted for and 3,601,434 withheld from Mr. Richard Hadrill.  With respect to the approval of the amendment to the Plan, 16,873,536 shares were voted for, 9,562,696 shares against, 979,187 shares abstained and there were 16,683,308 broker non-votes resulting in the approval of the amendment to the Plan.  Additionally, the shareholders ratified the Board of Director’s appointment of Deloitte and Touche LLP to act as independent public accountants of the Company for the fiscal year ending June 30, 2005.

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ITEM 6.Exhibits

a.Exhibits

2.7	Amendment dated December 30, 2004, to the Amended and Restated Stock Purchase Agreement by and among Alliance Gaming Corporation, Sierra Design Group, and Robert Luciano, as Trustee for the Robert Luciano Family Trust, dated March 2, 2004.
10.40	Amendment as of December 22, 2004, to the Employment Agreement between the Company and Richard Haddrill, entered into as of June 30, 2004.
10.41	Alliance Gaming Corporation Amended and Restated 2001 Long-Term Incentive Plan including Amendment #1 (incorporated by reference to Form S-8 filed January 14, 2005, Registration Number 333-122064).
31.1	Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Act of 1934, as amended.
31.2	Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Act of 1934, as amended.
32.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2004.
32.2	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2004.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.

ALLIANCE GAMING CORPORATION	Date: February 9, 2005
(Registrant)

By	/s/ Richard Haddrill
	Richard Haddrill
	President and Chief Executive Officer
	(Principal Executive Officer)
By	/s/ Robert L. Saxton
	Robert L. Saxton
	Executive Vice President, Treasurer and Chief Financial
	Officer (Principal Financial and Accounting Officer)

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EX-2.7

Exhibit 2.7

AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCK PURCHASE AGREEMENT

THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCK PURCHASE AGREEMENT (this “Amendment”) is dated as of December 30, 2004, and is being entered into by and among Alliance Gaming Corporation, a Nevada corporation (“Buyer”), Sierra Design Group, a Nevada corporation (the “Company”), Robert Luciano (“Luciano”) and Robert Luciano, as trustee of the Robert Luciano Family Trust dated February 27, 1995, as amended, as sole stockholder of the Company (“Seller”).

R E C I T A L S

WHEREAS, Buyer, the Company, Luciano and Seller are parties to that certain Amended and Restated Stock Purchase Agreement, dated as of March 2, 2004 (the “Agreement”);

WHEREAS, pursuant to the Agreement, the Seller Group may be entitled to certain additional consideration (referred to therein as “Contingent Consideration” and “Bonus Contingent Consideration”) based on the Company reaching certain earnings and/or revenue targets (the “Earn Out”);

WHEREAS, the parties hereto desire to eliminate the Earn Out in its entirety and to agree to a superseding payment structure as set forth herein; and

WHEREAS, the parties hereto desire to enter into this Amendment to amend Article I, Sections 2.1, 2.3(c), 2.4, 2.7, 3.23(b), 6.5, 8.1(c) and Schedule A of the Agreement and to add Sections 2.9 and 7.3 to the Agreement, as set forth below.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1.The parties agree and acknowledge that Article I of the Agreement is hereby amended as follows:

(a)The following defined terms are added:

“Additional Cash Payment” has the meaning set forth in Section 2.4(a) of the Agreement.

“Additional Payment” has the meaning set forth in Section 2.4 of the Agreement.

“Additional Payment Closing Date” has the meaning set forth in Section 2.4 of the Agreement.

“LIBOR” means the London Interbank Offered Rate, as reported in the Wall Street Journal on an applicable Payment Date.

“Maturity Date” has the meaning set forth in Section 2.4(c) of the Agreement.

“Note” has the meaning set forth in Section 2.4(c) of the Agreement.

“Outstanding Balance” has the meaning set forth in Section 2.4(c) of the Agreement.

“Payment Date” has the meaning set forth in Section 2.4(c) of the Agreement.

“Seller Group Acknowledgement Agreement” has the meaning set forth in Section 2.9 of the Agreement.

(b)the following defined term is hereby amended and restated in its entirety to read as follows:

“Optionees” means those employees and consultants of the Company who will receive proceeds from the Closing Payment and the Additional Payment, in consideration for (a) entering into the Stock Option Cancellation Agreements or the Warrant Cancellation Agreements, or both, as the case may be, prior to the Closing and (b) entering into the Optionee Acknowledgement Agreements.

(c)The following defined terms are deleted in their entirety:

“Bonus Contingent Cash Payment”

“Bonus Contingent Consideration”

“Bonus Contingent Stock Payment”

“Contingent Cash Payment”

“Contingent Consideration”

“Contingent Stock Payment”

 “EBITDA”

“First Contingent Installment”

 “Objection Notice”

“Second Contingent Installment”

“Second Contingent Installment Percentage”

“Third Contingent Installment”

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“Third Contingent Installment Percentage”

“Tranche 1 First Installment Bonus”

“Tranche 2 First Installment Bonus”

“Tranche 1 Second Installment Bonus”

“Tranche 1 Second Installment Bonus Percentage”

“Tranche 2 Second Installment Bonus”

“Tranche 2 Second Installment Bonus Percentage”

“Tranche 1 Third Installment Bonus”

“Tranche 1 Third Installment Bonus Percentage”

“Tranche 2 Third Installment Bonus”

“Tranche 2 Third Installment Bonus Percentage”

“Warrant Holder Bonus Contingent Consideration Payment”

“Warrant Holder Contingent Consideration Payment”

2.The parties agree and acknowledge that Section 2.1 of the Agreement is hereby amended and restated in its entirety to read as follows:

“Section 2.1Sale of Shares; Purchase Price.  On the terms and subject to the conditions of this Agreement, at the Closing, Seller agrees to sell to Buyer and Buyer agrees to purchase from Seller all of the Shares.  The purchase price for the Shares (the “Purchase Price”) shall consist of the Base Purchase Price plus the Additional Payment.”

