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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended September 30, 2002

OR

[   ]

TRANSITION 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

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

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

The number of shares of Common Stock, $0.10 par value, outstanding as of November 4, 2002, according to the records of the registrant’s registrar and transfer agent was 48,859,000.

Table of Contents

ALLIANCE GAMING CORPORATION
FORM 10-Q

September 30, 2002

I N D E X

						Page
PART I.				FINANCIAL INFORMATION
Item 1.				Unaudited Financial Statements
				Unaudited Condensed Consolidated Balance Sheets as of June 30, 2002 and September 30, 2002			3
				Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2001 and 2002			4
				Unaudited Condensed Consolidated Statement of Stockholders’ Equity as of September 30, 2002			5
				Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2001 and 2002			6
				Notes to Unaudited Condensed Consolidated Financial Statements			7-18
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			19-23
Item 3.				Quantitative and Qualitative Disclosures About Market Risk			24
Item 4.				Disclosure Controls and Procedure			25
PART II.				OTHER INFORMATION
Item 1.				Legal Proceedings			25
Item 6.				Exhibits and Reports on Form 8-K			25
SIGNATURES							26-28

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PART 1

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In 000’s, except share data)

						June 30,				September 30,
						2002				2002
ASSETS
Current assets:
	Cash and cash equivalents					$	63,404			$	63,461
	Accounts and notes receivable, net of allowance for doubtful accounts of $15,695 and $15,647						96,832				95,593
	Inventories, net of reserves of $7,814 and $6,837						42,997				45,543
	Deferred tax assets, net						27,605				27,605
	Other current assets						13,975				14,430
			Total current assets				244,813				246,632
Long-term notes receivable, net of allowance for doubtful accounts of $456 and $431							2,389				2,317
Leased equipment, net of accumulated depreciation of $9,931 and $11,688							17,892				21,697
Property, plant and equipment, net of accumulated depreciation and amortization of $63,313 and $66,523							91,982				92,150
Excess of costs over net assets of acquired businesses, net of accumulated amortization of $6,517 and $6,518							47,713				47,740
Intangible assets, net of accumulated amortization of $25,148 and $25,421							32,512				34,184
Deferred tax assets, net							18,240				13,825
Other assets, net of reserves of $1,818 and $1,818							4,339				4,466
				Total assets		$	459,880			$	463,011
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable					$	15,894			$	17,173
	Accrued liabilities						45,841				39,979
	Jackpot liabilities						5,915				7,138
	Current maturities of long-term debt						4,116				3,970
				Total current liabilities			71,766				68,260
Long-term debt, net							338,148				337,161
Other liabilities							2,747				3,527
				Total liabilities			412,661				408,948
Minority interest							1,233				1,099
Commitments and contingencies
Stockholders’ equity:
	Special Stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 120 shares and 115 shares issued and outstanding						12				12
	Common Stock, $.10 par value; 100,000,000 shares authorized; 49,227,000 and 49,304,000 shares issued						4,927				4,934
	Treasury stock at cost, 513,000 shares						(501	)			(501	)
	Additional paid-in capital						157,866				158,550
	Accumulated other comprehensive losses						(19,364	)			(19,335	)
	Accumulated deficit						(96,954	)			(90,696	)
				Total stockholders’ equity			45,986				52,964
				Total liabilities and stockholders’ equity		$	459,880			$	463,011

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In 000’s, except per share data)

			Three Months Ended Sept. 30,
			2001				2002
Revenues:
	Gaming equipment and systems		$	45,315			$	63,539
	Wall machines and amusement games			12,661				10,566
	Route operations			53,800				54,837
	Casino operations			18,179				17,790
				129,955				146,732
Costs and expenses:
	Cost of gaming equipment and systems			19,551				26,258
	Cost of wall machines and amusement games			7,505				6,170
	Cost of route operations			44,398				45,720
	Cost of casino operations			8,335				8,188
	Selling, general and administrative			23,889				29,416
	Research and development costs			3,692				4,760
	Depreciation and amortization			7,724				7,999
				115,094				128,511
Operating income				14,861				18,221
Other income (expense):
	Interest income			395				281
	Interest expense			(7,647	)			(6,636	)
	Minority interest			(463	)			(445	)
	Other, net			420				(71	)
Income before income taxes				7,566				11,350
Income tax provision				(138	)			(5,092	)
Net income			$	7,428			$	6,258
Basic earnings per share			$	0.17			$	0.13
Diluted earnings per share			$	0.16			$	0.13
Weighted average common shares outstanding				43,650				48,740
Weighted average common and common share equivalents outstanding				46,494				49,821

