** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                              |       |                                                                                          |   |   |
| **For the quarterly period ended March 31, 2008** |
|                                              |       |                                                                                          |   |   |
| **OR**                                            |
|                                              |       |                                                                                          |   |   |
| **o**                                             | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom       to**

 

**Commission File Number 0-4281**

 

**BALLY TECHNOLOGIES, INC.**

(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) |

 

**(702) 584-7700**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.

x  Yes  o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See the definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):

 

x  Large Accelerated Filer                                                                                                o  Accelerated Filer

 

                o Non-Accelerated Filer (do not check if a smaller reporting company)  o  Smaller Reporting Company

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

o            Yesx  No

 

Thenumber of shares of Common Stock, $0.10 par value, outstanding as of May 7,2008, according to the records of the registrant’s registrar and transfer agentwas 54,703,000 which does not include 1,017,000 shares held in treasury.

 

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**I N D E X**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                              | ** ** |
|----------------|------------------------------------------------------------------------------------------------------------------------|------------|
|           |                                                                                                                   |       |
| Item 1.        | Financial  Statements                                                                                                  |       |
|           |                                                                                                                   |       |
|           | Unaudited Condensed Consolidated Balance Sheets as of  March 31, 2008 and June 30, 2007                                |       |
|           |                                                                                                                   |       |
|           | Unaudited Condensed Consolidated Statements of  Operations for the Three and Nine Months Ended March 31, 2008 and 2007 |       |
|           |                                                                                                                   |       |
|           | Unaudited Condensed Consolidated Statements of Cash  Flows for the Nine Months Ended March 31, 2008 and 2007           |       |
|           |                                                                                                                   |       |
|           | Notes to Unaudited Condensed Consolidated Financial  Statements                                                        |       |
|           |                                                                                                                   |       |
| Item 2.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |       |
|           |                                                                                                                   |       |
| Item 3.        | Quantitative  and Qualitative Disclosures About Market Risk                                                            |       |
|           |                                                                                                                   |       |
| Item 4.        | Controls and  Procedures                                                                                               |       |
|           |                                                                                                                   |       |
| **PART II.**   | **OTHER INFORMATION**                                                                                                  | ** ** |
| ** **     | ** **                                                                                                             | ** ** |
| Item 1.        | Legal Proceedings                                                                                                      |       |
|           |                                                                                                                   |       |
| Item 1A.       | Risk Factors                                                                                                           |       |
|           |                                                                                                                   |       |
| Item 2.        | Unregistered  Sales of Equity Securities and Use of Proceeds                                                           |       |
|           |                                                                                                                   |       |
| Item 4.        | Submission  of Matters to a Vote of Security Holders                                                                   |       |
|           |                                                                                                                   |       |
| Item 6.        | Exhibits                                                                                                               |       |
|           |                                                                                                                   |       |
| **SIGNATURES** |                                                                                                                   |       |

 

2

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**PART I**

**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                        | ** ** | **March 31,**                                  | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                        | ** ** | **2008**                                            | ** ** | **2007**          | ** ** |
| ** **                                                                                                                                        | ** ** | **(in 000s, except share  amounts)** | ** ** |
| ASSETS                                                                                                                                            |       |                                                |       |              |       |
| Current assets:                                                                                                                                   |       |                                                |       |              |       |
| Cash and cash  equivalents                                                                                                                        |       | $                                                   | 36,042     |              | $          | 40,842 |   |
| Restricted cash                                                                                                                                   |       | 13,571                                              |       | 17,201            |       |
| Accounts and  notes receivable, net of allowances for doubtful accounts of $11,553 and  $8,481                                                    |       | 209,688                                             |       | 172,060           |       |
| Inventories                                                                                                                                       |       | 91,154                                              |       | 81,151            |       |
| Deferred tax  assets, net                                                                                                                         |       | 62,896                                              |       | 59,486            |       |
| Deferred cost of  revenue                                                                                                                         |       | 61,751                                              |       | 36,744            |       |
| Other current  assets                                                                                                                             |       | 19,415                                              |       | 14,399            |       |
| Total current  assets                                                                                                                             |       | 494,517                                             |       | 421,883           |       |
|                                                                                                                                              |       |                                                |       |              |       |
| Long-term  investments (restricted)                                                                                                               |       | 10,803                                              |       | 10,455            |       |
| Long-term  receivables                                                                                                                            |       | 7,988                                               |       | 9,840             |       |
| Property, plant  and equipment, net of accumulated depreciation of $57,270 and $46,320                                                            |       | 72,494                                              |       | 75,623            |       |
| Leased gaming  equipment, net of accumulated depreciation of $88,553 and $73,396                                                                  |       | 92,132                                              |       | 67,965            |       |
| Goodwill                                                                                                                                          |       | 162,728                                             |       | 161,708           |       |
| Intangible  assets, net of accumulated amortization of $29,203 and $24,543                                                                        |       | 30,503                                              |       | 24,401            |       |
| Deferred tax  assets, net                                                                                                                         |       | 24,129                                              |       | 18,457            |       |
| Long-term  deferred cost of revenue                                                                                                               |       | 35,161                                              |       | 28,376            |       |
| Other assets,  net                                                                                                                                |       | 5,582                                               |       | 6,187             |       |
| Total assets                                                                                                                                      |       | $                                                   | 936,037    |              | $          | 824,895 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                         |       |                                                |       |              |       |
| Current liabilities:                                                                                                                              |       |                                                |       |              |       |
| Accounts payable                                                                                                                                  |       | $                                                   | 40,568     |              | $          | 44,045 |   |
| Accrued  liabilities                                                                                                                              |       | 52,611                                              |       | 56,427            |       |
| Customer  deposits                                                                                                                                |       | 23,863                                              |       | 23,489            |       |
| Jackpot  liabilities                                                                                                                              |       | 13,471                                              |       | 13,414            |       |
| Deferred revenue                                                                                                                                  |       | 127,459                                             |       | 94,347            |       |
| Income taxes  payable                                                                                                                             |       | 2,254                                               |       | 12,945            |       |
| Current  maturities of long-term debt and capital leases, including $2,800 and $2,381  owed to related parties                                    |       | 13,535                                              |       | 12,271            |       |
| Total current  liabilities                                                                                                                        |       | 273,761                                             |       | 256,938           |       |
| Long-term debt and capital leases, net of current  maturities, including $2,800 and $7,600 owed to related parties                                |       | 294,057                                             |       | 321,583           |       |
| Long-term deferred revenue                                                                                                                        |       | 55,629                                              |       | 36,651            |       |
| Other income tax liability                                                                                                                        |       | 20,285                                              |       | —            |       |
| Other liabilities                                                                                                                                 |       | 8,057                                               |       | 9,321             |       |
| Total  liabilities                                                                                                                                |       | 651,789                                             |       | 624,493           |       |
| Minority interest                                                                                                                                 |       | 1,689                                               |       | 948               |       |
| Commitments and contingencies (Note 9)                                                                                                            |       |                                                |       |              |       |
| Stockholders’ equity:                                                                                                                        |       |                                                |       |              |       |
| Special stock,  10,000,000 shares authorized: Series E, $100 liquidation value; 115  shares issued and outstanding                           |       | 12                                                  |       | 12                |       |
| Common stock,  $0.10 par value; 100,000,000 shares authorized; 55,686,000 and 54,612,000  shares issued and 54,669,000 and 54,025,000 outstanding |       | 5,555                                               |       | 5,455             |       |
| Treasury stock  at cost, 1,017,000 and 587,000 shares                                                                                             |       | (18,614                                             | )          | (1,894            | )          |
| Additional  paid-in capital                                                                                                                       |       | 285,138                                             |       | 253,809           |       |
| Accumulated  other comprehensive income                                                                                                           |       | 2,414                                               |       | 1,119             |       |
| Retained  earnings (accumulated deficit)                                                                                                          |       | 8,054                                               |       | (59,047           | )          |
| Total  stockholders’ equity                                                                                                                  |       | 282,559                                             |       | 199,454           |       |
| Total  liabilities and stockholders’ equity                                                                                                  |       | $                                                   | 936,037    |              | $          | 824,895 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

** **

 

3

----

 

**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                       | ** ** | **Three Months Ended**                                 | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **March 31,**                                               | ** ** | **March 31,**              | ** ** |
| ** **                                       | ** ** | **2008**                                                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Revenues:                                        |       |                                                             |       |                            |       |   |   |   |   |
| Gaming equipment  and systems                    |       | $                                                                | 160,627    |                            | $          | 117,513 |   | $ | 448,889 |   | $ | 318,108 |   |
| Gaming  operations                               |       | 58,981                                                           |       | 44,731                          |       | 167,237 |   | 125,770 |   |
| Casino  operations                               |       | 13,001                                                           |       | 12,974                          |       | 36,165 |   | 36,051 |   |
|                                             |       | 232,609                                                          |       | 175,218                         |       | 652,291 |   | 479,929 |   |
| Costs and expenses:                              |       |                                                             |       |                            |       |   |   |   |   |
| Cost of gaming  equipment and systems (1)        |       | 74,918                                                           |       | 63,452                          |       | 205,720 |   | 174,001 |   |
| Cost of gaming  operations                       |       | 17,691                                                           |       | 18,645                          |       | 58,507 |   | 53,311 |   |
| Direct cost of  casino operations                |       | 4,901                                                            |       | 4,681                           |       | 14,332 |   | 13,583 |   |
| Selling, general  and administrative             |       | 60,416                                                           |       | 51,303                          |       | 173,679 |   | 151,150 |   |
| Research and  development costs                  |       | 15,103                                                           |       | 12,536                          |       | 43,059 |   | 38,399 |   |
| Depreciation and  amortization                   |       | 4,725                                                            |       | 6,236                           |       | 14,175 |   | 17,111 |   |
|                                             |       | 177,754                                                          |       | 156,853                         |       | 509,472 |   | 447,555 |   |
| Operating income                                 |       | 54,855                                                           |       | 18,365                          |       | 142,819 |   | 32,374 |   |
|                                             |       |                                                             |       |                            |       |   |   |   |   |
| Other income (expense):                          |       |                                                             |       |                            |       |   |   |   |   |
| Interest income                                  |       | 832                                                              |       | 680                             |       | 2,836 |   | 2,004 |   |
| Interest expense                                 |       | (6,326                                                           | )          | (7,656                          | )          | (20,833 | ) | (25,777 | ) |
| Other, net                                       |       | 1,281                                                            |       | (37                             | )          | 2,274 |   | 1,143 |   |
|                                             |       |                                                             |       |                            |       |   |   |   |   |
| Income before income taxes and minority interest |       | 50,642                                                           |       | 11,352                          |       | 127,096 |   | 9,744 |   |
| Income tax  expense                              |       | (18,939                                                          | )          | (4,493                          | )          | (47,283 | ) | (2,806 | ) |
| Minority  interest                               |       | (1,454                                                           | )          | (277                            | )          | (3,866 | ) | (3,100 | ) |
|                                             |       |                                                             |       |                            |       |   |   |   |   |
| Net income                                       |       | $                                                                | 30,249     |                            | $          | 6,582 |   | $ | 75,947 |   | $ | 3,838 |   |
|                                             |       |                                                             |       |                            |       |   |   |   |   |
| Basic and diluted earnings per share:            |       |                                                             |       |                            |       |   |   |   |   |
| Basic earnings  per share                        |       | $                                                                | 0.55       |                            | $          | 0.12 |   | $ | 1.40 |   | $ | 0.07 |   |
| Diluted earnings  per share                      |       | $                                                                | 0.52       |                            | $          | 0.12 |   | $ | 1.31 |   | $ | 0.07 |   |
|                                             |       |                                                             |       |                            |       |   |   |   |   |
| Weighted average shares outstanding:             |       |                                                             |       |                            |       |   |   |   |   |
| Basic                                            |       | 54,576                                                           |       | 53,220                          |       | 54,335 |   | 53,062 |   |
| Diluted                                          |       | 58,396                                                           |       | 55,662                          |       | 58,114 |   | 55,249 |   |

 

----

(1) Costof gaming equipment and systems exclude amortization related to certainintangibles, including core technology and license rights, which are includedin depreciation and amortization.

 

 

See accompanying notes to unaudited condensed consolidated financialstatements.