3.The parties agree and acknowledge that the first sentence of Section 2.3(c) of the Agreement is hereby deleted in its entirety.

4.The parties agree and acknowledge that Section 2.4 of the Agreement is hereby amended and restated in its entirety to read as follows:

“Section 2.4Additional Payment.  In consideration for Seller entering into this Amendment, Buyer shall pay to the Seller Group additional consideration (the “Additional Payment”) on or before January 31, 2005, subject to Seller’s satisfaction of the conditions set forth in Section 7.3 hereof (the “Additional Payment Closing Date”), as follows:

(a)Buyer shall deliver to Seller Twelve Million Dollars ($12,000,000) in cash (the “Additional Cash Payment”), to be distributed to the Seller Group in accordance with the amounts set forth on Schedule I attached hereto.

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(b)Buyer shall deliver to Seller an unsecured, subordinated promissory note, substantially in the form of Exhibit H hereto (the “Note”), in a principal amount of Twenty-Eight Million Dollars ($28,000,000), to be distributed to the Seller Group in accordance with the amounts set forth on Schedule II attached hereto.

(c)Interest on the unpaid principal balance (such balance, the “Outstanding Balance”) will accrue from the Additional Payment Closing Date at the rate of LIBOR + two percent (2%) per annum, calculated on the basis of a 360 day year and actual days elapsed.  Subject to any prepayments provided herein, Buyer shall repay the Outstanding Balance in five (5) equal annual installments, together with any accrued and unpaid interest due and payable on such installment, with the first installment of principal and accrued interest due and payable on the date which is one year following the Additional Payment Closing Date, and the remaining installments to be paid on each subsequent anniversary of the Additional Payment Closing Date (each, a “Payment Date”) until the Outstanding Balance is repaid in full.  To the extent not previously repaid in full on an earlier Payment Date, Buyer shall repay the Outstanding Balance plus all accrued and unpaid interest thereon on the final Payment Date (the “Maturity Date”).  All or any portion of the Outstanding Balance and all accrued and unpaid interest thereon and any and all other sums payable to Seller hereunder may be, in Buyer’s sole discretion, (i) prepaid in whole or in part without penalty at any time and from time to time, prior to the Maturity Date, and (ii) paid in cash or by the delivery of such number of Alliance Shares equal to the amount of such portion of the Outstanding Balance and all accrued and unpaid interest thereon otherwise payable to Seller divided by the average per share closing price of the Company’s common stock on the stock exchange in which the stock is principally traded for the 20 business days immediately prior to the date of delivery of such Alliance Shares.  Prior to delivery of any Alliance Shares pursuant to this Section 2.4(c), (A) Alliance shall have filed a registration statement (the “Shelf Registration Statement”) with the Securities and Exchange Commission in order to register such Alliance Shares, and (B) the Shelf Registration Statement shall have been declared effective by the Securities and Exchange Commission.  Alliance shall bear all fees associated with the filing of the Shelf Registration Statement including: (i) all registration and filing fees, (ii) all fees and expenses of compliance with federal securities laws and state “blue sky or securities laws, (iii) all expenses of printing, (iv) all fees and disbursements of legal counsel to Alliance, (v) all application fees in connection with the listing of the Alliance Shares on a national securities exchange, (vi) all fees and disbursements of independent public accountants for Alliance and (vii) the reasonable fees and disbursements of not more than one law firm or counsel to act as counsel for the Selling Group Members.  Alliance shall use its best efforts to keep the Shelf Registration Statement continuously effective, supplemented and amended as required by the Securities Act of 1933, as amended, and the rules and regulations adopted thereunder (the “Act”), in order to permit the Shelf Registration Statement to be usable by the Seller Group Members for a period from the date the Shelf Registration Statement is declared effective by the Securities Exchange Commission until the earlier of (i) the second anniversary thereof or (ii) the date upon which there are no Alliance Shares outstanding.  The Company shall cause the Shelf Registration Statement and any amendment or supplement, (i) to comply in all material respects with the applicable requirements of the Act; and (ii) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading.  If required under the Act or other applicable laws, Alliance shall, at its sole expense, and within a reasonable time of receiving a written request from a Seller Group Member (at no time later than

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10 business days from Alliance receiving the written request from a Seller Group Member) file with the Securities Exchange Commission a post-effective amendment to the Shelf Registration Statement or, as required by law, file a supplement or an amendment to the Shelf Registration Statement or any document incorporated therein by reference such that the Seller or such person as designated by Seller shall be named as a selling shareholder in the Shelf Registration Statement or related prospectus.

5.The parties agree and acknowledge that Section 2.7 of the Agreement is hereby deleted in its entirety.

