Things have gone from bad to worse at Alliance Gaming (NYSE:AGI), the nation's No. 2 slot manufacturer. A weak first-quarter outlook incited the wrath of investors, who sent shares tumbling 25% lower to a new 52-week low of $11.27. Perhaps "weak" was a mild word, as the profit warning was not exactly run-of-the-mill. Alliance announced last night that it anticipates a first-quarter loss of between $0.09 and $0.14 a share, a far cry from analyst forecasts, which ranged as high as a $0.27 gain.

Alliance hinted in its fourth-quarter earnings release in August that some first-quarter softness was to be expected, but there was little indication of just how steep the drop might be. The company has also revised its full-year guidance downward, projecting flat-to-minimal earnings growth for the year. Now, even that reduced outlook has been called into question, as the firm said that its annual guidance is currently under review.

As bad as the estimates look, the actual results (due to be released on October 21) will likely be worse. The numbers provided do not include a $7.4 million settlement against Alliance that was awarded earlier this week to market leader International Gaming Technology (NYSE:IGT). According to the federal court ruling, a former subsidiary of Alliance, United Coin, had infringed on two IGT patents when it manufactured its Multi-Play video poker machines. As a result, Alliance will be forced to take a $0.09 first-quarter charge.

Weakness in both the games and systems divisions of Alliance's Bally Gaming subsidiary, as well as restructuring charges, were cited as factors for the soft outlook. Even before the reduced guidance, however, estimates of $0.10 were only half of what the company earned in last year's first quarter. Today's precipitous drop caps off a slide that began in April, when Alliance reached a 52-week high of around $34. Since, the stock has surrendered two-thirds of its value, retreating to a 52-week low.

All this trouble follows a solid quarter for Alliance, where revenues increased 41% to $162.8 million. Bally's, in particular, delivered a 60% jump in game sales, amid a 13% increase in new units as well as a higher per-unit selling price ($10,580). Furthermore, Alliance and rivals IGT and WMS Industries (NYSE:WMS) appear to be the obvious recipients of gaming expansion in states such as California and Pennsylvania.

With a second-best 10% of the domestic slot machine market, and a lead in slot-monitoring systems, the company may look attractive at less than 10 times future earnings. However, the company has a precarious hold on those positions, as IGT is making inroads into the systems market, and WMS is gaining ground elsewhere. Furthermore, today's debacle is not an isolated incident, and looks similar to the beating that ensued after an earlier warning in June. Last night's surprising profit warning illustrates that there may be deeper problems lurking beneath the surface. Until this uncertainty has been cleared, investors may want to think twice before dropping a few coins in Alliance Gaming.

Fool contributor Nathan Slaughter won 50 nickels on a Price Is Right slot machine recently, but owns none of the companies mentioned.