** **

 

4

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                   | ** ** | **Nine Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| ** **                                                                                   | ** ** | **(in 000s)**                              | ** ** |
| Cash flows from operating activities:                                                        |       |                                            |       |   |   |   |
| Net income                                                                                   |       | $                                               | 75,947     |   | $ | 3,838 |   |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                            |       |   |   |   |
| Depreciation and  amortization                                                               |       | 45,339                                          |       | 44,672 |   |   |
| Share-based  compensation                                                                    |       | 10,020                                          |       | 11,090 |   |   |
| Tax benefit of  stock option exercises                                                       |       | 155                                             |       | — |   |   |
| Excess tax  benefit of stock option exercises                                                |       | (6,481                                          | )          | (526 | ) |   |
| Deferred income  taxes                                                                       |       | —                                          |       | 1,809 |   |   |
| Provision for  doubtful accounts                                                             |       | 3,757                                           |       | 669 |   |   |
| Inventory and  other asset write-downs                                                       |       | 7,587                                           |       | 7,762 |   |   |
| Other                                                                                        |       | 1,017                                           |       | 5,564 |   |   |
| Changes in operating assets and liabilities:                                                 |       |                                            |       |   |   |   |
| Accounts and  notes receivable                                                               |       | (39,496                                         | )          | (19,036 | ) |   |
| Inventories                                                                                  |       | (65,650                                         | )          | (67,568 | ) |   |
| Other current  assets                                                                        |       | (4,861                                          | )          | (2,488 | ) |   |
| Accounts payable                                                                             |       | (4,902                                          | )          | (3,050 | ) |   |
| Accrued  liabilities and jackpot liabilities                                                 |       | (8,953                                          | )          | (8,594 | ) |   |
| Deferred revenue                                                                             |       | 20,298                                          |       | 19,785 |   |   |
| Net cash provided by (used in) operating activities                                          |       | 33,777                                          |       | (6,073 | ) |   |
|                                                                                         |       |                                            |       |   |   |   |
| Cash flows from investing activities:                                                        |       |                                            |       |   |   |   |
| Capital  expenditures                                                                        |       | (12,565                                         | )          | (15,238 | ) |   |
| Restricted cash  and investments                                                             |       | 3,567                                           |       | (2,087 | ) |   |
| Additions to  other long-term assets                                                         |       | (10,634                                         | )          | (3,299 | ) |   |
| Net cash used in investing activities                                                        |       | (19,632                                         | )          | (20,624 | ) |   |
|                                                                                         |       |                                            |       |   |   |   |
| Cash flows from financing activities:                                                        |       |                                            |       |   |   |   |
| Proceeds from  revolving credit facility                                                     |       | —                                          |       | 15,000 |   |   |
| Payments on  revolving credit facility                                                       |       | —                                          |       | (10,000 | ) |   |
| Reduction of  long-term debt                                                                 |       | (25,062                                         | )          | (9,943 | ) |   |
| Proceeds from  sale lease-back arrangements                                                  |       | —                                          |       | 22,303 |   |   |
| Purchase of  treasury stock                                                                  |       | (16,720                                         | )          | — |   |   |
| Excess tax  benefit of stock option exercises                                                |       | 6,481                                           |       | 526 |   |   |
| Proceeds from  exercise of stock options                                                     |       | 14,976                                          |       | 7,401 |   |   |
| Net cash (used in) provided by financing activities                                          |       | (20,325                                         | )          | 25,287 |   |   |
|                                                                                         |       |                                            |       |   |   |   |
| Effect of exchange rate changes on cash                                                      |       | 1,380                                           |       | 212 |   |   |
|                                                                                         |       |                                            |       |   |   |   |
| Cash and cash equivalents:                                                                   |       |                                            |       |   |   |   |
| Decrease for  period                                                                         |       | (4,800                                          | )          | (1,198 | ) |   |
| Balance,  beginning of period                                                                |       | 40,842                                          |       | 16,425 |   |   |
| Balance, end of  period                                                                      |       | $                                               | 36,042     |   | $ | 15,227 |   |   |
|                                                                                              |            |                                                 |            |  |  |  |  |  |  |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

** **

 

5

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED****SUPPLEMENTAL CASH FLOW INFORMATION (Continued)**

 

The followingsupplemental information is related to the unaudited condensed consolidatedstatements of cash flows:

 
| ** **                                                                                   | ** ** | **Nine Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| ** **                                                                                   | ** ** | **(in 000s)**                              | ** ** |
| Cash paid for interest                                                                       |       | $                                               | 21,942     |   | $ | 25,681 |   |
| Cash paid for income taxes                                                                   |       | 49,321                                          |       | 1,127 |   |
|                                                                                         |       |                                            |       |   |   |
| Non-cash investing and financing transactions:                                               |       |                                            |       |   |   |
| Transfer of leased gaming equipment to inventory (1)                                         |       | $                                               | 7,478      |   | $ | 6,026 |   |
| Transfer of inventory to leased gaming equipment (1)                                         |       | 56,964                                          |       | 48,998 |   |
| Capital expenditure accruals                                                                 |       | 1,220                                           |       | 580 |   |
| Assets acquired through sale lease-back transactions                                         |       | —                                          |       | 11,681 |   |
| Non-cash aspects of sale lease-back transactions                                             |       | —                                          |       | 3,333 |   |
| Receipt of Company’s common stock as consideration  for employee stock option exercises |       | —                                          |       | 507 |   |
| Consolidation of variable interest entities                                                  |       | 635                                             |       | 1,000 |   |

 

----

(1)                                  The Company has one process to procureraw materials for the assembly of both inventory and leased gamingequipment.  The materials requisition planningprocess considers the number of devices the Company expects to build for saleand for use in its gaming operations division during a particular period, butit does not separately earmark purchases for leased gaming equipment.  Without such an earmarking process, theCompany is unable to determine whether the cash expended to construct leasedgaming equipment during a particular period came from inventory on hand at thebeginning of the period or was constructed from inventory procured during the periodof deployment, thus requiring the expenditure of cash.  As a result of the inability to separatelyidentify the cash flows associated with the construction of leased gamingequipment, the Company has included all additions to leased gaming equipment asa change in inventory under cash provided by (used in) operating activities inthe unaudited condensed consolidated statement of cash flows.  In addition, cash generated from the sale ofused gaming equipment classified as leased gaming equipment is also included incash provided by (used in) operating activities in the unaudited condensedconsolidated statement of cash flows.

 

6

----

 

 

**BALLY TECHNOLOGIES, INC.**

**FORM 10-Q**

Notesto Unaudited Condensed Consolidated Financial Statements

 

**1.             BASIS OF PRESENTATION**

 

*Principlesof presentation and consolidation*

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles andpursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”) and reflect all adjustments, consisting of normal recurringadjustments, which management believes are necessary to fairly present thefinancial position, results of operations and cash flows of Bally Technologies, Inc.(“Bally” or the “Company”), a Nevada corporation, and its subsidiaries for therespective periods presented as required by Regulation S-X, Rule 10-01.  Certain information and note disclosuresnormally included in annual financial statements prepared in accordance withgenerally accepted accounting principles have been condensed or omittedpursuant to those rules and regulations. The results of operations for an interim period are not necessarilyindicative of the results that may be expected for any other interim period orthe year as a whole.  The accompanyingunaudited condensed consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto in the Company’sAnnual Report on Form 10-K for the fiscal year ended June 30, 2007,as filed with the SEC on November 2, 2007.

 

Bally is a diversified, worldwide gaming company that designs,manufactures, distributes and operates gaming machines and computerizedmonitoring systems for gaming machines and owns and operates one casino.

 

The Company is the general partner of Rainbow Casino VicksburgPartnership (“RCVP”), which operates the Rainbow Casino in Vicksburg,Mississippi.  The limited partner of RCVPis entitled to receive 10% of the net available cash flows of RCVP after debtservice and other items, as defined in the limited partnership agreement, whichincreases to 20% of the net available cash flows based on the incrementalamount of revenues in excess of $35.0 million, payable quarterly through December 31,2010.  The Company holds the remainingeconomic interest in the partnership. The Company consolidates RCVP and records an adjustment to reflect theportion of the earnings of RCVP attributable to the minority shareholders.

 

TheCompany also consolidates certain Atlantic City progressive trusts (the“Trusts”) in accordance with Financial Accounting Standards Board (“FASB”) Interpretation(“FIN”) 46R, *Consolidation of Variable Interest Entities,*which addresses consolidation by a business enterprise of variable interestentities.   The Trusts are consolidatedbased on the premise they do not have sufficient equity investment at risk topermit the Trusts to finance their activities without additional subordinatedfinancial support from the Company.  Asof March 31, 2008 and June 30, 2007, the Company consolidated $7.0million and $6.3 million, respectively, in total assets and liabilities,primarily consisting of restricted cash accounts and restricted investments(included in other assets in the unaudited condensed consolidated balancesheets) and related jackpot liabilities. The following revenues and costs were also consolidated:

 

| ** **                | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                | ** ** | **2008**                                         | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                | ** ** | **(in 000s)**                               | ** ** |
| Gaming operations revenue |       | $                                                | 614        |                                            | $          | 1,453 |   | $ | 4,075 |   | $ | 5,455 |   |
| Cost of gaming operations |       | (390                                             | )          | 1,660                                           |       | 1,211 |   | 3,466 |   |
|                           |            |                                                  |            |                                                 |            |  |  |  |  |  |  |  |  |

 

All intercompany accountsand transactions have been eliminated in consolidation.

 

 

7

----

 

 

*Inventories*

 

Inventoriesare stated at the lower of cost, determined on a first in, first out basis, ormarket.  Cost elements included inwork-in-process and finished goods include raw materials, direct labor andmanufacturing overhead.  Inventoriesconsist of the following:

 

| ** **      | ** ** | **March 31,  2008** | ** ** | **June 30,  2007** | ** ** |
|-----------------|------------|--------------------------|------------|-------------------------|------------|
| ** **      | ** ** | **(in 000s)**       | ** ** |
| Raw materials   |       | $                        | 62,246     |                    | $          | 58,473 |   |
| Work-in-process |       | 1,190                    |       | 639                     |       |
| Finished goods  |       | 27,718                   |       | 22,039                  |       |
| Total           |       | $                        | 91,154     |                    | $          | 81,151 |   |

 

*Property,plant and equipment and leased gaming equipment*

 

Property, plant andequipment is stated at cost and depreciated over the estimated useful lives orlease term, if less, using the straight line method as follows: buildings andimprovements, 10 to 40 years; gaming equipment used in casino operations, 4 to7 years; furniture, fixtures and equipment, 3 to 7 years; and leaseholdimprovements, the shorter of the lease term or 10 years.  Leased gaming equipment is stated at cost anddepreciated over the estimated useful lives ranging from 2 to 31⁄2 years.  Equipment under capital leases is recorded atthe lower of the present value of the minimum lease payments or the fair valueof the assets.

 

*DeferredRevenue and Deferred Cost of Revenue*

 

Deferred revenue arises from the timing differencesbetween the shipment or installation of gaming equipment and systems productsand the satisfaction of all revenue recognition criteria consistent with theCompany’s revenue recognition policy. Deferred cost of revenue consists of the direct costs associated withthe manufacture of gaming equipment and systems products for which revenue hasbeen deferred.  Deferred revenue anddeferred cost of revenue that are expected to be realized within one year areclassified as current liabilities and current assets, respectively.  In certain cases, deferred cost of revenue isrecorded in advance of deferred revenue due to the shipment and receipt of theproduct by the customer in advance of billing.

* *

*RecentlyIssued Accounting Pronouncements*

 

In March 2008,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161,*Disclosures about Derivative Instruments andHedging Activities — An Amendment of FASB Statement No. 133. *SFAS No. 161 enhancesrequired disclosures regarding derivatives and hedging activities, includingenhanced disclosures regarding how: (a) an entity uses derivativeinstruments; (b) derivative instruments and related hedged items areaccounted for under FASB Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities;* and (c) derivativeinstruments and related hedged items affect an entity’s financial position,financial performance, and cash flows. SFAS No. 161 is effective for fiscal years, and interim periodswithin those fiscal years, beginning after November 15, 2008, thoughearlier application is encouraged.  TheCompany expects to adopt SFAS No. 161 beginning in fiscal 2010.  The Company expects that SFAS No. 161will have an impact on accounting for derivative instruments and hedgingactivities once adopted, but the significance of the effect is dependent uponentering into these related transactions, if any, at that time.

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007),*Business Combinations.* SFAS No. 141R willsignificantly change the accounting for business combinations.  Under SFAS No. 141R, an acquiring entityis required to recognize all of the assets acquired and liabilities assumed ina transaction at the acquisition-date fair value with limited exceptions.   SFAS No. 141R also includes asubstantial number of new disclosure requirements.  SFAS No. 141R applies prospectively tobusiness combinations for which the acquisition date is on or after the beginningof the first annual reporting period beginning on or after December 15,2008, and accordingly, the Company expects to adopt SFAS No. 141Rbeginning in fiscal 2010.  The Companyexpects that SFAS No. 141R will have an impact on accounting for businesscombinations once adopted, but the significance of the effect is dependent uponacquisitions, if any, at that time.

 

 

8

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In December 2007,the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated Financial Statements - An Amendment ofARB No. 51.* SFAS No. 160 establishes new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. Specifically, this statement requires the recognition of anoncontrolling interest (minority interest) as equity in the consolidatedfinancial statements and separate from the parent’s equity.  The amount of net income attributable to thenoncontrolling interest will be included in consolidated net income on the faceof the income statement.  SFAS No. 160clarifies that changes in a parent’s ownership interest in a subsidiary that donot result in deconsolidation are equity transactions if the parent retains itscontrolling financial interest.  In addition,this statement requires that a parent recognize a gain or loss in net incomewhen a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of thenoncontrolling equity investment on the deconsolidation date.  SFAS No. 160 also includes expandeddisclosure requirements regarding the interests of the parent and itsnoncontrolling interest.  SFAS No. 160is effective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008, and accordingly, the Companyexpects to adopt SFAS No. 160 beginning in fiscal 2010.  The Company is currently in the process ofevaluating the impact SFAS No. 160 will have on its consolidated resultsof operations, financial position and cash flows.

 

In February 2007,the FASB issued Statement SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities*.  SFAS No. 159 provides companies with anoption to report selected financial assets and liabilities at fair value.  It also establishes presentation anddisclosure requirements to facilitate comparisons between companies usingdifferent measurement attributes for similar types of assets andliabilities.  The statement is effectivefor fiscal years beginning after November 15, 2007, and accordingly, theCompany expects to adopt SFAS No. 159 beginning in fiscal 2009.  Earlier application is permitted provided theCompany also applies the provisions of SFAS No. 157, *Fair ValueMeasurements*, which is discussed below.  The Company is currently in the process ofevaluating the impact SFAS No. 159 will have on its consolidated resultsof operations, financial position and cash flows.

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*,which defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  SFAS No. 157does not require any new fair value measurements, rather it applies to existingaccounting pronouncements that require or permit fair value measurements.  SFAS No. 157 is effective for fiscalyears beginning after November 15, 2007.  In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS157-2, *Effective Date of FASB Statement No.157*,delaying the effective date of SFAS 157 for certain nonfinancial assets andliabilities until fiscal years beginning after November 15, 2008, andaccordingly, the Company expects to adopt SFAS No. 157 beginning in fiscal2010.  The Company is currently in theprocess of evaluating the impact SFAS No. 157 will have on itsconsolidated results of operations, financial position and cash flows.