6.The parties agree and acknowledge the addition of Section 2.9 of the Agreement to read in its entirety as follows:

“Section 2.9Additional Payment Closing Date Deliveries.  On the Additional Payment Closing Date:

(a)Seller will deliver, or cause to be delivered, to Buyer:

(i)  for each member of the Seller Group, an acknowledgment, substantially in the form attached hereto as Exhibit I (a “Seller Group Acknowledgement Agreement”), duly executed by such Person, acknowledging that the Earn Out is no longer payable and that the Additional Payment and the Additional Contingent Tax Payment are Buyer’s sole remaining obligation to the Seller Group as a result of the transactions contemplated hereunder; and

(ii)  a certificate, substantially in the form attached hereto as Exhibit J, duly executed by Seller representing and warranting to Buyer that (A) the representations and warranties of Seller contained in Section 3.23 of the Agreement were true and correct at and as of the date hereof and as of the Additional Payment Closing Date as if made at and as of such time and (B) that Seller’s covenants and obligations required to be complied with prior to Additional Payment Closing Date have been so complied with in all material respects.

(b)Buyer will deliver, or cause to be delivered, to Seller:

(i)  the Additional Cash Payment by wire transfer to the Seller Group’s Account pursuant to the wire transfer instructions set forth on Schedule III hereto;

(ii)  the Note, executed on behalf of Buyer; and

(iii)  a certificate, substantially in the form attached hereto as Exhibit K, duly executed by Buyer representing and warranting to Seller that each of Buyer’s covenants and obligations required to be complied with prior to Additional Payment Closing Date have been so complied with in all material respects.”

7.The parties agree and acknowledge that Section 3.23(b) of the Agreement is hereby amended and restated to read in its entirety as follows:

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“(b)Seller acknowledges receipt of (a) the Annual Report on Form 10-K, as amended, of Buyer for its fiscal year ended June 30, 2004, (b) the Quarterly Report on Form 10-Q of Buyer for the quarter ended September 30, 2004, (c) the Proxy Statement for the Annual Meeting of Buyer held on December 8, 2004 and (d) any current reports on Form 8-K of Buyer filed with the Securities and Exchange Commission since September 30, 2004.”

8.The parties agree and acknowledge that Section 6.5 of the Agreement is hereby amended and restated to read in its entirety as follows:

“Section 6.5Exchange Listing.

(a)Closing Date.  On or before the Closing Date, Buyer shall cause that number of Alliance Shares to be issued as the Closing Stock Payment pursuant to the terms of this Agreement to be approved for listing on the New York Stock Exchange (the “NYSE”), subject to official notice of issuance.

(b)Payment Date.  On or before the applicable Payment Date or date of prepayment of the Note, to the extent that Buyer exercises its right under Section 2.4 hereof to pay all or any portion of the Note in Alliance Shares, Buyer shall cause such number of Alliance Shares to be issued pursuant to the terms of this Agreement to be approved for listing on the NYSE, subject to official notice of issuance.”

9.The parties agree and acknowledge the addition of Section 7.3 of the Agreement to read in its entirety as follows:

“Section 7.3Conditions to Obligations of Buyer and Seller on Additional Payment Closing Date.  The obligations of Buyer and Seller to consummate the transactions contemplated by the Additional Payment are subject to Buyer’s and Seller’s receipt of all of the deliveries required pursuant to Section 2.9 hereof, or a waiver thereof. In the event Buyer and Seller do not receive all deliveries required pursuant to Section 2.9 hereof, or waive the requirement to receive the deliveries, this Amendment shall become void and of no further force or effect, and Buyer’s and Seller’s obligations under the Agreement shall remain in full force and effect without modification by this Amendment or the exhibits and schedules attached hereto.”

10.The parties agree and acknowledge that Section 8.1(c) of the Agreement is hereby amended and restated to read in its entirety as follows:

“(c)Any claims of any nature whatsoever made against the Company or Buyer or any of its affiliates with respect to the Stock Option Cancellation Agreements, Warrant Cancellation Agreements or Seller Group Acknowledgment Agreements or the arrangements contemplated thereby; provided, however, that this Section 8.1(c) will not apply to any claims with respect to the Stock Option Cancellation Agreements, Warrant Cancellation Agreements or Seller Group Acknowledgment Agreements or the arrangements contemplated thereby that result from:

(i)gross negligence, recklessness, willful misconduct or fraud on the part of Buyer or any of its representatives; or

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(ii)Buyer’s tax treatment of the Stock Option Cancellation Agreements, Warrant Cancellation Agreements or Seller Group Acknowledgment Agreements or the arrangements contemplated thereby.”

11.The parties agree and acknowledge that Sections A and B of Schedule A to the Agreement are hereby deleted in their entirety.

Except as expressly modified herein, the Agreement is affirmed by the parties hereto in its entirety and shall remain in full force and effect.  Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement.  This Amendment may be executed in two or more counterparts, each of which shall be an original and all of which, taken together, shall be deemed to be one and the same instrument.

[Signature Page follows]

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IN WITNESS WHEREOF, each of the parties has executed this Amendment as of the date first above written.

