UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from       to

Commission File Number 0-4281

ALLIANCE GAMING CORPORATION

(Exact name of registrant as specified in its charter)

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 October 1, 2004, according to the records of the registrant’s registrar and transfer agent was 51,044,000.

I N D E X

2

PART I

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In 000s except share amounts)

See accompanying notes to unaudited condensed consolidated financial statements.

3

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In 000s, except per share amounts)

See accompanying notes to unaudited condensed consolidated financial statements.

4

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 (In 000s)

See accompanying notes to unaudited condensed consolidated financial statements.

5

ALLIANCE GAMING CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In 000s)

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 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 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, 2004.

We completed the sale of Rail City Casino in May 2004 and the sale of United Coin Machine Co. (“UCMC”) in June 2004. As a result of the sale of these assets, the terms of our bank 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 reduced its term loan by $31.6 million and its revolver by $11.3 million.

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

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.

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 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-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

7

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):

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:

The resulting fair values applied to the options granted were $5.67 and $9.36 per share for the three month periods ended September 30, 2004 and September 30, 2003, respectively.

3.  DISCONTINUED OPERATIONS

We have completed several divestitures in accordance with our plan to sell our “non-core” businesses, which was a strategy we 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 sell 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, we 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.  We received approximately $2.0 million.

The results of these discontinued operations are presented net of applicable income taxes within income from discontinued operations in the accompanying consolidated statements of operations.  The net assets of VSI are classified as assets held for sale in the accompanying condensed consolidated balance sheets.

Operating results for the discontinued operations for the quarter ended September 30, 2004 include VSI and UCMC, while the results for the quarter ended September 30, 2003 include UCMC, VSI, and Rail City.  Summary operating results are as follows (in 000s):

8

During the quarter ended September 30, 2004, a Federal District Court jury reached a verdict in a patent infringement case filed by Action Gaming, Inc. and International Game Technology, Inc. (“plaintiffs”).  The jury awarded the plaintiffs approximately $7.4 million (or $4.7 million after tax) in damages related to a single, optional feature offered in certain multi-hand poker games provided solely by UCMC.  This charge is included in the UCMC discontinued operations in the table above.

The following schedule reflects the net assets held for sale, included in the accompanying consolidated balance sheets consisting of VSI as of September 30, 2004 and June 30, 2004 (in 000s):

4. OTHER CURRENT ASSETS

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

The increase in refundable deposits of $4.4 million is a result of units purchased from other manufacturers.  The increase in deferred costs of $2.7 million is due to shipments of games to the European market which will not be installed until the second 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, net of valuation reserves, consist of the following (in 000s):

9

                                                During the quarter ended September 30, 2004, the Company recorded an inventory write down of $3.0 million for recently discontinued legacy video products and used games which have been identified for accelerated disposal.

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):

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. No impairment was charged to goodwill in the three months ended September 30, 2004 or during fiscal 2004.

                                                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.

10

Intangibles

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

                                                Amortization expense totaled $2.0 million and $1.3 million for the three months ended September 30, 2004 and 2003, respectively.  Computer software amortization expense totaled $0.5 million for the three months ended September 30, 2004 and 2003.

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

Goodwill

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

The purchase agreements for two recent acquisitions, Sierra Design Group (“SDG”) and MindPlay LLC, call for future contingent consideration (“earnouts”) to be paid to the former principals of these companies, as more fully descried in footnote 14. The MindPlay earnout is payable based on future revenues and gross margins from the sale of MindPlay products, while the SDG earnout is payable based on Adjusted EBITDA (as that term is defined in the purchase agreement) and revenues generated from the SDG related business division over the three year period ended June 30, 2007. Any earnout payments made under either agreement will be treated as additional purchase consideration, which would result in increases in goodwill.

11

8.  ACCRUED AND JACKPOT LIABILITIES

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

                                                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.

                        The increase in litigation accruals of $8.6 million is a result of the patent litigation discussed in Note 3 and consists of the damage award of $7.4 million and related litigation costs.

                        9.  LONG-TERM DEBT

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

The Company’s debt structure at September 30, 2004 consists primarily of a term loan facility with an original balance of $350 million and a $125 million revolving credit facility. The term loan which is due on September 4, 2009, has an interest rate of LIBOR plus 2.25% or 3.8% at September 30, 2004, and has required quarterly principal reductions of approximately 1% per annum.

12

We completed the sale of Rail City in May 2004 and the sale of UCMC in June 2004. As a result of the sale of these assets, the terms of our bank 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, no later than 180 days after the close of the sales. Accordingly, in August 2004 the Company made an initial reduction in the term loan of $31.6 million and the revolver of $11.3 million and will be required to make additional term loan reduction currently estimated to be approximately $10.0 million by December 31, 2004. In August 2004 the Company made additional revolver paydown totaling $58.7 million, which reduced the revolver to zero.  The Company has the ability to borrow approximately $10.0 million on the revolver as of September 30, 2004.

The Company’s bank credit agreement contains several 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 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 September 30, 2004, the Company is in compliance with the financial covenants.

The other debt totaling approximately $8.4 million as of September 30, 2004, consists primarily of the debt owed to the former principals of MCC, MindPlay, and CMS totaling $2.5 million, $4.0 million  and $0.4 million respectively.  The loans are due at various dates between 2005 and 2006 and bear rates of interest between LIBOR plus 2% (3.8% as of September 30, 2004) and 6%, and are generally unsecured.

10.  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):