 

** **

**2.             EARNINGS PER SHARE**

 

The computation of basicand diluted earnings per share applicable to the Company’s common stock is as follows:

 
| ** **                                                                    | ** ** | **Three Months Ended  March 31,**                 | ** ** | **Nine Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                                         | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Net income                                                                    |       | $                                                                | 30,249     |                                            | $          | 6,582 |   | $ | 75,947 |   | $ | 3,838 |   |
| After tax  interest expense on convertible debt                               |       | 66                                                               |       | —                                          |       | 234 |   | — |   |
| Dilutive earnings                                                             |       | $                                                                | 30,315     |                                            | $          | 6,582 |   | $ | 76,181 |   | $ | 3,838 |   |
|                                                                          |       |                                                             |       |                                            |       |   |   |   |   |
| Weighted average common shares outstanding                                    |       | 54,576                                                           |       | 53,220                                          |       | 54,335 |   | 53,062 |   |
| Dilutive effect  of:                                                          |       |                                                             |       |                                            |       |   |   |   |   |
| Stock options,  Restricted Stock Units (“RSU”) and restricted stock |       | 3,616                                                            |       | 1,990                                           |       | 3,511 |   | 1,598 |   |
| Warrants                                                                      |       | 41                                                               |       | —                                          |       | 33 |   | — |   |
| Convertible debt  (1)                                                         |       | 163                                                              |       | 452                                             |       | 235 |   | 589 |   |
| Diluted shares  outstanding                                                   |       | 58,396                                                           |       | 55,662                                          |       | 58,114 |   | 55,249 |   |
|                                                                          |       |                                                             |       |                                            |       |   |   |   |   |
| Basic earnings per share                                                      |       | $                                                                | 0.55       |                                            | $          | 0.12 |   | $ | 1.40 |   | $ | 0.07 |   |
| Diluted earnings per share                                                    |       | $                                                                | 0.52       |                                            | $          | 0.12 |   | $ | 1.31 |   | $ | 0.07 |   |

 

----

(1)          The Company has certain related party debt outstandingwhich is convertible into common stock at the Company’s discretion.  See Note 6, Related Party Transactions.

 

 

 

9

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Certain securities wereexcluded from the diluted per share calculation for certain periods becausetheir inclusion would be anti-dilutive. Such securities consisted of the following:

 

| ** **                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                              | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **(in 000s  )**             | ** ** |
| Stock options, RSU and restricted stock |       | 84                               |       | 1,634                           |       | 149 |   | 1,940 |   |
| Warrants                                |       | —                           |       | 100                             |       | — |   | 100 |   |
| Total                                   |       | 84                               |       | 1,734                           |       | 149 |   | 2,040 |   |

 

**3.             SHARE-BASED COMPENSATION**

 

The Company accounts forits share-based compensation in accordance with the provisions of SFAS No. 123R,*Share-Based Payment*, whichestablished accounting for equity instruments exchanged for employeeservices.  SFAS No. 123R requiresemployee stock options and rights to purchase shares under stock participationplans to be accounted for under the fair value method.  Under the provisions of SFAS No. 123R,share-based compensation cost is measured at the grant date, based on thecalculated fair value of the award, and is recognized as an expense over theemployee’s requisite service period which is generally the vesting period ofthe equity grant.

 

The following tablepresents share-based compensation expense and related effect of the income taxbenefit included in the Company’s unaudited condensed consolidated statementsof operations:

 

| ** **                                          | ** ** | **Three Months Ended  March 31** | ** ** | **Nine Months Ended  March 31** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                        | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(in 000s)**                                   | ** ** |
|                                                |       |                                            |       |                                           |       |   |   |   |   |
| Selling, general and administrative                 |       | $                                               | 2,937      |                                           | $          | 2,501 |   | $ | 8,562 |   | $ | 9,778 |   |
| Research and development                            |       | 470                                             |       | 437                                            |       | 1,367 |   | 1,204 |   |
| Cost of gaming equipment and systems and operations |       | 28                                              |       | 40                                             |       | 91 |   | 108 |   |
| Share-based compensation expense before tax         |       | 3,435                                           |       | 2,978                                          |       | 10,020 |   | 11,090 |   |
| Income tax  benefit                                 |       | 1,202                                           |       | 1,042                                          |       | 3,507 |   | 3,882 |   |
| Net share-based  compensation expense               |       | $                                               | 2,233      |                                           | $          | 1,936 |   | $ | 6,513 |   | $ | 7,208 |   |

 

As of March 31,2008, there was $16.8 million of total unrecognized compensation expenserelated to the unvested portion of stock options which will be recognized overthe subsequent 2.2 years.

 

The Company estimates thefair value of stock options using the Black-Scholes valuation model.  Key input assumptions used to estimate thefair value of stock options include the exercise price of the option, theexpected option term, the expected volatility of the Company’s common stockover the option’s expected term, the risk-free interest rate over the option’sexpected term and the Company’s expected annual dividend yield.  The Company believes that the valuationtechnique and the approach utilized to develop the underlying assumptions areappropriate in calculating the fair values of the Company’s stock optionsgranted.  Estimates of fair value are notintended to predict actual future events, or the value ultimately realized bythe recipients of equity awards.

 

The fair value of eachoption granted during the periods referenced below was estimated on the grantdate using the Black-Scholes valuation model with the following assumptions:

 

| ** **                       | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                         | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted average:                |       |                                             |       |                                            |       |   |   |   |   |
| Expected option  term (in years) |       | 4.52                                             |       | 6.25                                            |       | 5.30 |   | 6.19 |   |
| Expected  volatility             |       | 41.45                                            | %          | 56.84                                           | %          | 45.56 | % | 57.35 | % |
| Risk-free  interest rate         |       | 2.98                                             | %          | 4.83                                            | %          | 3.90 | % | 4.77 | % |
| Expected annual  dividend yield  |       | —                                           |       | —                                          |       | — |   | — |   |

 

 

 

10

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Stock option activity asof and for the nine months ended March 31, 2008 is summarized below:

 

| ** **                                    | ** ** | **Weighted Average** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|
| ** **                                    | ** ** | **Shares**                | ** ** | **Exercise  Price** | ** ** | **Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| ** **                                    | ** ** | **(in 000s)**        | ** ** | **(per share)** | ** ** | **(years)** | ** ** | **(in 000s)** | ** ** |
| Balance outstanding as of June 30, 2007  |       | 8,179                     |       | $ | 15.87 |   | 6.88 |   | $ | 86,328 |   |
| Granted                                       |       | 210                       |       | 36.14 |   |   |   |   |   |
| Exercised                                     |       | (1,003                    | )          | 14.93 |   |   |   |   |   |
| Forfeited or  expired                         |       | (126                      | )          | 16.86 |   |   |   |   |   |
| Balance outstanding as of March 31, 2008 |       | 7,260                     |       | $ | 16.56 |   | 6.47 |   | $ | 130,085 |   |
|                                          |       |                      |       |   |   |   |   |   |   |
| Exercisable as of March 31, 2008         |       | 4,972                     |       | $ | 16.52 |   | 5.88 |   | $ | 88,996 |   |

 

Restricted stock and RSUactivity as of and for the nine months ended March 31, 2008 is summarizedbelow:

 

| ** **                                    | ** ** | **Weighted Average** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|
| ** **                                    | ** ** | **Shares**                | ** ** | **Grant Date  Fair Value** | ** ** |
| ** **                                    | ** ** | **(in 000s)**        | ** ** | **(per share)** | ** ** |
| Balance outstanding as of June 30, 2007  |       | 761                       |       | $ | 16.05 |   |
| Granted                                       |       | 94                        |       | 42.32 |   |
| Vested                                        |       | (24                       | )          | 17.42 |   |
| Forfeited or  expired                         |       | —                    |       | — |   |
| Balance outstanding as of March 31, 2008 |       | 831                       |       | $ | 19.19 |   |
|                                          |       |                      |       |   |   |
| Vested as of March 31, 2008              |       | 546                       |       | $ | 15.96 |   |

** **

**4.             GOODWILL AND INTANGIBLE ASSETS**

 

*Finite lived intangible assets*

 

Finitelived intangible assets are comprised of the following:

 

| ** **                          | ** ** | **March 31,  2008** | ** ** | **June 30,  2007** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **(in 000s)**       | ** ** |
| Patents and gaming related products |       | $                        | 16,050     |                    | $          | 16,050 |   |
| Less: accumulated amortization      |       | (7,378                   | )          | (5,992                  | )          |
|                                |       | 8,672                    |       | 10,058                  |       |
|                                |       |                     |       |                    |       |
| Licenses and other                  |       | $                        | 43,656     |                    | $          | 32,894 |   |
| Less: accumulated amortization      |       | (21,825                  | )          | (18,551                 | )          |
|                                |       | 21,831                   |       | 14,343                  |       |
|                                |       |                     |       |                    |       |
| Total                               |       | $                        | 30,503     |                    | $          | 24,401 |   |

* *

*Goodwill*

 

Thechanges in the carrying amount of goodwill for the nine months ended March 31,2008, are as follows:

 

| ** **                              | ** ** | **(in 000s)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| Balance at June 30, 2007           |       | $                  | 161,708    |   |
| Foreign currency translation adjustment |       | 1,020              |       |
| Balance at March 31, 2008          |       | $                  | 162,728    |   |

** **

** **

 

11

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** **

**5.             LONG-TERM DEBT AND CAPITAL LEASES**

 

Long-termdebt and capital leases consist of the following:

 

| ** **                                                  | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                  | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| ** **                                                  | ** ** | **(in 000s)** | ** ** |
| Term loan facility                                          |       | $290,385           |       | $307,882          |       |
| Capital lease obligations                                   |       | 11,557             |       | 15,944            |       |
| Related party debt (see Note 6)                             |       | 5,600              |       | 9,981             |       |
| Other, generally unsecured                                  |       | 50                 |       | 47                |       |
| Long-term debt  and capital leases                          |       | 307,592            |       | 333,854           |       |
| Less current maturities                                     |       | 13,535             |       | 12,271            |       |
| Long-term debt  and capital leases, less current maturities |       | $294,057           |       | $321,583          |       |

 

The Company’s debt structure at March 31,2008 consisted primarily of a term loan facility and a $75.0 million revolvingcredit facility, which are limited by a current leverage ratio and debt owed torelated parties.  The revolving creditfacility is further restricted to the extent of outstanding letters ofcredit.  Outstanding letters of credit atMarch 31, 2008 were $26.3 million which reduced availability under therevolving credit facility to approximately $48.7 million.  The revolving credit facility commitmentexpires in September 2008.  Therewere no amounts outstanding under the Company’s revolving credit facility as ofMarch 31, 2008.

 

The term loan requires principalreductions of approximately 1% per annum paid quarterly, with a balloon paymentdue in September 2009.  As of March 31,2008, the term loan had an interest rate of 7.36%, based on LIBOR plus 3.00%.

 

The term loan and the revolvingcredit facility are collateralized by substantially all of the Company’sdomestic property and are guaranteed by each of the Company’s domesticsubsidiaries, other than the entity that holds the Company’s interest in itsRainbow Casino operations, and are secured by a pledge agreement.  The bank loan agreement governing the termloan and the revolving credit facility (the “Loan Agreement”) contains a numberof maintenance and other covenants that, among other things, restrict theability of the Company and certain of its subsidiaries to dispose of assets,incur additional indebtedness or issue preferred stock, pay dividends or make otherdistributions, enter into certain acquisitions, repurchase equity interests orsubordinated indebtedness, issue or sell equity interests of the Company’ssubsidiaries, engage in mergers or acquisitions or certain transactions withsubsidiaries and affiliates, and that otherwise restrict corporateactivities.  The Company was incompliance with these covenants as of March 31, 2008.

 

As of March 31, 2008, theCompany was also in compliance with its financial covenants consisting of aleverage ratio, a fixed charges coverage ratio and a minimum of Earnings BeforeInterest, Taxes, Depreciation and Amortization (“EBITDA”) as defined by theLoan Agreement.  The leverage ratio iscomputed as total average debt outstanding during the quarter divided by thetrailing 12 months EBITDA, excluding certain cash and non-cash charges.  The Company’s leverage ratio as of March 31,2008 was 1.30 times versus the covenant maximum allowable of 3.50 times.

 

Capitallease obligations represent amounts owed under lease or sale-lease backtransactions primarily related to equipment used in the Company’s GamingEquipment and Systems segment.  Based ondifferent installation dates over a four month period, three separate paymentstreams of thirty-six equal installments were created with an aggregate monthlypayment of $655,000 at an average interest rate of 9.11%.

 

The Company’s related party debt,which totaled approximately $5.6 million as of March 31, 2008, consists ofthe debt owed to the former principals of Sierra Design Group (“SDG”).  See Note 6, Related Party Transactions,regarding related party debt.

 

 

12

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** **

** **

**6.             RELATED PARTY TRANSACTIONS**

 

TheCompany completed the acquisition of all of the assets of SDG during fiscal2005 and substantially all of the assets and liabilities of MindPlay duringfiscal 2004.  In each acquisition, theconsideration paid included subordinated debt issued to the former principalsof each business.  Certain of the formerprincipals are now employees of the Company.

 

Thenotes payable to the former principals of SDG totaled approximately $5.6million as of March 31, 2008 and are payable in annual installments plusinterest at LIBOR plus 2% (7.24% set at beginning of calendar year) through2009.  At the Company’s discretion, theprincipal and accrued interest thereon can be paid in cash, or can be convertedinto shares of the Company’s common stock using the average stock price for the20 business days prior to the delivery of such shares.

 

Theinitial purchase price for Mindplay included, among other things, the issuanceof a $4.0 million note payable with a fixed rate of 6%.  The notes payable to the former principals ofMindplay totaled $3.0 million at June 30, 2007.  No amounts were outstanding under the notespayable at March 31, 2008.    In thethird quarter of fiscal 2008, the Company entered into an agreement with theformer principals of MindPlay to settle the $3.0 million note payable, $0.5million of accrued interest and $1.0 million in certain other relatedliabilities for $1.8 million.  Thesettlement resulted in a gain of approximately $2.7 million which is includedin selling, general and administrative expense.