SELLER	Robert Luciano Family Trust dated February 27, 1995, as amended
	Name:	Robert Luciano
	Title:	Trustee
LUCIANO
	Robert Luciano
BUYER	ALLIANCE GAMING CORPORATION,
	a Nevada corporation
	By:
	Name:	Richard Haddrill
	Title:	President and CEO
THE COMPANY	SIERRA DESIGN GROUP,
	a Nevada corporation
	By:
	Name:	Robert Luciano
	Title:	President

Exhibit H

Form of Unsecured Subordinated Promissory Note

UNSECURED SUBORDINATED PROMISSORY NOTE

$28,000,000 December 30, 2004

FOR VALUE RECEIVED, the undersigned, Alliance Gaming Corporation, a Nevada corporation (“Maker”), unconditionally promises to pay to the order of Robert Luciano, Jr. (“Luciano”), as trustee of the Robert Luciano Family Trust dated February 27, 1995, as amended, for the benefit of the Seller Group (“Holder”), at Holder’s address located at Sierra Design Group, 300 Sierra Manor Group, Reno, Nevada  89511, or at such other place as Holder may designate in writing, the principal sum of: Twenty-Eight Million Dollars ($28,000,000) in lawful money of the United States with interest thereon at the rate described below, as follows:

1.Definitions.  Terms which are used in this Unsecured Subordinated Promissory Note (the “Note”) and not otherwise defined herein shall have the meanings set forth in this Paragraph or in that certain Amended and Restated Stock Purchase Agreement (the “Agreement”), dated as of March 2, 2004, and as amended by that certain Amendment No. 1 dated as of December 30, 2004, by and among Maker, Sierra Design Group, a Nevada corporation (the “Company”), Luciano and Holder, as sole stockholder of the Company.

“Applicable Rate” means LIBOR plus two percent (2%) per annum, calculated on the basis of a 360 day year and actual days elapsed.

“Event of Default” means the occurrence or happening, at any time and from time to time, of any one or more of the following:

(a)Payment of Indebtedness.  If Maker fails to pay, in full, all of the indebtedness evidenced by this Note on the Maturity Date hereof or any installment or portion of the indebtedness evidenced by this Note as and when the same shall become due and payable, and such failure continues for a period of five (5) days following written notice of such failure by Holder to Maker.

(b)Voluntary Bankruptcy.  If Maker shall (i) seek entry of any order for relief as a debtor in a proceeding under the bankruptcy laws of the United States or any other competent jurisdiction; (ii) file a petition seeking relief under the bankruptcy, arrangement, reorganization or other debtor relief laws of the United States or any other competent jurisdiction; (iii) call a meeting of its creditors or any one of them for the purpose of requesting a rearrangement or restructuring of its debts or any concessions with respect to such debt; or (iv) make a general assignment for the benefit of its creditors.

(c)Involuntary Bankruptcy.  If a petition is filed against Maker seeking relief under the bankruptcy, arrangement, reorganization or other debtor relief

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laws of the United States or other competent jurisdiction and such petition is not dismissed within ninety (90) days following the date of its filing.

(d)Appointment of a Receiver.  If a court of competent jurisdiction enters an order, judgment or decree appointing, without the consent of Maker, a receiver for it, or for all or any material part of its property, and such order, judgment or decree shall not be and remain vacated, reversed or stayed or such receiver shall not otherwise be removed within a period of thirty (30) days following entry of such order.

“LIBOR” means the London Interbank Offered Rate, as reported in the Wall Street Journal on an applicable Payment Date.

“Maturity Date” means the earlier of (i) the fifth anniversary of the date of this Note or (ii) an Event of Default.

2.Interest; Payments; Prepayment.

(a)Interest Payments.  Interest shall accrue on the Outstanding Balance of this Note at the Applicable Rate from the date of this Note.

(b)Principal Payments.  Subject to any prepayments as provided herein, Maker shall repay the initial Outstanding Balance in five (5) equal annual installments, together with any accrued and unpaid interest due and payable on such installment, with the first installment of principal and accrued interest due and payable on the date which is one year following the date hereof, and the remaining installments to be paid on each subsequent anniversary of the date hereof until the Outstanding Balance is repaid in full.  The Outstanding Balance and accrued but unpaid interest on this Note shall be due and payable on the Maturity Date.

(c)Form of Payment.  At Maker’s sole election, all and any portion of the Outstanding Balance may be paid in cash or by the delivery of such number of Alliance Shares equal to the amount of such portion of the Outstanding Balance and accrued but unpaid interest thereon otherwise payable to Holder divided by the average per share closing price of the Company’s common stock on the stock exchange in which the stock is principally traded for the 20 business days immediately prior to the date of delivery of such Alliance Shares.

(d)Application of Payments.  All payments hereunder shall be first applied to any accrued but unpaid interest and then to principal.  If any payment due date falls on a Saturday, Sunday or holiday observed by Holder, the due date of the payment shall automatically be extended to the next following business day.

(e)Prepayment.  Maker may prepay the Outstanding Balance in whole or in part at any time without penalty or premium.

3.Default; Remedies.  If an Event of Default occurs, the Outstanding Balance, together with all accrued but unpaid interest owing hereon, shall at once become due and payable, at the option of Holder, effective upon written notice of acceleration by Holder to Maker.  Upon an Event of Default, for so long as an Event of Default is occurring, the

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Applicable Rate shall be increased to LIBOR plus four percent (4%) per annum, calculated on the basis of a 360 day year and actual days elapsed.