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended September 30, 2002
(In 000’s)

																						Accumulated								Total
		Common Stock																Additional				Other								Stock-
										Series E				Treasury				Paid-in				Comprehensive				Accum.				holders'
		Shares				Dollars				Special Stock				Stock				Capital				Losses				Deficit				Equity
Balances at June 30, 2002			49,227			$	4,927			$	12			$	(501	)		$	157,866			$	(19,364	)		$	(96,954	)		$	45,986
Net income			—				—				—				—				—				—				6,258				6,258
Foreign currency translation adjustment			—				—				—				—				—				29				—				29
Total comprehensive income																															6,287
Shares issued upon exercise of stock options			77				7				—				—				568				—				—				575
Tax benefit of employee stock option exercises			—				—				—				—				116				—				—				116
Balances at Sept. 30, 2002			49,304			$	4,934			$	12			$	(501	)		$	158,550			$	(19,335	)		$	(90,696	)		$	52,964

See notes to unaudited condensed consolidated financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000’s)

							Three Months Ended
							Sept. 30,
							2001				2002
Cash flows from operating activities:
	Net income						$	7,428			$	6,258
		Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization					7,724				7,999
			Amortization of debt discount					20				20
			(Gain) loss on sale of assets					25				(11	)
			Provision for losses on receivables					379				91
			Deferred income tax					—				4,535
			Other					552				(246	)
		Net change in operating assets and liabilities:
			Accounts and notes receivable					6,091				1,192
			Inventories					(6,608	)			(4,513	)
			Other current assets					1,602				(116	)
			Accounts payable					(3,657	)			1,280
			Accrued liabilities					(4,473	)			(3,868	)
				Net cash provided by operating activities				9,083				12,621
Cash flows from investing activities:
		Additions to property, plant and equipment						(3,450	)			(4,282	)
		Additions to leased gaming equipment						(2,887	)			(4,750	)
		Additions to other long-term assets						(1,305	)			(2,976	)
		Proceeds from disposal of property and equipment and other assets						16				8
				Net cash used in investing activities				(7,626	)			(12,000	)
Cash flows from financing activities:
		Reduction of long-term debt						(123	)			(1,152	)
		Net increase (decrease) in revolving credit facility						—				—
		Proceeds from exercise of stock options and warrants						1,166				575
				Net cash provided by (used in) financing activities				1,043				(577	)
Effect of exchange rate changes on cash								194				13
Cash and cash equivalents:
			Increase for period					2,694				57
			Balance, beginning of period					54,845				63,404
			Balance, end of period				$	57,539			$	63,461

See notes to unaudited condensed consolidated financial statements

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended September 30, 2001 and 2002

1.		BASIS OF PRESENTATION
		The accompanying unaudited interim condensed consolidated financial statements reflect all normal recurring adjustments, that management believes are necessary to present fairly the financial position, results of operations and cash flows of Alliance Gaming Corporation (“Alliance” or the “Company”) for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results, which may be expected for any other interim period, or for 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, 2002. All intercompany accounts and transactions have been eliminated in consolidation.
		The accompanying condensed consolidated financial statements at June 30, 2002, were derived from audited consolidated financial statements, but do not include all disclosures required under generally accepted accounting principles. Certain reclassifications have been made to conform to the current year presentation.
2.		INVENTORIES
		Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost elements included for work-in-process and finished goods include raw materials, freight, direct labor and manufacturing overhead.
		Inventories, net of reserves, consist of the following (in 000’s):