 

In November 2007,the Company repurchased 149,253 shares of common stock for $6.0 million from Mr. RobertLuciano, a former principal of SDG and the Company’s Chief Technology Officer.The shares are included in treasury stock.

 

TheCompany leases a warehouse and office facility from an entity owned by Mr. Luciano.  Rental payments totaled $117,000 and $112,000for the three months ended March 31, 2008 and 2007, respectively, and$341,000 and $336,000 for nine months ended March 31, 2008 and 2007,respectively.

 

 

13

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**7.             SEGMENTS AND GEOGRAPHICALINFORMATION**

 

TheCompany operates in two reportable segments: (i) Bally Gaming Equipmentand Systems which designs, manufactures, assembles, distributes and operatesgaming machines and computerized monitoring and bonusing systems for gamingmachines, and (ii) Casino Operations which owns and operates a casino inVicksburg, Mississippi.  The accountingpolicies of these segments are consistent with the Company’s policies for theunaudited condensed consolidated financial statements.

 

The table below presentsinformation as to the Company’s revenues and operating income by segment:

 

| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                         | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(in 000s)**                               | ** ** |
| Revenues:                    |       |                                             |       |                                            |       |   |   |   |   |
| Gaming Equipment and Systems |       | $                                                | 219,608    |                                            | $          | 162,244 |   | $ | 616,126 |   | $ | 443,878 |   |
| Casino Operations            |       | 13,001                                           |       | 12,974                                          |       | 36,165 |   | 36,051 |   |
| Total revenues               |       | $                                                | 232,609    |                                            | $          | 175,218 |   | $ | 652,291 |   | $ | 479,929 |   |
|                         |       |                                             |       |                                            |       |   |   |   |   |
| Inter-segment revenues:      |       |                                             |       |                                            |       |   |   |   |   |
| Gaming Equipment and Systems |       | $                                                | 490        |                                            | $          | 113 |   | $ | 924 |   | $ | 300 |   |
| Casino Operations            |       | —                                           |       | —                                          |       | — |   | — |   |
| Total inter-segment revenues |       | $                                                | 490        |                                            | $          | 113 |   | $ | 924 |   | $ | 300 |   |
|                         |       |                                             |       |                                            |       |   |   |   |   |
| Operating income:            |       |                                             |       |                                            |       |   |   |   |   |
| Gaming Equipment and Systems |       | $                                                | 56,221     |                                            | $          | 20,596 |   | $ | 154,113 |   | $ | 40,449 |   |
| Casino Operations            |       | 5,387                                            |       | 5,483                                           |       | 13,429 |   | 13,453 |   |
| Corporate/other              |       | (6,753                                           | )          | (7,714                                          | )          | (24,723 | ) | (21,528 | ) |
| Total operating income       |       | $                                                | 54,855     |                                            | $          | 18,365 |   | $ | 142,819 |   | $ | 32,374 |   |

 

The Company’s operations are basedprimarily in the United States and Canada with sales and distribution officesin Europe, China and South America.  Thetable below presents information as to the Company’s revenues and operatingincome by geographic region:

 

| ** **               | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                         | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **               | ** ** | **(in 000s)**                               | ** ** |
| Revenues:                |       |                                             |       |                                            |       |   |   |   |   |
| United States and Canada |       | $                                                | 190,458    |                                            | $          | 155,179 |   | $ | 555,147 |   | $ | 425,651 |   |
| Europe                   |       | 17,466                                           |       | 7,020                                           |       | 37,215 |   | 22,019 |   |
| Other foreign            |       | 24,685                                           |       | 13,019                                          |       | 59,929 |   | 32,259 |   |
| Total revenues           |       | $                                                | 232,609    |                                            | $          | 175,218 |   | $ | 652,291 |   | $ | 479,929 |   |
|                     |       |                                             |       |                                            |       |   |   |   |   |
| Operating income:        |       |                                             |       |                                            |       |   |   |   |   |
| United States and Canada | ** ** | $                                                | 45,087     |                                            | $          | 15,442 |   | $ | 123,038 |   | $ | 25,590 |   |
| Europe                   |       | 5,993                                            |       | 1,067                                           |       | 12,614 |   | 4,553 |   |
| Other foreign            |       | 3,775                                            |       | 1,856                                           |       | 7,167 |   | 2,231 |   |
| Total operating income   | ** ** | $                                                | 54,855     |                                            | $          | 18,365 |   | $ | 142,819 |   | $ | 32,374 |   |

 

14

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** **

**8.             INCOME TAXES**

 

On July 1, 2007, the Company adopted FIN 48, *Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No. 109*, which creates asingle model to address uncertainty in income tax positions and prescribes theminimum recognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification,interest and penalties, accounting in interim periods, disclosure andtransition.

 

As a result of theadoption of FIN 48, the Company recorded $22.9 million of liabilities forunrecognized tax benefits of which $8.8 million were accounted for as anincrease in accumulated deficit on July 1, 2007.  Of this amount, $14.9 million, if recognized,would impact the effective tax rate.  TheCompany recognizes interest and penalties related to unrecognized tax benefitsas tax expense.  As of July 1, 2007,the Company had $1.2 and $0.4 million accrued for the payment of interest andpenalties, respectively.  During thequarter ended March 31, 2008, there were no material changes to theamounts recognized upon adoption.

 

The Company files numerous consolidated and separateincome tax returns in the United States federal jurisdiction and in many stateand foreign jurisdictions.  With fewexceptions, the Company is no longer subject to United States federal incometax examinations for years before 1995 and is no longer subject to state andlocal, or foreign income tax examinations for years before 2000.

 

The Internal Revenue Service (“IRS”) commencedexamination of the Company’s United States federal income tax returns for 2003through 2005 in the fourth quarter of 2006.  To date, the IRS has proposed,and management has agreed to certain adjustments related to the open tax yearsthat have been recorded in the income tax provision.  It is reasonablypossible that within the next twelve months the Company will resolve some ofthe matters presently under consideration with the IRS which may increase ordecrease unrecognized tax benefits for the open tax years. However, an estimateof such increase or decrease cannot reasonably be made.

 

During 2006, the German tax authorities commencedaudits of certain German income tax returns for 2000 through 2003.  It is unlikely that the examinations will becompleted in the next twelve months.

 

 

**9.             COMMITMENTS AND CONTINGENCIES**

 

In February 2005, the SEC initiated aninformal inquiry and requested documents and information regarding mattersrelated to the allegations in the securities class actions that were filedin 2004 and settled and dismissed in August 2007.  In August 2005, the SEC notified theCompany that its investigation had entered a formal phase, and requestedadditional information from the Company covering the same general areas thatwere addressed in the informal inquiry. Management is cooperating fully with the SEC in this matter.

 

In August 2004, Shuffle Master sued theCompany in the United States District Court for the District of Nevada,alleging infringement of various patents in connection with the Company’sMindPlay product line and seeking injunctive relief and damages in anunspecified amount.  In June 2005,it was announced that IGT had acquired an interest in the patents at issue inthe case, and thereafter, IGT joined the case as a plaintiff.  In December 2005, the DistrictCourt issued a ruling construing the claim terms of all the patents in thesuit.  Cross-motions for summary judgment were filed and heard and, on March 21,2008, the court granted the Company’s motions, ruling that one of the twopatents asserted by IGT and Shuffle Master was invalid and that the Company’sproducts did not infringe on the other patent. This ruling disposed of IGT’s and Shuffle Master’s case against theCompany, though certain of the Company’s counterclaims, and IGT’s and ShuffleMaster’s defenses to those counterclaims, remain alive.

 

On December 7, 2004, IGT filed a patentinfringement lawsuit against the Company in the United States District Courtfor the District of Nevada.  Thecomplaint asserts that the Company’s wheel-based games, such as Monte CarloTM,Lucky WheelTM andCash For LifeTM,its games with a reel in the top box, such as Bonus FrenzyTM,and its iVIEWTMproducts infringe on patents held by IGT, and seeks injunctive relief anddamages in unspecified amounts.  The Company believes IGT’s claims arewithout merit and is vigorously defending itself against the lawsuit.  As part of its defense, the Company hasasserted counterclaims against IGT, including claims that IGT’s patents areinvalid, unenforceable and not infringed, as well as several claims thatIGT has engaged in anti-competitive conduct in violation of state and federalantitrust laws.  By its counterclaims,the Company is seeking damages and other relief from IGT. IGT’s motion todismiss the Company’s antitrust claims was denied in January 2006,and in March 2007, the court denied IGT’s motions for summary judgmentwith respect to the antitrust claims dealing with the wheel game market.  The court issued its claims constructionrulings in May 2007.  The partiesfiled assorted motions for summary judgment on November 16, 2007 and nohearing date has been set to date.  Trialis scheduled for December 2008.

 

15

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In September 2006, the Company filed apatent infringement lawsuit against IGT in the United States District Court forthe District of Nevada.  The complaintasserts that certain of IGT’s bonus wheel games infringe a patent held by theCompany, and seeks injunctive relief and damages.  IGT filed an answer generally denying theclaims and has filed a motion for summary judgment, which the Company isopposing. In December 2007, the District Court issued a ruling construingthe claim terms of the patent in the suit. No trial date has been set.

 

In May 2006, IGT filed a patentinfringement lawsuit against the Company in the United States District Courtfor the District of Delaware.  Thecomplaint asserts that the Company’s Bally Power BonusingTMproducts infringe patents held by IGT, and seeks injunctive relief and damagesin unspecified amounts.  The court tookIGT’s motion for a preliminary injunction off-calendar and set a November 2008trial date.  The Company believes IGT’sclaims are without merit and is vigorously defending itself against thelawsuit.

 

The Company is also a party to various lawsuitsrelating to routine matters incidental to our business.  Management does not believe that the outcomeof such litigation, including the matters above, in the aggregate, will have amaterial adverse effect on our consolidated financial position, results ofoperations or cash flows.

 

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** **

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

 

Webegin this Management’s Discussion and Analysis of Financial Condition andResults of Operations with an overview of our key operating business divisionsas of March 31, 2008.  This overviewis followed by a detailed analysis of our results of operations and ourfinancial condition as of, and for, the three and nine months ended March 31,2008 and 2007.

 

**Forward Looking Statements**

 

Certainstatements made or incorporated by reference in this Quarterly Report on Form 10-Q,in our other filings with the SEC, in our press releases and in statements madeby or with the approval of authorized personnel constitute “forward lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended and Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”), and are subject to the safe harbor createdthereby.  Forward looking statementsreflect intent, belief or current expectations with respect to, among otherthings, future events and financial trends affecting us. Forward lookingstatements are typically identified by words such as “believes,” “expects,”“anticipates” and similar expressions.

 

Althoughwe believe the expectations reflected in any forward looking statements arereasonable, readers are cautioned that forward looking statements involve knownand unknown risks and uncertainties, are not guarantees of future performanceand that actual results, performance or achievements may differ materiallyfrom any future results, performance or achievements expressed or implied bysuch forward looking statements.  Thesedifferences can arise as a result of the risks described in Item 1A, RiskFactors included in our Annual Report on Form 10-K for the fiscal yearended June 30, 2007 (the “2007 10-K”), as well as other factors such asthe impact of competition, our ability to service debt, product development,foreign operations, dependence on key personnel, the ability to integratefuture acquisitions, regulation by gaming authorities, the outcome of pendinglitigation matters, gaming taxes, market risks and the potential adverse effectsto our financial condition, results of operations or prospects.

 

Forwardlooking statements in this Quarterly Report on Form 10-Q speak only as ofthe date hereof, and forward looking statements in documents incorporated byreference speak only as of the date of those documents.  Unless otherwise required by law, weundertake no obligation to publicly update or revise these forward lookingstatements, whether as a result of new information, future events or otherwise.  In light of these risks and uncertainties, wecannot assure you that the forward looking statements contained in thisQuarterly Report on Form 10-Q will, in fact, transpire.

 

**Our Business**

 

We area diversified, worldwide gaming company that designs, manufactures, distributesand operates gaming machines and computerized monitoring systems for gamingmachines.  In addition to selling ourgaming devices, we also offer our customers a wide range of lease and rentaloptions.  Our primary technologiesinclude gaming devices for land based, riverboat and Native American casinos,video lottery and central determination markets and specialized system-basedhardware and software products.  Ourspecialized hardware and software products provide casinos with a wide-range ofmarketing, data management, accounting, security and other softwareapplications and tools to more effectively manage their operations.  We also own and operate the Rainbow casino, ariverboat, dockside casino in Vicksburg, Mississippi.

 

We derive our revenues from the following foursources:

 
| · | *Gaming Equipment*  | - | Sale of gaming devices;                                                                                                    |
|--------|---------------------|---|----------------------------------------------------------------------------------------------------------------------------|
| · | *Gaming Operations* | - | Operation of wide-area progressive, lottery  and centrally determined systems and the lease and rental of gaming machines; |
| · | *Systems*           | - | Sales of computerized monitoring systems and  related recurring hardware and software maintenance revenue; and             |
| · | *Casino Operations* | - | Operation of the Rainbow Casino.                                                                                           |

 

We design, manufacture, assemble,sell, maintain and operate a full range of technology-based gaming devices.These devices are not mass produced and are normally configured to specificrequirements based on a customer’s particular order.  Gaming devices are differentiated from oneanother by a number of factors including, but not limited to, graphic designand theme, cabinet style, pay table, game layout, betting denomination andminimum/maximum betting amount.

 

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Each gaming device contains anoperating system referred to as a game platform.  The operating system manages the softwareneeded to run the device.  Game platformsand the related computer systems are constantly updated and revised to keeppace with the ever-increasing complexity of modern game play requirements.  The change in game play requirements isdriven by, among other things, changes in consumer demand, capacity, securityand regulation.  In fiscal 2005, wecompleted the successful migration from our legacy platforms, including theV7000 and EVOTM, to the Linux-based ALPHA OSTM platform.  In fiscal 2006, we also extended the ALPHA OSplatform to our mechanical reel spinning devices. ALPHA OS is now theplatform for each of our gaming device product offerings and, as a result,marketing of our legacy products has generally been discontinued.