4.Subordination.  Maker and Holder acknowledge that this Note shall be subordinate to Maker’s obligations under the Loan Agreement dated as of September 5, 2003, as amended by that certain Amendment No. 1 to Loan Agreement dated as of February 18, 2004 and that certain Amendment No. 2 to Loan Agreement dated as of December 10, 2004, among Maker, the Lenders, the Syndication Agent, the Documentation Agent, Banc of America Securities LLC and CIBC World Markets Corp., as Joint Lead Arrangers and Joint Book Managers, and Bank of America, N.A., as Administrative Agent.

5.Miscellaneous.

(a)Maker hereby waives presentment, demand, protest, notice of dishonor, diligence and all other notices, any release or discharge arising from any extension of time, discharge of a prior party, release of any or all of any security given from time to time for this Note, or other cause of release or discharge other than actual payment in full hereof.

(b)No delay or omission of Holder to exercise any right, whether before or after a default hereunder, shall impair any such right or shall be construed to be a waiver of any right or default, and the acceptance at any time by Holder of any past-due amount shall not be deemed to be a waiver of the right to require prompt payment when due of any other amounts then or thereafter due and payable.

(c)Time is of the essence hereof.  Upon any default hereunder, Holder may exercise all rights and remedies provided for herein and by law or equity, including, but not limited to, the right to immediate payment in full of this Note.

(d)The remedies of Holder as provided herein, or any one or more of them, or in law or in equity, shall be cumulative and concurrent, and may be pursued singularly, successively or together at Holder’s sole discretion, and may be exercised as often as occasion therefor shall occur.

(e)If any provisions of this Note would require Maker to pay interest hereon at a rate exceeding the highest rate allowed by applicable law, Maker shall instead pay interest under this Note at the highest rate permitted by applicable law.

(f)This Note shall be governed by and construed in accordance with and the laws of the State of Nevada applicable to contracts wholly made and performed in the State of Nevada.

[Remainder of page intentionally left blank.]

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IN WITNESS WHEREOF, Maker has executed this Note as of the date first above written.

ALLIANCE GAMING CORPORATION

By:

Name:

Title:

Exhibit I

Form of Seller Group Acknowledgment Agreement

THIS ACKNOWLEDGMENT (this “Acknowledgment”) is dated as of December     , 2004, and is being entered into by and between                               , an individual and a member of the Seller Group referred to below (“Seller Group Member”), and Robert Luciano, as trustee of the Robert Luciano Family Trust dated February 27, 1995, as amended (“Seller”).

R E C I T A L S

WHEREAS, Alliance Gaming Corporation, a Nevada corporation (“Buyer”), Sierra Design Group, a Nevada corporation (the “Company”), Robert Luciano (“Luciano”) and Seller, as sole stockholder of the Company, are parties to that certain Amended and Restated Stock Purchase Agreement, dated as of March 2, 2004 (the “Agreement”);

WHEREAS, pursuant to the Agreement, the Seller Group may be entitled to certain additional consideration (referred to therein as “Contingent Consideration” and “Bonus Contingent Consideration”) based on the Company reaching certain earnings and/or revenue targets (the “Earn Out”); and

WHEREAS, Buyer, the Company, Luciano and Seller are contemplating an amendment to the Agreement (the “Amendment”; the Agreement and the Amendment are hereinafter collectively referred to as the “Agreement”) to eliminate the Earn Out in its entirety and to agree to a superseding payment structure as set forth therein.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1.Seller Group Member hereby acknowledges and agrees as follows:

(a)The Earn Out contemplated by the Agreement is eliminated in its entirety, and further acknowledges and agrees that Buyer, the Company, Luciano and Seller have agreed to the following consideration, payable on the Additional Payment Closing Date:

(i)  Buyer shall deliver to Seller Twelve Million Dollars ($12,000,000) in cash to be distributed to the Seller Group on a pro rata basis in accordance with the Agreement.

(ii)  Buyer shall deliver to Seller an unsecured, subordinated promissory note, substantially in the form of Exhibit A hereto (the “Note”), in a principal amount of Twenty-Eight Million Dollars ($28,000,000), to be distributed to the Seller Group on a pro rata basis in accordance with the Agreement.

(b)Upon Buyer’s delivery of the foregoing consideration to Seller, Seller Group Member shall look solely to Seller for payment of any amounts due it under the Agreement.

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2.Seller hereby acknowledges and agrees to pay to Seller Group Member its pro rata share of consideration paid under the Agreement promptly following its receipt thereof.

3.Seller Group Member hereby acknowledges and agrees that the remaining provisions of the Stock Option Cancellation Agreement remain in full force and effect.

Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement.  This Acknowledgment may be executed in two or more counterparts, each of which shall be an original and all of which, taken together, shall be deemed to be one and the same instrument.

[Signature Page follows]

IN WITNESS WHEREOF, each of the parties has executed this Acknowledgment as of the date first above written.