3.		DEBT
		Long-term debt consists of the following (in 000’s):

The Company’s debt structure consists primarily of a $190 million term loan facility and a $25 million revolving credit facility (which can be increased by $15 million at the Company’s discretion) (collectively referred to herein as the “bank facility”) and $150 million Senior Subordinated Notes. The term loan has an interest rate of LIBOR plus 3.25% (or 5.4% as of September 30, 2002), has a 1% per year mandatory principal amortization, and a 5.5 year maturity. The revolving credit facility commitment decreases ratably over its 5 year commitment. As of

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended September 30, 2001 and 2002

		September 30, 2002, there were no borrowings outstanding on the revolving credit facility. The bank facility loan contains certain customary financial and operational covenants.
		The bank facility is collateralized by substantially all domestic property and is guaranteed by each domestic subsidiary of the U.S. Borrower and German Subsidiaries (both as defined), other than the entity that holds the Company’s interest in its Louisiana and Mississippi operations, and secured by both a U.S. and German Pledge Agreement (both as defined). The bank facility contains a number of maintenance covenants and other significant covenants that, among other things, restrict the ability of the Company and the ability of certain of its subsidiaries to dispose of assets, incur additional indebtedness, 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 September 30, 2002, we are in compliance with these covenants.
		The Senior Subordinated Notes bear interest at 10%, are due in 2007, and are general unsecured obligations of the Company, ranking subordinate in right of payment to all Senior Debt (as defined) of the Company, including indebtedness under the bank facility. The Senior Subordinated Notes are fully and unconditionally guaranteed on a joint and several senior subordinated basis by all existing and future domestic Restricted Subsidiaries of the Company, subject to certain exceptions including the partially-owned entities through which its Mississippi casino and Louisiana route operations are conducted. The Subsidiary Guarantees are general unsecured obligations of the Guarantors, ranking subordinate in right of payment to all Senior Debt of the Guarantors. The Company will be able to designate other current or future subsidiaries as Unrestricted Subsidiaries under certain circumstances. Unrestricted Subsidiaries will not be required to issue a Subsidiary Guarantee and will not be subject to many of the restrictive covenants set forth in the Indenture pursuant to which the Senior Subordinated Notes were issued. The Indenture for the Company’s Senior Subordinated Notes contains various covenants, including limitations on incurrence of additional indebtedness, on restricted payments and on dividend and payment restrictions on subsidiaries. The Senior Subordinated Notes may be redeemed beginning in August 2002 at 105%, which decreases ratably over the remaining term. Upon the occurrence of a Change of Control (as defined), the holders of the Senior Subordinated Notes will have the right to require the Company to purchase their notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of purchase. As of September 30, 2002, we are also in compliance with the covenants contained in the Indenture for the Senior Subordinated Notes.
4.		INCOME TAXES
		Beginning July 1, 2002, the Company began recognizing Federal income tax expense based on 35% of pre-tax domestic income and state income taxes at a rate of approximately 2% of domestic income. There was no tax benefit recorded for the operating loss generated in Germany. For the prior year quarter ended September 30, 2001, substantially all of the Company’s taxable income was offset against Federal net operating loss carry forwards. This reduced the Company’s tax expense from approximately $3.5 million to approximately $138,000.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended September 30, 2001 and 2002

5.		EARNINGS PER SHARE
		The computation of basic and diluted earnings per share is as follows (in 000’s except per share amounts):

6.		SEGMENT AND GEOGRAPHICAL INFORMATION
		The Company operates in four business segments: (i) Gaming Equipment and Systems designs, manufactures and distributes gaming machines and computerized monitoring systems for gaming machines; (ii) Wall Machines and Amusement Games designs, manufactures and distributes wall-mounted gaming machines and distributes third party manufactured amusement games; (iii) Route Operations owns and manages a significant installed base of gaming machines; and (iv) Casino Operations owns and operates two regional casinos. The accounting policies of these segments are consistent with Company’s policies for the Consolidated Financial Statements.
		The tables below present information as to the Company’s revenues, intersegment revenues and operating income (loss) (in 000’s):