 

The ALPHA OS is designed toseparate the gaming operating system from the game layer, which enables gamedevelopment in a much shorter time. ALPHA OS is also designed to incorporate bonusing, free spin, scatterand other advanced game features, while providing internal and third-partydevelopers with a secure, easy-to-use programming environment that incorporatesan advanced set of development tools. Moreover, ALPHA OS is designed to support server-based gaminginitiatives, including download of game results, configuration and gamecontent.  Additionally, our layeredarchitecture and modular design allow for adaptability and simplifiedrequirement changes.  The operatingsystem, which is Linux-based, is compatible with the most common accounting,ticketing and bonusing systems and supports 50-plus bet lines, various gamebonusing, top boxes, multi-denomination, multi-game and multi-pay table gameconfigurations.  ALPHA OS also supportsstand alone, local and wide-area progressive products.

 

Inaddition to selling our gaming devices, we also offer our customers a widerange of lease and rental options through our Gaming Operations division.  Specifically, these arrangements areavailable under four business models: linked progressive systems, rental anddaily fee games, lottery systems and centrally determined systems.  In most cases, operating gaming devices undera lease or rental arrangement requires us to invest capital in manufacturingthe gaming device and related equipment, purchasing signs and seating, and, incertain cases, acquiring certain intellectual property rights.

 

We also design, program, test, market and support casinoenterprise systems for a wide range of customers of varying size and complexitythrough our Systems division.  Thesesystems typically provide casino operators features such as active, real-timemonitoring tools for gaming devices, tools to collect and manage customer data,security to protect against theft and data loss, and marketing programs toenhance the gaming experience.  The useof system technology in gaming has grown in the past ten years from basicautomation of manual activities to highly integrated mission criticalapplications.  We believe we are the onlyprovider in the industry that offers a selection of technologyplatform options to its customers. Our products operate on platforms such as Windows, AS/400 (iSeries) andUNIX which allow our customers to choose a technology solution that meets theirexisting or future infrastructure requirements.

 

The primary systems we sell our customers are products forslot floor management, casino management, cashless systems and iVIEWTM player-communicationdevices.  iVIEW is a small, horizontalliquid-crystal display screen and accompanying hardware and software thatresides in the gaming devices and serves as a communication tool to playerssitting at the machine.  Our iVIEW networkis also designed to work with our Bally Power BonusingTM suite of productsand other new technologies under development. We market our system product solutions under the broad categories ofBally CMS® (Casino Management Systems), Bally SMS® (Slot Management Systems)and Bally TMS® (Table Management Systems).

 

We spent approximately 7%of revenue generated from our Bally Gaming Equipment and Systems segment forboth the three and nine months ended March 31, 2008 on research anddevelopment to accelerate the use of technology in our gaming products.

 

Our Rainbow Casino is one of four casinos currently operating in theVicksburg, Mississippi market and comprises our Casino Operationsdivision.  The facility includes a33,000-square foot casino with 830 gaming devices and 10 table games, a224-seat buffet-style restaurant and a 20,000-square foot conferencecenter.  The Casino also includes the89-room Rainbow Hotel, which is owned and operated by a third party.  Rainbow is marketed as a “locals” casino anddraws mid-level gaming customers principally from within a 75-mile radius ofVicksburg.  Our promotions are focusedprimarily on direct mail and special promotional events.  A new casino project adjacent to the RainbowCasino is under construction and is scheduled to open in November 2008.  There may be other new casinosconstructed in the Vicksburg market in the future as previously existing andnew Gulf Coast properties continue to open in the aftermath of the 2005hurricane season.  These properties willprovide additional competition to our business.

 

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** **

**Resultsof Operations**

 

Ourresults of operations include the accounts of Bally Technologies, Inc. andits subsidiaries.  We report our revenueand income in two reportable segments: the Bally Gaming Equipment and Systemssegment, which includes our Gaming Equipment, Systems and Gaming Operationsdivisions, and our Casino Operations segment. Revenue from our Bally Gaming Equipment and Systems segment representedapproximately 94% of our total revenues for both the three and nine monthsended March 31, 2008 and 93% of our total revenues for both the three andnine months ended March 31, 2007.

*** ***

***Bally Gaming Equipment and Systems***

 

The summary financialresults for our Bally Gaming Equipment and Systems segment for the three monthsand nine months ended March 31, 2008 and 2007 were as follows:

 
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                             | ** ** | **% Rev**                                      | ** ** | **2007** | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** | **2007** | ** ** | **% Rev** | ** ** |
| Revenues                            |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment                    |       | $                                                    | 103.7      |                                                | 47         | % | $ | 86.7 |   | 53 | % | $ | 296.4 |   | 48 | % | $ | 219.4 |   | 50 | % |
| Gaming Operations                   |       | 58.9                                                 |       | 27                                                  | %          | 44.7 |   | 28 | % | 167.2 |   | 27 | % | 125.8 |   | 28 | % |
| Systems                             |       | 57.0                                                 |       | 26                                                  | %          | 30.8 |   | 19 | % | 152.5 |   | 25 | % | 98.7 |   | 22 | % |
| Total revenues                      |       | $                                                    | 219.6      |                                                | 100        | % | $ | 162.2 |   | 100 | % | $ | 616.1 |   | 100 | % | $ | 443.9 |   | 100 | % |
|                                |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross Margin                        |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment (1)                |       | $                                                    | 45.5       |                                                | 44         | % | $ | 30.6 |   | 35 | % | $ | 132.1 |   | 45 | % | $ | 74.8 |   | 34 | % |
| Gaming Operations                   |       | 41.3                                                 |       | 70                                                  | %          | 26.1 |   | 58 | % | 108.7 |   | 65 | % | 72.5 |   | 58 | % |
| Systems (1)                         |       | 40.2                                                 |       | 71                                                  | %          | 23.4 |   | 76 | % | 111.1 |   | 73 | % | 69.3 |   | 70 | % |
| Total gross margin                  |       | $                                                    | 127.0      |                                                | 58         | % | $ | 80.1 |   | 49 | % | $ | 351.9 |   | 57 | % | $ | 216.6 |   | 49 | % |
|                                |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative |       | $                                                    | 52.0       |                                                | 24         | % | $ | 41.8 |   | 26 | % | $ | 143.6 |   | 23 | % | $ | 124.0 |   | 28 | % |
| Research and development costs      |       | 15.1                                                 |       | 7                                                   | %          | 12.5 |   | 8 | % | 43.1 |   | 7 | % | 38.4 |   | 9 | % |
| Depreciation and amortization       |       | 3.7                                                  |       | 2                                                   | %          | 5.2 |   | 3 | % | 11.1 |   | 2 | % | 13.8 |   | 3 | % |
| Operating income                    |       | $                                                    | 56.2       |                                                | 25         | % | $ | 20.6 |   | 13 | % | $ | 154.1 |   | 25 | % | $ | 40.4 |   | 9 | % |

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(1)          Gross Margin from Gaming Equipment and Systemsexcludes amortization related to certain intangibles including core technologyand license rights, which are included in depreciation and amortization.

 

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The summary operatingstatistics for our Bally Gaming Equipment and Systems segment for the threemonths and nine months ended March 31, 2008 and 2007 and the end of periodinstalled base as of March 31, 2008 and 2007 were as follows:

 
| ** **                                                    | ** ** | **Three  Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating  Statistics                                         |       |                                    |       |                                            |       |   |   |   |   |
| New  gaming devices sold                                      |       | 6,742                                   |       | 6,032                                           |       | 19,037 |   | 14,131 |   |
| Original  Equipment Manufacturer (“OEM”) units sold |       | —                                  |       | —                                          |       | — |   | 1,605 |   |
| New  unit Average Selling Price (“ASP”)             |       | $                                       | 13,427     |                                            | $          | 12,984 |   | **$** | 13,281 |   | $ | 12,628 |   |
|                                                          |       |                                    |       |                                            |       | ** ** |   |
|                                                          |       |                                    |       |                                            |       | **As of  March 31,** |   |
|                                                          |       |                                    |       |                                            |       | **2008** |   | **2007** |   |
| End  of period installed base:                                |       |                                    |       |                                            |       |   |   |   |   |
| Gaming  monitoring units installed base                       |       |                                    |       |                                            |       | 315,000 |   | 289,000 |   |
| Casino  management systems installed base                     |       |                                    |       |                                            |       | 607 |   | 575 |   |
| Systems  managed cashless games                               |       |                                    |       |                                            |       | 272,000 |   | 237,000 |   |
|                                                          |       |                                    |       |                                            |       |   |   |   |   |
| Wide-area  progressive                                        |       |                                    |       |                                            |       | 990 |   | 904 |   |
| Local-area  progressive                                       |       |                                    |       |                                            |       | 269 |   | 485 |   |
| Total  linked progressive systems                             |       |                                    |       |                                            |       | 1,259 |   | 1,389 |   |
|                                                          |       |                                    |       |                                            |       |   |   |   |   |
| Rental  and daily-fee games (1)                               |       |                                    |       |                                            |       | 12,377 |   | 5,916 |   |
| Lottery  systems                                              |       |                                    |       |                                            |       | 7,980 |   | 7,736 |   |
| Centrally  determined systems (1)(2)                          |       |                                    |       |                                            |       | 42,924 |   | 32,690 |   |
|                                                               |            |                                         |            |                                                 |            |  |  |  |  |  |  |  |  |  |

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(1)        Certain devices previously included in centrallydetermined systems that were converted to standalone devices have beenreclassified to rental and daily-fee games.

(2)        Daily fee revenue from approximately 9,100 units included in the centrallydetermined systems end of period installed base total as of March 31, 2008are currently being deferred based upon the completion of certain contractualcommitments necessary to recognize the revenue under the Company’s revenuerecognition policy.  There were nosimilar deferrals as of March 31, 2007.

** **

**ThreeMonths Ended March 31, 2008 Compared to Three Months Ended March 31,2007**

 

Totalrevenues for our Bally Gaming Equipment and Systems segment increased $57.4million, or 35%, in the three months ended March 31, 2008, when comparedto the same period last year, as a result of the following:

 

*Gaming Equipment Revenue. *GamingEquipment revenue increased by $17.0 million, or 20%, to approximately $103.7million primarily as a result of:

 

·                  A 12% increase in new gaming device salesto 6,742 units in the three months ended March 31, 2008, when compared to6,032 units in the same period last year; and

 

·                  A 3% increase in the ASP of new gamingdevices, excluding OEM sales, as a result of product mix and price increases takingeffect in the period.

 

*GamingEquipment Gross Margin*.  Gaming Equipment gross marginincreased to 44% in the three months ended March 31, 2008 from 35%, in thesame period last year, primarily as a result of the increase in ASP, discussedabove, and improved purchasing and manufacturing efficiencies due to increasedvolumes which allows for competitive bidding from suppliers and lowermanufacturing costs due to the standardization of game platforms.

 

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* *

*Gaming Operations Revenue. *GamingOperations revenue increased $14.2 million, or 32%, to approximately $58.9million in the three months ended March 31, 2008, when compared to thesame period last year, primarily as a result of:

 

·                  An increase of $13.1 million, or 38%, inparticipation, rental and license revenue in the three months ended March 31,2008, when compared to the same period last year, primarily derived from:

 

·                  Our installed base of devices connectedto our centrally determined systems (Class II, Video Lottery and iVIEWnetwork) increased 31% from 32,690 units as of March 31, 2007 to 42,924units as of March 31, 2008 primarily due to units added in Washington andMexico.  Excluding the approximately 9,100units where revenue is currently being deferred, centrally determined gamesincreased approximately 3% as of March 31, 2008 when compared to the sameperiod last year;

 

·                  Our installed base of rental and dailyfee games, which includes premium titles such as Hot Shot ProgressiveTM, increased 109% from 5,916 units as of March 31,2007 to 12,377 units as of March 31, 2008. The net change was primarily due to the popularity of our premiumproducts and conversion of older Class II devices (classified as centrallydetermined systems) to Class III rental and daily-fee games; and

 

·                  Our installed base of lottery unitsincreased 3% from 7,736 units as of March 31, 2007 to 7,980 units as of March 31,2008.  The increase was primarily due toadditional units deployed in Delaware.

* *

*GamingOperations Gross Margin*.  Gross margin increased to 70%in the three months ended March 31, 2008 from 58% in the same period lastyear, primarily as a result of a decrease in the cost of funding jackpotliabilities related to our wide-area progressives and increases inparticipation and rental revenue with a relatively fixed cost of operatingexpenses.

 

Revenueand gross margin from Gaming Operations in fiscal 2007 included daily fees thatrelated to certain contracts which are currently being deferred due to newcontractual commitments made to the customers. The margin on the deferred daily fees are higher than average as theyare generated from transactions which require a relatively low depreciableinfrastructure.  Approximately $3.8million in net daily fees generated during the third quarter of fiscal 2008were deferred pending delivery of the commitments.  Deferral of the daily fees associated withthe contracts will continue until the commitments have been delivered.

 

*SystemsRevenue.  *Systems revenue increased $26.2 million,or 85%, to $57.0 million in the three months ended March 31, 2008, whencompared to the same period last year, primarily as a result of continuedacceptance of the Company’s products, including the Company’s iVIEW player-communicationdevices and Bally Power Bonusing software, and an increase in the number ofgo-lives during the period.  Systemsmaintenance revenue was $10.0 million, representing an increase of $1.4million, or 17%, in the three months ended March 31, 2008 when compared to$8.5 million in the same period last year.

 

*SystemsGross Margin. *Systems gross margin decreased to 71% inthe three months ended March 31, 2008 from 76%, in the same period lastyear, primarily as a result of an increase in the mix of hardware revenue tosoftware revenue during the period.  Hardware sales have a higher cost of goods sold than software sales.