SELLER	Robert Luciano Family Trust dated February 27, 1995, as amended
	Name:	Robert Luciano
	Title:	Trustee
SELLER GROUP MEMBER
	Name:

Exhibit J

Form of

SELLER’S CERTIFICATE

Reference is made to that certain Amendment No. 1 dated as of December 30, 2004 (the “Amendment”) to Amended and Restated Stock Purchase Agreement (the “Agreement”), dated as of March 2, 2004, by and among Alliance Gaming Corporation, a Nevada corporation (“Buyer”), Sierra Design Group, a Nevada corporation (the “Company”), Robert Luciano (“Luciano”) and Robert Luciano, as trustee of the Robert Luciano Family Trust dated February 27, 1995, as amended, as sole stockholder of the Company (“Seller”).  This certificate is being delivered pursuant to Section 2.9(a)(ii) of the Agreement.  The Amendment and the Agreement are collectively referred to herein as the “Agreement”.  Capitalized terms used herein without definition shall have the meaning specified in the Agreement.

The undersigned, Robert Luciano, Jr., does hereby certify that he is the duly elected, qualified and acting Trustee of Seller.  As such, he has access to Seller’s trust records and is familiar with the matters therein contained and herein certified.  He further certifies:

1.Each of the representations and warranties of Seller contained in Section 3.23 of the Agreement were true and correct at and as of the date of the Amendment and are true and correct as of the date hereof.

2.Seller’s covenants and obligations required to be complied with under the Agreement prior to the Additional Payment Closing Date have been so complied with in all material respects.

IN WITNESS WHEREOF, this certificate has been executed by the undersigned as of December 30, 2004.

THE ROBERT LUCIANO FAMILY TRUST, DATED FEBRUARY 27, 1995, AS AMENDED
By:
	Robert Luciano, Jr., Trustee

Exhibit K

Form of

OFFICER’S CERTIFICATE

OF

ALLIANCE GAMING CORPORATION,
a Nevada corporation

Reference is made to that certain Amendment No. 1 dated as of December 30, 2004 (the “Amendment”) to Amended and Restated Stock Purchase Agreement (the “Agreement”), dated as of March 2, 2004, by and among Alliance Gaming Corporation, a Nevada corporation (“Buyer”), Sierra Design Group, a Nevada corporation (the “Company”), Robert Luciano (“Luciano”) and Robert Luciano, as trustee of the Robert Luciano Family Trust dated February 27, 1995, as amended, as sole stockholder of the Company (“Seller”).  The Amendment and the Agreement are collectively referred to herein as the “Agreement”.  This certificate is being delivered pursuant to Section 2.9(b)(iii) of the Agreement.  Capitalized terms used herein without definition shall have the meaning specified in the Agreement.

The undersigned, Richard Haddrill, does hereby certify that he is the duly elected, qualified and acting President and Chief Executive Officer of Buyer.  As such, he has access to Buyer’s corporate records and is familiar with the matters therein contained and herein certified.  He further certifies:

Buyer’s covenants and obligations required to be complied with under the Agreement prior to the Additional Payment Closing Date have been so complied with in all material respects.

IN WITNESS WHEREOF, this certificate has been executed by the undersigned as of December 30, 2004.

Richard Haddrill

President and Chief Executive Officer

EX-10.40

Exhibit 10.40

AMENDMENT TO
HADDRILL EMPLOYMENT AGREEMENT

This Amendment to the Employment Agreement (the “Amendment”) is made and entered into as of December 22, 2004 (the “Effective Date”), by and between Alliance Gaming Corporation, a Nevada corporation (the “Company”), and Richard Haddrill, currently residing at 3394 Knollwood Drive, Atlanta, Georgia  30305 (“Haddrill”).

WHEREAS, the Company and Haddrill are parties to that certain Employment Agreement dated as of June 30, 2004 (the “Employment Agreement”) pursuant to which Haddrill is employed as the Company’s Chief Executive Officer;

WHEREAS, pursuant to the Employment Agreement, the Company granted to Haddrill non-statutory stock options to acquire 500,000 shares of the Company’s common stock (the “Options”) and 377,030 restricted stock units (the “Restricted Stock Units”) under the Company’s Amended and Restated 2001 Long Term Incentive Plan (the “Plan”); and

WHEREAS, the Company and Haddrill desire to amend the Employment Agreement to grant additional non-statutory stock options and restricted stock units and to modify the date by which Haddrill is to acquire the Alliance Stock (as such term is defined herein).

NOW THEREFORE, on the basis of the foregoing premises and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows:

1.As of the Effective Date, the Company shall grant Haddrill additional non-statutory stock options to acquire 300,000 shares of the Company’s common stock under the Plan (the “Additional Options”), at an exercise price per share equal to the fair market value of a share of the Company’s common stock as of the Effective Date (as determined in accordance with the Plan).  The Additional Options shall vest and be subject to the terms and conditions set forth on Schedule A-1 hereto.

2.As of the Effective Date, the Company shall grant Haddrill a number of additional restricted stock units under the Plan (the “Additional Restricted Stock Units”), in an amount equal to $1.9 million, as calculated in accordance with Schedule B-1 hereto.  The Additional Restricted Stock Units shall vest and be subject to the terms and conditions set forth on Schedule B-1 hereto.

3.Sections 8(a), (b), (c) and (d)(i) of the Employment Agreement are hereby amended and restated in their entirety to read as follows:

“8.Payments Upon Termination or Change of Control.