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended September 30, 2001 and 2002

		The Company has operations based primarily in the United States and Germany. The German operation’s customers are a diverse group of operators of wall machines and amusement games at arcades, hotels, restaurants and taverns, primarily in Germany. Gaming Equipment and Systems’ customers are primarily casinos and gaming machine distributors in the United States and abroad. Receivables of the German operations and Gaming Equipment and Systems are generally collateralized by the related equipment.
		The table below presents information as to the Company’s revenues and operating income (loss) by geographic region (in $000’s):

7.		SUPPLEMENTAL CASH FLOW INFORMATION
		The following supplemental information is related to the unaudited condensed consolidated statements of cash flows (in $000’s):

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended September 30, 2001 and 2002

8.		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 Senior Subordinated Notes (see note 2). The financial information presented includes Alliance Gaming Corporation (the “Parent”) and its wholly-owned guaranteeing subsidiaries (together the “Parent and Guaranteeing Subsidiaries”), and the non-guaranteeing subsidiaries Video Services, Inc., United Gaming Rainbow, BGI Australia Pty. Limited, Bally Gaming de Puerto Rico, Inc., and Alliance Automaten GmbH & Co. KG (the subsidiary that holds the Company’s German interests) (together the “Non-Guaranteeing Subsidiaries”). The notes to consolidating financial statements should be read in conjunction with these consolidating financial statements.

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ALLIANCE GAMING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS

June 30, 2002
(In 000’s)

																		Alliance
																		Gaming
						Parent and				Non-								Corporation
						Guaranteeing				Guaranteeing				Elimina-				and
						Subsidiaries				Subsidiaries				tions				Subsidiaries
ASSETS
Current assets:
		Cash and cash equivalents				$	47,379			$	16,025			$	—			$	63,404
		Accounts and notes receivable, net					66,698				43,956				(13,822	)			96,832
		Inventories, net					28,469				14,528				—				42,997
		Deferred tax assets, net					27,586				19				—				27,605
		Other current assets					12,567				1,408				—				13,975
				Total current assets			182,699				75,936				(13,822	)			244,813
Long-term notes receivable, net							60,818				408				(58,837	)			2,389
Leased equipment, net							17,892				—				—				17,892
Property, plant and equipment, net							59,165				32,817				—				91,982
Excess of costs over net assets of acquired businesses, net							43,390				4,323				—				47,713
Intangible assets, net							32,511				1				—				32,512
Investments in subsidiaries							81,855				—				(81,855	)			—
Deferred tax assets, net							17,489				751				—				18,240
Other assets, net							8,118				(4,131	)			352				4,339
						$	503,937			$	110,105			$	(154,162	)		$	459,880
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable					$	13,533			$	2,361			$	—			$	15,894
	Accrued liabilities						33,840				13,033				(1,032	)			45,841
	Jackpot liabilities						5,812				103				—				5,915
	Current maturities of long-term debt						3,979				12,952				(12,815	)			4,116
				Total current liabilities			57,164				28,449				(13,847	)			71,766
Long term debt, net							396,807				12				(58,671	)			338,148
Other liabilities							2,747				—				—				2,747
				Total liabilities			456,718				28,461				(72,518	)			412,661
Minority interest							1,233				—				—				1,233
Commitments and contingencies
Stockholders’ equity:
		Series E Special Stock					12				—				—				12
		Common Stock					4,927				17,832				(17,832	)			4,927
		Treasury stock					(501	)			—				—				(501	)
		Additional paid-in capital					157,866				7,862				(7,862	)			157,866
		Accumulated other comprehensive loss					(19,364	)			(19,384	)			19,384				(19,364	)
		Retained earnings (accumulated deficit)					(96,954	)			75,334				(75,334	)			(96,954	)
			Total stockholders’ equity				45,986				81,644				(81,644	)			45,986
						$	503,937			$	110,105			$	(154,162	)		$	459,880