 

*Selling,General and Administrative***.**   Selling, general and administrative expenseincreased $10.2 million, or 24%, in the three months ended March 31, 2008,when compared to same period last year. Salaries and related expenses increased $6.8 million, or 21%,  in the three months ended March 31,2008, when compared to the same period last year, due primarily to increases instaffing to meet growing demands of the business brought about by an increasein revenue coupled with an increase in commissions and bonuses of $1.3 millionduring the period.  In addition, bad debtexpense increased $1.3 million during the three months ended March 31,2008 when compared to the same period last year due to the increase inrevenue.  Bad debt expense as apercentage of revenue remained under 1% in both periods.

 

*Researchand Development Costs*.  Research and development costsincreased 20% in the three months ended March 31, 2008, when compared tothe same period last year, as a result of our increased focus on technologyassets and the competitive landscape that requires a continual investment infuture generations of gaming products and systems.

 

*Depreciationand Amortization*.Depreciation and amortization expense decreased 29% in the three months ended March 31,2008, when compared to same period last year, primarily as a result of certainassets becoming fully depreciated during the last twelve months.

 

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** **

**NineMonths Ended March 31, 2008 Compared to Nine Months Ended March 31,2007**

 

Totalrevenues for our Bally Gaming Equipment and Systems segment increased $172.2million, or 39%, in the nine months ended March 31, 2008, when compared tothe same period last year, as a result of the following:

 

*Gaming Equipment Revenue. *GamingEquipment revenue increased by $77.0 million, or 35%, to approximately $296.4million primarily as a result of:

 

·              A 35% increase in new gaming device salesto 19,037 units in the nine months ended March 31, 2008, when compared to14,131 units in the same period last year. The nine months ended March 31, 2007 included 1,605 lower marginunits which were sold to OEMs.

 

·              A 5% increase in the ASP of new gamingdevices, excluding OEM sales, as a result of product mix and price increasesduring the period.

 

*GamingEquipment Gross Margin*.  Gaming Equipment gross marginincreased to 45% in the nine months ended March 31, 2008 from 34%, in thesame period last year, primarily as a result of the decrease in lower marginOEM sales and the increase in ASP, discussed above, and improved purchasing andmanufacturing efficiencies due to increased volumes which allows for competitivebidding from suppliers and lower manufacturing costs due to the standardizationof game platforms.

* *

*Gaming Operations Revenue. *GamingOperations revenue increased $41.4 million, or 33%, to approximately $167.2million in the nine months ended March 31, 2008, when compared to the sameperiod last year, primarily as a result of:

 

·                  An increase of $38.0 million, or 41%, inparticipation, rental and license revenue in the nine months ended March 31,2008, when compared to the same period last year, primarily derived from:

 

·                  Our installed base of devices connectedto our centrally determined systems increased 31% from 32,690 units as of March 31,2007 to 42,924 units as of March 31, 2008 primarily due to units added inWashington and Mexico.  Excluding the approximately9,100 units where revenue is currently being deferred, centrally determinedgames increased approximately 3% as of March 31, 2008 when compared to thesame period last year;

 

·                  Our installed base of rental and dailyfee games, which includes premium titles such as Hot Shot ProgressiveTM, increased 109% from 5,916 units as of March 31,2007 to 12,377 units as of March 31, 2008. The net change was primarily due to the popularity of our premiumproducts and conversion of Class II devices (classified as centrallydetermined systems) to Class III rental and daily-fee games; and

 

·                  Our installed base of lottery unitsincreased 3% from 7,736 units as of March 31, 2007 to 7,980 units as of March 31,2008.  The increase was primarily due toadditional units deployed in Delaware.

 

*GamingOperations Gross Margin*.  Gross margin increased to 65%in the nine months ended March 31, 2008 from 58%, in the same period lastyear, primarily as a result of the increase in participation and rental revenuewith a relatively fixed cost of operating expenses.

 

Revenueand gross margin from Gaming Operations in fiscal 2007 included daily fees thatrelated to certain contracts which are currently being deferred due to newcontractual commitments made to customers. Approximately $11.4 million in daily fees generated during the ninemonths ended March 31, 2008 were deferred pending delivery of thecommitments.  Deferral of the daily feesassociated with the contracts will continue until the commitments have beendelivered.

 

*SystemsRevenue. *Systems revenue increased $53.8 million, or 55%, toapproximately $152.5 million in the nine months ended March 31, 2008 whencompared to the same period last year primarily as a result of continuedacceptance of the Company’s products, including the Company’s iVIEW player-communicationdevices and Bally Power Bonusing software, and an increase in the number ofgo-lives, principally in the last two quarters. Systems maintenance revenue was $28.8 million, representing an increaseof $4.8 million, or 20%, in the nine months ended March 31, 2008 whencompared to $24.0 million in the same period last year.

 

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*SystemsGross Margin. *Systemsgross margin increased to 73% in the nine months ended March 31, 2008 from70%, in the same period last year, primarily as a result of an increase in theproportion of software and maintenance revenue as compared to hardware revenuein the earlier part of the fiscal year.  Hardwaresales have a higher cost of goods sold than software sales.

 

*Selling,General and Administrative*.  Selling, general and administrative expense increased $19.6 million, or16%, in the nine months ended March 31, 2008, when compared to same periodlast year.  Salaries and related expensesincreased $14.8 million, or 16%, in the nine months ended March 31, 2008,when compared to the same period last year due primarily to increases instaffing to meet growing demands of the business brought about by an increasein revenue.  In addition, bad debtexpense increased $3.1 million during the nine months ended March 31, 2008 whencompared to the same period last year due to the increase in revenue.  Bad debt expense as a percentage of revenueremained under 1% in both periods.  

* *

*Researchand Development Costs*. Research and development costs increased 12% in the nine months endedMarch 31, 2008, when compared to the same period last year, as a result ofour increased focus on technology assets and the competitive landscape thatrequires a continual investment in future generations of gaming products andsystems.

 

*Depreciationand Amortization*. Depreciation and amortization expense decreased 19% in the nine monthsended March 31, 2008, when compared to same period last year, primarily asa result of certain assets becoming fully depreciated during the last twelvemonths.

 

 

***Casino Operations***

 

The summary of ourfinancial results and operating statistics for our Casino Operations is asfollows:

 
| ** **                              | ** ** | **Three  Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                               | ** ** | **% Rev**                                      | ** ** | **2007** | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** | **2007** | ** ** | **% Rev** | ** ** |
| ** **                              | ** ** | **(dollars in millions)**    | ** ** |
| Revenue                                 |       | $                                      | 13.0       |                                                | 100        | % | $ | 13.0 |   | 100 | % | $ | 36.2 |   | 100 | % | $ | 36.1 |   | 100 | % |
|                                    |       |                                   |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative    |       | $                                      | 2.0        |                                                | 15         | % | $ | 2.1 |   | 16 | % | $ | 6.4 |   | 18 | % | $ | 6.7 |   | 19 | % |
| Depreciation and  amortization          |       | $                                      | 0.7        |                                                | 5          | % | $ | 0.7 |   | 5 | % | $ | 2.0 |   | 6 | % | $ | 2.3 |   | 6 | % |
| Operating income                        |       | $                                      | 5.4        |                                                | 41         | % | $ | 5.5 |   | 42 | % | $ | 13.4 |   | 37 | % | $ | 13.5 |   | 37 | % |
|                                    |       |                                   |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  statistics:                  |       |                                   |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
|   Average number of gaming devices |       |                                   |       |                                                |       |   |   |   |   | 830 |   |   |   | 845 |   |   |   |
|   Average number of table games    |       |                                   |       |                                                |       |   |   |   |   | 10 |   |   |   | 10 |   |   |   |
|                                         |            |                                        |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ThreeMonths Ended March 31, 2008 Compared to Three Months Ended March 31,2007**

 

*CasinoOperations Revenue**. ***CasinoOperations revenue remained flat in the three months ended March 31, 2008when compared to the same period last year. Food and beverage revenue increased due to the new restaurant which openedin June 2007 which was offset by a decrease in table game revenue.  

 

*Selling,General and Administrative*. Selling, general and administrative expenses decreased by 4% for thethree months ended March 31, 2008, when compared to the same period lastyear, primarily as a result of a decrease in advertising and the reduction incertain promotional expenses during the period.

 

*Depreciationand Amortization*. Depreciation and amortization expense was $0.7 million for both thethree months ended March 31, 2008 and 2007.  

 

23

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** **

**NineMonths Ended March 31, 2008 Compared to Nine Months Ended March 31,2007**

 

*CasinoOperations Revenue**. ***CasinoOperations revenue increased $0.1 million for the nine months endedMarch 31, 2008 when compared to the same period last year.  The increase in revenue was primarily due tothe new restaurant which opened in June 2007 which was offset by decreases inboth slot and table game revenue during the period.  The average number of gaming devicesdecreased by 15 units, or 2%, to 830 units during the nine months endedMarch 31, 2008 when compared to the same period last year.  

 

*Selling,General and Administrative*. Selling, general and administrative expenses decreased by 5% for thenine months ended March 31, 2008, when compared to the same period lastyear, primarily as a result of a reduction in advertising expenditures forbillboards and the reduction of certain promotional expenses.

* *

*Depreciationand Amortization*. Depreciation and amortization expense decreased 11% for the nine monthsended March 31, 2008, when compared to the same period last year, as aresult of the decrease in the number of slot machines and reduced capitalexpenditures during the period.

*** ***

*** ***

***Parent Company***

 

The summary financialresults of Bally Technologies, Inc., our parent entity, are set forthbelow. These results also include certain other income and expenses that areotherwise not allocated to a specific business segment.

 
| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                    | ** ** | **(dollars in millions)**                  | ** ** |
| General and administrative    |       | $                                                    | 6.4        |                                                | $          | 7.4 |   | $ | 23.7 |   | $ | 20.5 |   |
| Depreciation and amortization |       | 0.3                                                  |       | 0.3                                                 |       | 1.0 |   | 1.0 |   |
| Total expense                 |       | $                                                    | 6.7        |                                                | $          | 7.7 |   | $ | 24.7 |   | $ | 21.5 |   |
|                          |       |                                                 |       |                                                |       |   |   |   |   |
| Other income (expense)        |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income               |       | $                                                    | 0.8        |                                                | $          | 0.7 |   | $ | 2.8 |   | $ | 2.0 |   |
| Interest expense              |       | (6.3                                                 | )          | (7.7                                                | )          | (20.8 | ) | (25.8 | ) |
| Other, net                    |       | 1.3                                                  |       | —                                              |       | 2.3 |   | 1.1 |   |
| Total other expense           |       | $                                                    | (4.2       | )                                                   | $          | (7.0 | ) | $ | (15.7 | ) | $ | (22.7 | ) |
|                          |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax benefit (expense)  |       | $                                                    | (18.9      | )                                                   | $          | (4.5 | ) | $ | (47.3 | ) | $ | (2.8 | ) |
| Minority interest             |       | $                                                    | (1.5       | )                                                   | $          | (0.3 | ) | $ | (3.9 | ) | $ | (3.1 | ) |

 

**ThreeMonths Ended March 31, 2008 Compared to Three Months Ended March 31,2007**

 

*Generaland Administrative.*General and administrative expense decreased$1.0 million, or 13%, in the three months ended March 31, 2008, whencompared to the same period last year, primarily as a result of a gain of $2.7million related to the MindPlay settlement (see Note 6, Related PartyTransactions) offset by an increase in payroll and related expenses of $2.0million, or 77%,  in the three monthsended March 31, 2008, when compared to the same period last year.  The increase in payroll and related expenses wasprimarily due to share-based compensation expense and accruals related to ourannual bonus plan due to increased earnings in the current period when comparedto the same period last year.

 

*Depreciationand Amortization**.  ***Therewas minimal change in depreciation and amortization expense during the threemonths ended March 31, 2008 as compared to the same period last year.

 

*OtherIncome (Expense).*Other expense decreased $2.8 million in thethree months ended March 31, 2008, when compared to the same period lastyear, primarily as a result of an decrease in interest expense due to lower ratesand a reduction in the amount of debt outstanding.  

 

*MinorityInterest.  *Minorityinterest increased primarily due to increased earnings from certain variableinterest entities and from the partnership interest in Rainbow Casino.  

 

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** **

**NineMonths Ended March 31, 2008 Compared to Nine Months Ended March 31,2007**

 

*Generaland Administrative.*General and administrative expenseincreased $3.2 million, or 16%, in the nine months ended March 31, 2008,when compared to the same period last year, primarily as a result of:

 

•                  An increase in accountingfees of $2.6 million, or 48%, in the nine months ended March 31, 2008,when compared to the same period last year, due to the timing of the filing ofour 2007 10-K on November 2, 2007, the filing of our fiscal 2008 first quarterForm 10-Q on December 21, 2007, our Form 10-K/A and Proxy on January 14, 2008and our fiscal 2008 second quarter Form 10-Q on February 14, 2008; 

 

•                  An increase inpayroll and related costs of $2.8 million, or 32%, in the nine months endedMarch 31, 2008, when compared to the same period last year, primarily due toincreases in accruals related to our annual bonus plan due to increasedearnings in the current period when compared to the same period last year.  In addition, there was an increase inheadcount, including additional finance resources, to address our weaknesses ininternal control over financial reporting; and

 

•                  A reduction inselling, general and administrative expense of $2.7 million related to theMindPlay settlement (see Note 6, Related Party Transactions).

* *

*Depreciationand Amortization**. ***Therewas minimal change in depreciation and amortization expense during the ninemonths ended March 31, 2008 as compared to the same period last year.

* *

*Other Income (Expense).*Otherexpense decreased $7.0 million in the nine months ended March 31, 2008,when compared to the same period last year, primarily as a result of andecrease in interest expense due to lower rates and a reduction in the amountof debt outstanding.  During the ninemonths ended March 31, 2007, we executed amendments to the bank loan agreement governingour revolving credit facility and our term loan (the “Loan Agreement”) and paidcombined administrative fees of $2.3 million which was recorded as interestexpense during the period.  