(a)If Haddrill’s employment is terminated under paragraph 7(a) or 7(d) hereof, (i) the Company shall have no further obligation under this Agreement, except the obligation to pay Haddrill an amount equal to the portion of his compensation

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and out-of-pocket business expenses as may be accrued and unpaid on the date of termination and (ii) Haddrill shall be entitled to retain the rights granted hereunder to [a] that number of Restricted Stock Units and Additional Restricted Stock Units that have vested through the date of termination in accordance with the vesting schedules set forth on Schedules B and B-1, respectively, hereof and [b] that number of Options and Additional Options that have vested in accordance with the vesting schedules set forth in Schedules A and A-1, respectively, hereof.  All non-vested Restricted Stock Units, Additional Restricted Stock Units, Options and Additional Options shall be immediately forfeited.

(b)If Haddrill’s employment is terminated under paragraphs 7(b) or 7(c) hereof, (i) the Company shall [a] pay Haddrill an amount equal to the portion of his compensation and out-of-pocket business expenses as may be accrued and unpaid on the date of termination; [b] pay Haddrill severance pay in an amount equal to the base salary for a period of one year from the date of termination or until the expiration of this Agreement, whichever first occurs; and (ii) Haddrill shall be entitled to retain the rights granted hereunder to [a] the Restricted Stock Units and Additional Restricted Stock Units to the extent provided in Schedules B and B-1, respectively, hereof; provided that the Restricted Stock Units and Additional Restricted Stock Units shall be pro rated through the 12-month period following the month in which the date of termination occurs (i.e., the number of Restricted Stock Units and Additional Restricted Stock Units to which Haddrill shall be entitled shall be equal to the aggregate of all  Restricted Stock Units and Additional Restricted Stock Units multiplied by a fraction, the numerator of which shall be the number of partial or whole months served by Haddrill under this Agreement from and after the Commencement Date plus 12, and the denominator of which shall be 36), and [b] (i) all Options in which price targets have been achieved at the date of termination regardless of the time vesting requirement, (ii) the portion of Additional Options pro rated through the month in which the date of termination occurs and (iii) all other time vesting options with respect to which the price targets have not been achieved (“Time Vested Options”) shall be pro rated through the month in which the date of termination occurs; provided that the Time Vested Options shall be exercisable only to the extent the price targets are achieved within the time periods specified on Schedule A attached hereto.  Except as provided herein, all non-vested Restricted Stock Units, Additional Restricted Stock Units, Options and Additional Options shall be immediately forfeited.

(c)If Haddrill’s employment is terminated under paragraph 7(e) or 7(f), (i) the Company shall [a] pay to Haddrill or Haddrill’s Estate, as the case may be, an amount equal to the portion of his compensation and out-of-pocket business expenses as may be accrued and unpaid as of the date of his termination; and [b] pay Haddrill or Haddrill’s Estate the base salary for a period of one year from the date of Haddrill’s termination of employment or until expiration of the term of this Agreement, whichever occurs first; and (ii) Haddrill or Haddrill’s Estate shall be entitled to retain the rights granted hereunder to [a] that number of Restricted Stock Units and Additional Restricted Stock Units that have vested through the date of termination in accordance with the vesting schedules set forth on Schedules B and B-1, respectively, hereof and [b] the number of Options and Additional Options that have vested at the date of termination in accordance with the vesting schedules set forth in Schedules A and A-1, respectively,

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hereof.  Except as provided herein, all non-vested Restricted Stock Units, Additional Restricted Stock Units, Options and Additional Options shall be immediately forfeited.

(d)(i) Upon a Change of Control, as hereinafter defined, [a] the Company shall pay to Haddrill $980,000, and [b] Haddrill shall be entitled to retain the rights granted hereunder to [1] all of the Restricted Stock Units and Additional Restricted Stock Units granted to him irrespective of the vesting schedules or distribution provisions set forth on Schedules B and B-1, respectively, hereof; provided that he shall not be entitled to receive a distribution of the shares represented by the Restricted Stock Units or Additional Restricted Stock Units until the occurrence of one of the distribution events listed in Section 409A(a)(2)(a) of the Internal Revue Code (the “Code”) and [2] all of the Options and Additional Options granted to him irrespective of the vesting schedules set forth in Schedules A and A-1, respectively, hereof, and all such Restricted Stock Units, Additional Restricted Stock Units, Options and Additional Options shall vest immediately.  Notwithstanding paragraphs 8(a) through (c), upon a Change of Control the Company shall have no further obligations under this Agreement other than as set forth in this paragraph 8(d).  For purposes of this paragraph 8(d), “Change of Control” shall mean (i) the acquisition, directly or indirectly, by any unaffiliated person, entity or group (a “Third Party”) of beneficial ownership of more than 50% of the combined voting power of the Company’s then outstanding voting securities entitled to vote generally in the election of directors; (ii) consummation of (1) a reorganization, merger or consolidation of the Company, or (2) a liquidation or dissolution of the Company or (3) a sale of all or substantially all of the assets of the Company (whether such assets are held directly or indirectly) to a Third Party; or (iii) the individuals who as of the date of this Agreement are members of the Board of Directors (together with any directors elected or nominated by a majority of such individuals) cease for any reason to constitute at least a majority of the members of the Board of Directors; except that any event or transaction which would be a “Change of Control” under (i) or (ii) (1) of this definition, shall not be a Change of Control if persons who were the equity holders of the Company immediately prior to such event or transaction (other than the acquiror in the case of a reorganization, merger or consolidation), immediately thereafter, beneficially own more than 50% of the combined voting power of the Company’s or the reorganized, merged or consolidated company’s then outstanding voting securities entitled to vote generally in the election of directors.”

4.Section 9 of the Employment Agreement is hereby amended and restated in its entirety to read as follows:

“9.Purchase of Company Stock.  Prior to the June 30, 2005, Haddrill shall, subject to the Company’s policies relating to the purchase of shares of the Company’s common stock by persons deemed to be Insiders, increase his holdings of shares of the Company’s common stock (such holdings of shares, the “Alliance Stock”) to a point at which, as of June 30, 2005, such holdings have an aggregate acquisition cost to Haddrill of at least $1.0 million.  Subject to his compliance with applicable State and Federal securities laws, Haddrill shall be entitled to sell the Alliance Stock commencing on the earlier of (i) October 1, 2007 or (ii) the day after he is no longer employed as CEO of the Company under this Agreement.”

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5.Except as expressly modified by this Amendment, the Employment Agreement shall remain unchanged and shall remain in full force and effect.

[signatures on next page]

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IN WITNESS WHEREOF, the Company and Haddrill have duly executed this Amendment as of the date first above written.

ALLIANCE GAMING CORPORATION

By:

Name:

Title:

By:

Name:

Title:

Richard Haddrill

Schedule A-1

ADDITIONAL OPTIONS

1.The Company shall issue to Haddrill 300,000 Additional Options under the Company’s Amended and Restated 2001 Long Term Incentive Plan (the “Plan”).

2.Except as otherwise provided in the Employment Agreement, as amended, the Additional Options shall vest as follows:  (i) 200,000 Additional Options shall vest in one-third equal installments on each of October 1, 2005, October 1, 2006 and October 1, 2007, if Haddrill is continuously employed by the Company as Chief Executive Officer until each such respective vesting date, and (ii) the remaining 100,000 Additional Options shall vest on October 1, 2007, if Haddrill is continuously employed by the Company as Chief Executive Officer through that date.

3.Once the Additional Options become exercisable hereunder, they shall remain exercisable until October 1, 2014 without regard to whether Haddrill continues to be employed by the Company prior to or on such date.

Schedule B-1

ADDITIONAL RESTRICTED STOCK UNITS

1.The Company shall issue to Haddrill Additional Restricted Stock Units (“Additional RSUs”) under the Company’s Amended and Restated 2001 Long Term Incentive Plan (the “Plan”) in a number determined by dividing $1.9 million by the average per share closing price of the Company’s common stock on the stock exchange in which the stock is principally traded for the 20 business days immediately prior to the date of the grant or such other method as the parties shall mutually agree to, provided that such method complies with the Plan.

2.Except as provided in the Employment Agreement, as amended, the Additional RSUs will vest on October 1, 2010; provided that the vesting of 50% of the Additional RSUs will be accelerated to each of October 1, 2005 and October 1, 2006 upon the attainment in each case of strategic and/or financial measures specified for the approximately nine month period ending October 1, 2005 and for the twelve month period ending October 1, 2006 to be mutually agreed to between the Board of Directors and Mr. Haddrill.

3.Each vested Additional RSU represents Haddrill’s right to receive one (1) share of Company common stock, as follows:

a.75% of the shares represented by the vested Additional RSUs shall be issued to Haddrill (1) on the later of (a) October 1, 2007 or (b) the date that is six (6) months following the date Haddrill’s employment with the Company terminates for any reason or such shorter period as may be permissible pursuant to regulations promulgated under Section 409A of the Internal Revenue Code (the “Code”), or (2) in the event the Employment Agreement, as amended, is terminated prior to October 1, 2007, on the date that is six (6) months following the date Haddrill’s employment with the Company is terminated or such shorter period as may be permissible pursuant to regulations promulgated under Section 409A of the Code.

b.The remaining 25% of the shares represented by the vested Additional RSUs shall be issued to Haddrill (1) on the later of (a) October 1, 2008 or (b) the date that is six (6) months following the date Haddrill’s employment with the Company terminates for any reason or such shorter period as may be permissible pursuant to regulations promulgated under Section 409A of the Code, or (2) in the event the Employment Agreement, as amended, is terminated prior to October 1, 2007, on the date that is six (6) months following the date Haddrill’s employment with the Company is terminated or such shorter period as may be permissible pursuant to regulations promulgated under Section 409A of the Code.

4.Except as provided in the Employment Agreement, as amended, if Haddrill ceases to be the CEO, all nonvested Additional RSUs shall be immediately forfeited.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Richard Hadrill, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alliance Gaming Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 9, 2005

/s/ Richard Haddrill

Richard Haddrill

President and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Robert L. Saxton, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alliance Gaming Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 9, 2005

/s/ Robert L. Saxton

Robert L. Saxton

Executive Vice President, Treasurer and Chief Financial

Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2004

In connection with the Quarterly Report of Alliance Gaming Corporation (the “Company”) on Form 10-Q for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard Hadrill, President and Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that, to my knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 Dated:  February 9, 2005

/s/ Richard Haddrill

Richard Haddrill

President and Chief Executive Officer

(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2004

In connection with the Quarterly Report of Alliance Gaming Corporation (the “Company”) on Form 10-Q for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert L. Saxton, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that, to my knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Dated:  February 9, 2005

/s/ Robert L. Saxton

Robert L. Saxton

Executive Vice President, Treasurer and Chief Financial

Officer (Principal Financial and Accounting Officer)