 

*Income TaxExpense. *Our effectiveincome tax rate for the nine months ended March 31, 2008 and 2007 wasapproximately 37% and 29%, respectively. The effective tax rate for the nine months ended March 31, 2007 reflectedthe retroactive reinstatement of a research and development tax credit ofapproximately $1.1 million.  At the endof each interim period, we make our best estimate of the effective tax rateexpected to be applicable for the full fiscal year and the impact of discreteitems, if any, and adjust the quarterly rate, as necessary. During the ninemonths ended March 31, 2008 we implemented Financial Accounting StandardBoard (“FASB”) Interpretation (“FIN”) 48, *Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No. 109.*

* *

*MinorityInterest. *Minorityinterest increased primarily due to increased earnings from certain variableinterest entities and from the partnership interest in Rainbow Casino.  

 

 

**Financial Condition**

 

Selectedbalance sheet accounts are as follows:

 
| ** **                              | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **Increase (decrease)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **2008**           | ** ** | **2007**          | ** ** | **Amount**              | ** ** | **%** | ** ** |
| ** **                              | ** ** | **(in 000s)** | ** ** |
| Cash and cash equivalents               |       | $                  | 36,042     |              | $          | 40,842                  |       | $ | (4,800 | ) | (12 | )% |
|                                    |       |               |       |              |       |                    |       |   |   |
| Total long-term debt and capital leases |       | $                  | 307,592    |              | $          | 333,854                 |       | $ | (26,262 | )  | (8 | )% |
|                                    |       |               |       |              |       |                    |       |   |   |
| Total current assets                    |       | $                  | 494,517    |              | $          | 421,883                 |       | $ | 72,634 |   | 17 | % |
| Total current liabilities               |       | $                  | 273,761    |              | $          | 256,938                 |       | $ | 16,823 |   | 7 | % |
| Net working capital                     |       | $                  | 220,756    |              | $          | 164,945                 |       | $ | 55,811 |   | 34 | % |

 

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As ofMarch 31, 2008 and June 30, 2007, we had $36.0 million and $40.8million, respectively, in consolidated cash and cash equivalents which includedapproximately $4.0 million and $3.7 million, respectively, of cash utilized inour Casino Operations segment that is held in vaults, cages or changebanks.  Pursuant to various state gamingregulations, certain cash accounts are maintained to ensure availability offunds to pay wide-area progressive jackpot awards.  At March 31, 2008 and June 30,2007, these accounts had an aggregate value of approximately $13.6 million and$17.2 million, respectively, and are classified as restricted cash in ourunaudited condensed consolidated balance sheets.  In addition, we purchase U.S. Treasury StripSecurities for the benefit of jackpot winners who elect to receive winnings asannual or weekly installment payments rather than one lump sum.  These securities are included in restrictedlong-term investments in the accompanying unaudited condensed consolidatedbalance sheets, and totaled $10.8 million and $10.5 million as ofMarch 31, 2008 and June 30, 2007, respectively.

 

Ournet working capital increased $55.8 million for the nine months endedMarch 31, 2008.  Key factors relatedto the working capital increase included a $10.0 million increase in inventory,a $37.6 million increase in accounts receivable, a $25.0 million increase indeferred cost of revenue, and a $10.7 million decrease in income taxes payableoffset by a $33.1 million increase in current deferred revenue.

 

Our debt structure consistsprimarily of a term loan facility and a $75.0 million revolving creditfacility, which is limited by a current leverage ratio, and debt owed torelated parties.  The revolving creditfacility is further restricted to the extent of outstanding letters ofcredit.  Outstanding letters of credit atMarch 31, 2008 were $26.3 million which reduced availability under therevolving credit facility to approximately $48.7 million.  The revolving credit facility commitmentreduces annually until it expires in September 2008.  There were no amounts outstanding under ourrevolving credit facility as of March 31, 2008.  

 

The term loan requires principalreductions of approximately 1% per annum paid quarterly, with a balloon paymentdue in September 2009.  As of March31, 2008, the term loan had an interest rate of 7.36% based on LIBOR plus3.00%.

 

Theterm loan and the revolving credit facility are collateralized by substantiallyall of our domestic property and are guaranteed by each of our domesticsubsidiaries, other than the entity that holds our interest in its RainbowCasino operations, and are secured by a pledge agreement.  The Loan Agreement contains a number ofmaintenance and other covenants that, among other things, restrict our abilityand certain of our subsidiaries to dispose of assets, incur additionalindebtedness or issue preferred stock, pay dividends or make otherdistributions, enter into certain acquisitions, repurchase equity interests orsubordinated indebtedness, issue or sell equity interests of our subsidiaries,engage in mergers or acquisitions or certain transactions with subsidiaries andaffiliates, and that otherwise restrict corporate activities.   We were in compliance with these covenantsas of March 31, 2008.

 

As of March 31, 2008, we werealso in compliance with our financial covenants consisting of a leverage ratio,a fixed charges coverage ratio and a minimum of Earnings Before Interest,Taxes, Depreciation and Amortization (“EBITDA”) as defined by the LoanAgreement.  The leverage ratio iscomputed as total average debt outstanding during the quarter divided by thetrailing 12 months EBITDA, excluding certain cash and non-cash charges.  Our leverage ratio as of March 31, 2008was 1.30 times versus the covenant maximum allowable of 3.50 times.

 

Managementbelieves that cash flows from current operating activities will provide us withsufficient capital resources and liquidity to operate our business for at leastthe next 12 months.  At March 31,2008, we had no material future commitments for capital expenditures.

 

*** ***

***Cash Flow Summary***

 

Cashflows from operating activities are derived primarily from the sale of gamingequipment and systems, the operation of wide-area progressive systems, dailyfee and rental payments, and monthly cash receipts from maintenance agreementsfrom our casino systems customers.  Inaddition, we generate cash through our casino operations.  We utilize our cash to acquire materials forthe manufacture of goods for resale or lease, to pay payroll and selling,general and administrative expenses, to fund research and developmentactivities, as well as to service our debt.

 

Cashflows from operating activities increased $39.9 million in the nine monthsended March 31, 2008 as compared to the same period last year.  The 2008 increase in cash flows provided byoperating activities was primarily the result of the increase in net incomeduring the period as a result of the increase in revenue and the improvement inoperating margin during the period.

 

26

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Cashused for the purchase of inventory, which is included in cash flows fromoperating activities, was $65.7 million in the nine months ended March 31,2008 as compared to $67.6 million in the same period last year.  We only have one process to procure rawmaterials for the assembly of both inventory and leased gaming equipment.  The materials requisition planning processconsiders the number of devices we expect to build for sale and for use in ourgaming operations division during a particular period, but we do not separatelyearmark purchases for leased gaming equipment. Without such an earmarking process, we are unable to determine whetherthe cash expended to construct leased gaming equipment during a particularperiod came from inventory on hand at the beginning of the period or wasconstructed from inventory procured during the period of deployment, thusrequiring the expenditure of cash.  As aresult of our inability to separately identify the cash flows associated withthe construction of leased gaming equipment, we have included all additions toleased gaming equipment as a change in inventory under cash used in operatingactivities.  During the nine months endedMarch 31, 2008 we transferred $57.0 million from inventory to leasedgaming equipment compared to $49.0 million in the same period last year.

 

Cashflows used in investing activities totaled $19.6 million in the nine monthsended March 31, 2008 as compared to $20.6 million in the same period lastyear primarily as a result of:

 

·                  Capitalexpenditures of $12.6 million in the nine months ended March 31, 2008 ascompared to $15.2 million in the same period last year; and

 

·                  Decreasesin restricted cash and investments of $3.6 million in the nine months endedMarch 31, 2008 as compared to an increase of $2.1 million in same periodlast year.

 

Cash usedby financing activities totaled $20.3 million in the nine months endedMarch 31, 2008 as compared to cash provided by financing activities of$25.3 million in same period last year as a result of:

 

·                  Principalpayments on capital leases and other long term debt of $25.1 million in thenine months ended March 31, 2008 as compared to $9.9 million in the sameperiod last year.  We made an unscheduled$15.0 million payment under the term loan facility during the first quarter offiscal 2008.  In the third quarter offiscal 2008, the Company entered into an agreement with the former principalsof MindPlay to settle the note payable, accrued interest and certain otherrelated liabilities for $1.8 million (see Note 6, Related Party Transactions).

 

·                  Cashprovided from exercise of stock options and warrants of $15.0 million in the ninemonths ended March 31, 2008 as compared to $7.4 million in the same periodlast year;

 

·                  Purchaseof 429,253 shares of treasury stock for $16.7 million in the nine months ended March 31,2008.  In November 2007, the Companyrepurchased 149,253 shares of common stock for $6.0 million from RobertLuciano, our Chief Technology Officer (see Note 6, Related Party Transactions),and the remaining 280,000 shares were purchased for approximately $10.7 millionon the open market, with prices per share ranging from a low of $33.15 to ahigh of $41.25, during the third quarter of fiscal 2008;

 

·                  Excesstax benefit from the exercise of stock options of $6.5 million in the ninemonths ended March 31, 2008 as compared to $0.5 million in the same periodlast year; and

 

·                  Cashproceeds from the sale and lease-back of certain equipment for Yonkers Racewayof $22.3 million in the nine months ended March 31, 2007.

 

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** **

**Critical Accounting Policies**

 

Adescription of our critical accounting policies can be found within Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operationsin our 2007 10-K.  There were no materialchanges to those policies during the nine months ended March 31, 2008.

*** ***

***Recently Issued Accounting Pronouncements***

 

InMarch 2008, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 161, *Disclosures about Derivative Instruments andHedging Activities – An Amendment of FASB Statement No. 133. *SFAS No. 161 enhances requireddisclosures regarding derivatives and hedging activities, including enhanceddisclosures regarding how: (a) an entity uses derivative instruments; (b)derivative instruments and related hedged items are accounted for under FASBStatement No. 133, *Accounting for DerivativeInstruments and Hedging Activities;* and (c) derivative instrumentsand related hedged items affect an entity’s financial position, financialperformance, and cash flows.  Statement161 is effective for fiscal years, and interim periods within those fiscalyears, beginning after November 15, 2008, though earlier application isencouraged.  We expect to adopt SFAS No.161 beginning in fiscal 2010.  We expectthat SFAS No. 161 will have an impact on accounting for derivative instrumentsand hedging activities once adopted, but the significance of the effect isdependent upon entering into these related transactions, if any, at that time.

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007),*Business Combinations.* SFAS No. 141R willsignificantly change the accounting for business combinations. Under SFAS No. 141R,an acquiring entity is required to recognize all of the assets acquired andliabilities assumed in a transaction at the acquisition-date fair value withlimited exceptions.   SFAS No. 141R alsoincludes a substantial number of new disclosure requirements. SFAS No. 141Rapplies prospectively to business combinations for which the acquisition dateis on or after the beginning of the first annual reporting period beginning onor after December 15, 2008, and accordingly, we expect to adopt SFASNo. 141R beginning in fiscal 2010. We expect that SFAS No. 141R willhave an impact on accounting for business combinations once adopted, but the significanceof the effect is dependent upon acquisitions, if any, at that time.

 

InDecember 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated FinancialStatements - An Amendment of ARB No. 51.* SFAS No. 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary.Specifically, this statement requires the recognition of a noncontrollinginterest (minority interest) as equity in the consolidated financial statementsand separate from the parent’s equity. The amount of net income attributable tothe noncontrolling interest will be included in consolidated net income on theface of the income statement. SFAS No. 160 clarifies that changes in a parent’sownership interest in a subsidiary that do not result in deconsolidation areequity transactions if the parent retains its controlling financial interest. Inaddition, this statement requires that a parent recognize a gain or loss in netincome when a subsidiary is deconsolidated. Such gain or loss will be measuredusing the fair value of the noncontrolling equity investment on thedeconsolidation date. SFAS No. 160 also includes expanded disclosurerequirements regarding the interests of the parent and its noncontrollinginterest.  SFAS No. 160 is effective forfiscal years, and interim periods within those fiscal years, beginning on orafter December 15, 2008, and accordingly, we expect to adopt SFAS No. 160beginning in fiscal 2010. We are currently in the process of evaluating theimpact SFAS No. 160 will have on our consolidated results of operations,financial position and cash flows.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities*. SFASNo. 159 provides companies with an option to report selected financial assetsand liabilities at fair value. It also establishes presentation and disclosurerequirements to facilitate comparisons between companies using differentmeasurement attributes for similar types of assets and liabilities. Thestatement is effective for fiscal years beginning after November 15, 2007and accordingly, we expect to adopt SFAS No. 159 beginning in fiscal 2009.Earlier application is permitted provided we also apply the provisions of SFAS157, *Fair Value Measurements*, which isdiscussed below.  We are currently in theprocess of evaluating the impact SFAS No. 159 will have on ourconsolidated results of operations, financial position and cash flows.

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*,which defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements. SFAS No. 157 does not require any new fair valuemeasurements, rather it applies to existing accounting pronouncements thatrequire or permit fair value measurements. SFAS No. 157 is effective forfiscal years beginning after November 15, 2007.   In February 2008, the FASB issued FASB StaffPosition (“FSP”) FAS 157-2, *Effective Date of FASBStatement No.157*, delaying the effective date of SFAS 157 for certainnonfinancial assets and liabilities until fiscal years beginning after November15, 2008, and accordingly, we expect to adopt SFAS No. 157 beginning infiscal 20010.  We are currentlyevaluating the impact SFAS No. 157 will have on our consolidated resultsof operations, financial position and cash flows.

 

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** **

**ITEM 3.****     QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

*Interest Rate Risk*

 

As ofMarch 31, 2008, we had total debt outstanding of approximately $307.6million, consisting primarily of the $290.4 million outstanding under a termloan under our senior credit facility, $5.6 million in related party debt and$11.6 million in capital lease obligations and other debt.  The interest rate for the term loan isvariable, based on LIBOR, and resets every six months. The related party debtis variable and is based on LIBOR.  Ifthe LIBOR rates were to increase or decrease by 100 basis points, with allother factors remaining constant, earnings would decrease or increase byapproximately $3.0 million annually, on a pre-tax basis.

 

*ForeignCurrency Exchange Rate Risk*

 

Ourforeign subsidiaries generally use their domestic currency as their functionalcurrency.  A 10% fluctuation in theexchange rates of these currencies against the U.S. dollar would result in acorresponding change in earnings reported in the consolidated group ofapproximately $1.2 million.

 

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# ** **

# **ITEM 4.**     CONTROLS AND PROCEDURES

# ** **

**DisclosureControls and Procedures**

 

As required byRule 13a-15(b) promulgated under the Exchange Act, our management,with the participation of our Chief Executive Officer and Chief FinancialOfficer, evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Exchange ActRule 13a-15(e), as of the end of the period covered by this Quarterlyreport on Form 10-Q.  Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat, as of March 31, 2008, our disclosure controls and procedures werenot effective due to the existing material weaknesses in our internal controlover financial reporting previously identified and discussed in our2007 10-K and below under “—Internal Control Over Financial Reporting—Material Weakness in Internal Control Over Financial Reporting PreviouslyReported.”

 

In view of the fact that thefinancial information presented in this Quarterly Report on Form 10-Q forthe fiscal quarter ended March 31, 2008, was prepared in the absence ofeffective internal control over financial reporting, we have devoted asignificant amount of time and resources to the analysis of the financialstatements contained in this report.  Inparticular, we have reviewed the significant account balances and transactionsreflected in the financial statements contained in this report and otherwiseanalyzed the transactions underlying our financial statements to verify theaccuracy of the financial statements. Accordingly, management believes that the financial statements includedin this report fairly present, in all material respects, our financial condition,results of operations, and cash flows.

 

Nevertheless, there can be noassurance that either this review process or our existing disclosure controlsand procedures will prevent or detect all errors and all fraud, if any, orresult in accurate and reliable disclosure. A control system can provide only reasonable and not absolute assurancethat the objectives of the control system are met.  Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, have been detected.  Additionally, judgments in decision-makingcan be faulty and breakdowns in controls can occur because of simple errors ormistakes that are not detected on a timely basis.

 

**Internal ControlOver Financial Reporting**

 

Our management acknowledges itsresponsibility for establishing and maintaining adequate internal control overfinancial reporting that includes effective accounting policies andprocedures.  Our continuing progress in establishingadequate internal control over financial reporting is described below.

 

***CertainChanges in Internal Control Over Financial Reporting during the Fiscal QuarterEnded March 31, 2008***

 

Although we continued our efforts to remediate thepreviously reported material weaknesses and initiated certain updatedremediation activities, as described below, there were no changes in ourinternal control over financial reporting that occurred in the  fiscal quarter ended March 31, 2008 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting, and the material weakness conditionspreviously disclosed in our 2007 Form 10-K continue to exist as of March 31,2008.

 

***Material Weakness in Internal Control Over Financial ReportingPreviously Reported***

 

During the second quarterof fiscal 2008, management updated its remediation plan for the previouslyreported material weaknesses.  Theupdated remediation plan was developed through investigations and reviews ofthe processes and activities surrounding the previously reported materialweaknesses and includes changes in the design of these processes to prevent ordetect similar future occurrences.  Webegan implementing the updated remediation plan with respect to the previouslyreported material weaknesses, as discussed immediately below, during the secondquarter of fiscal 2008 and continued to do so through the third quarter offiscal 2008; however, there can be no assurances as to when, or if, the implementationof these initiatives will be completed.

 

The following discussion is an overview of the previously reportedmaterial weaknesses as well as each of the updated remediation activities wehave identified and/or begun to implement in respect of each such materialweakness:

 

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** **

**Inadequateand ineffective control related to revenue recognition. **The Company did not maintain appropriate internalcontrols related to the recognition of revenue for the sale of games, systemsand parts.  The Company’s controls werenot adequate to capture and analyze the terms and conditions of all contractsand agreements, or to timely determine that collectibility was probable inorder to ensure the proper recording of revenue related to game and systemsales.  The internal controls includethose related to the systematic tracking of contract terms and amendments.  Game and system sales are accounted for inaccordance with American Institute of Certified Public Accountants Statement ofPosition No. 97-2, *Software Revenue Recognition*,which includes complex revenue recognition criteria that were not alwaysadequately evaluated.  The review processis manual and the resources dedicated to the process are not adequate toaddress all of the accounting considerations on a timely basis given theincreased volume of business.

 

For parts sales,the Company’s internal controls did not ensure that the terms of the shipmentsand sales were captured and accounted for in accordance with the terms of thesale agreements, contracts, or shipping documents.

 

These weaknesses were the result of a material deficiency in the designof internal controls over financial reporting and resulted in materialadjustments to the consolidated financial statements for the fiscal year endedJune 30, 2007.

 

Remediation activities:

 

·                  Training personnel on revenuerecognition guidelines and updating internal reference materials, addingadditional qualified revenue accounting resources and designing a contractreview process based on complexity of transactions, each on a worldwide basis.

 

·                  Publishing a new worldwide customercredit policy based upon management’s current objectives and assessment ofrisk.

 

·                  Increasing the standardization ofcontract language as well as enhancing the controls over reviews of changes tothis standardized language as it relates to revenue recognition.

 

·                  Redesigning the customer order entryprocess so that customer orders are reviewed prior to shipment by finance andaccounting for collectability and terms or conditions that may impact revenuerecognition.

 

·                  Designingparts and systems sales processes to address completeness and timeliness ofshipping, billing and go-live activities consistent with the terms of saleagreements, contracts and shipping documents.

 

**Ineffectivecontrol related to the existence and valuation of inventory. **The Company did not maintain appropriate and oreffective controls related to the existence and valuation of inventory.  As a result, the Company identified severaldeficiencies including: (i) adjustments to its raw materials balanceresulting from ineffective periodic counting procedures; (ii) parts issuedto and restocked from work orders which were not always properly recorded inraw materials or the related open work order bill of materials;(iii) differences between the general ledger and perpetual inventory,which lacked the appropriate level of documentation for timely review andanalysis; (iv) the inaccurate recording of parts shipments to outerwarehouses; (v) inadequate control over transaction processing; and(vi) lack of effective change management for modifications made to theinventory system and processes.

 

This weakness wasthe result of a material deficiency in the operation of internal controls overfinancial reporting and resulted in material adjustments to the consolidatedfinancial statements for the fiscal year ended June 30, 2007.

 

Remediation activities:

 

·                  Inconjunction with the implementation of a new warehouse management system in thethird quarter of fiscal 2008:

 

·                  Implementinga workflow application that automates controls over timely and accurate rawmaterial transaction processing and on hand balances in the perpetual inventorysystem; 

 

·      Launching a reliable cyclecounting process for continuous, real time, validation of raw material on handbalances; and

 

·                  Implementinga new production work order review process to monitor the accuracy of completedproduct cost and returns to stock of unused parts prior to the closing of workorders.

 

·                  Performing timely monitoring,analysis and reconciliation of perpetual inventory system transactions to thegeneral ledger to eliminate manual journal entries.

 

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** **

**Insufficientpersonnel resources to adequately perform analytical review procedures. **The Company did not have sufficient qualifiedpersonnel to adequately analyze revenue and expenditure activities for properclassification of amounts in the consolidated statements of operations andstatements of cash flows.  This resultedin: (i) certain charges originally classified as selling, general andadministrative expenses being restated to reflect an increase to cost of salesor reduction of revenue; (ii) certain gaming operations transactions beingreclassified between investing and operating activities in the consolidatedstatements of cash flows; and (iii) certain revenue and operating income(loss) amounts previously presented under the United States and Canada in thesegment and geographic footnote disclosure being reclassified to Europe orOther foreign regions.  These adjustmentsresulted in the restatement of prior consolidated financial statements.

 

In addition, thelack of sufficient qualified personnel contributed to the other materialweaknesses described above.

 

Remediation activities:

 

·                  Strengthening policies and proceduressurrounding changes to significant financial processes, including theunderlying systems and applications, to ensure adequate review, testing andapproval prior to implementation.

 

·                  Deploying additional qualifiedaccounting staff and consultants in the areas of inventory and cost accounting,financial analysis and process improvement.

 

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** **

**PART II**

 

# **ITEM 1.**     LEGAL PROCEEDINGS

# ** **

For a description of ourlegal proceedings, see Note 9 to the unaudited condensed consolidated financialstatements, Commitments and Contingencies, which is incorporated by referencein response to this item.

 

 

**ITEM 1A.               RISKFACTORS**

 

TheCompany is subject to risks and uncertainties that could cause our actualresults to differ materially from the expectations expressed in the forwardlooking statements.  Factors that couldcause our actual results to differ from expectations are described under “Item1A. Risk Factors” in the 2007 10-K, to which there were no materialchanges during the period covered by this Quarterly Report on Form 10-Q.

 

** **

**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

** **

On February 14, 2008, our Board of Directors approved anamendment to our share repurchase plan to repurchase an additional $20.0million of our common stock, for a total authorized repurchase plan of up to$75.0 million.  This repurchase planexcludes shares of our common stock repurchased from our Chief TechnologyOfficer (see Note 6, Related Party Transactions).  Our quarterly share repurchases under thisplan, excluding treasury shares acquired in non-cash transactions related toforfeited stock awards and shares exchanged for options exercised, were asfollows:

 
| **Period**                                    | ** ** | **Total Number  of Shares (or  Units)  Purchased** | ** ** | **Average Price  Paid Per Share  (Per Unit)** | ** ** | **Total Number of Shares (or  Units) Purchased as Part of  Publicly Announced Plans  or Programs** | ** ** | **Maximum Number (or  Approximate Dollar Value) of  Shares (or Units) That May Be  Purchased Under the Plans or  Programs** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1 –  January 31, 2008  |       | —                                                            |       | —                                                            |       | —                                                                                                                                                    |       | $                                                                                                                                                                                                 | 75,000,000 |   |
| February 1 – February 29, 2008 |       | 190,000                                                           |       | $                                                                 | 40.44      |                                                                                                                                                      | 190,000    |                                                                                                                                                                                              | $          | 67,315,961 |   |
| March 1 – March 31, 2008       |       | 90,000                                                            |       | $                                                                 | 33.66      |                                                                                                                                                      | 90,000     |                                                                                                                                                                                              | $          | 64,286,654 |   |
| Total                                         |       | 280,000                                                           |       | $                                                                 | 38.26      |                                                                                                                                                      | 280,000    |                                                                                                                                                                                              |       |   |   |

 

 

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** **

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

** **

The following matters were submitted to a vote of ourstockholders during the Annual Meeting of Stockholders held on February 22,2008:

 

1.               The election to two directors for terms of threeyears each: 

** **
| **Director**     | ** ** | **Shares For** | ** ** | **Shares Withheld** | ** ** |
|------------------|------------|----------------|------------|---------------------|------------|
| ** **       | ** ** | ** **     | ** ** | ** **          | ** ** |
| Jacques Andre    |       | 41,768,979     |       | 2,555,245           | ** ** |
|             |       |           |       |                |       |
| Richard Haddrill |       | 43,983,498     |       | 340,726             |       |

 

 

2.               Approve the Bally Technologies, Inc. 2008 EmployeeStock Purchase Plan:

 
| **Shares For** | ** ** | **Shares Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|----------------|------------|--------------------|------------|-------------|------------|---------------------|------------|
| ** **     | ** ** | ** **         | ** ** | ** **  | ** ** | ** **          | ** ** |
| 40,882,923     |       | 373,749            |       | 15,479      |       | 3,052,073           |       |

** **

** **

3.               Approve an amendment to the Company’s Amended andRestated 2001 Long  Term Incentive Plan,as amended, to increase the number of shares of Bally common stock issuablethereunder by 1,500,000 shares:

 
| **Shares For** | ** ** | **Shares Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|----------------|------------|--------------------|------------|-------------|------------|---------------------|------------|
| ** **     | ** ** | ** **         | ** ** | ** **  | ** ** | ** **          | ** ** |
| 23,520,796     |       | 17,730,904         |       | 20,354      |       | 3,052,170           |       |

                                                

 

4.               Ratificationof Deloitte & Touche LLP as the Company’s independent registered publicaccounting firm for the fiscal year ending June 30, 2008:

 
| **Shares For** | ** ** | **Shares Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|----------------|------------|--------------------|------------|-------------|------------|---------------------|------------|
| ** **     | ** ** | ** **         | ** ** | ** **  | ** ** | ** **          | ** ** |
| 42,765,490     |       | 1,524,484          |       | 34,250      |       | —              |       |

 

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** **

**ITEM 6.****    ****EXHIBITS**

** **
| **Exhibits** | ** ** | **Description**                                                                                                                                                 |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                            |
| 31.1         |       | Certification of Chief  Executive Officer, pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934, as amended.                            |
|         |       |                                                                                                                                                            |
| 31.2         |       | Certification of Chief  Financial Officer, pursuant to Rule 13a-14(a) of the Securities  Exchange 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 2002. |
|         |       |                                                                                                                                                            |
| 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 2002. |
|         |       |                                                                                                                                                            |

 

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** **

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| BALLY  TECHNOLOGIES, INC. | Date: May 12,  2008                                         |   |   |
|--------------------------------|------------------------------------------------------------------|--------|--------|
|                           |                                                             |   |   |
|                           |                                                             |
| By                             | /s/Richard Haddrill                                              |   |
|                           | Richard Haddrill                                                 |   |
|                           | President and  Chief Executive Officer                           |   |
|                           | (Principal  Executive Officer)                                   |   |
|                           |                                                             |   |
|                           |                                                             |   |
| By                             | /s/Robert C.  Caller                                             |   |
|                           | Robert C. Caller                                                 |   |
|                           | Executive Vice  President, Chief Financial Officer and Treasurer |   |
|                           | (Principal  Financial and Accounting Officer)                    |   |
|                                |                                                                  |        |        |  |  |

 

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