Table ofContents

 

 

 

**UNITED STATES**

**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,  2010** |
| ** **                                              |
| **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 001-31558**

 

**BALLY TECHNOLOGIES, INC.**

(Exact name of registrant as specified in itscharter)

 

| **NEVADA**                                                      | ** ** | **88-0104066**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**6601S. Bermuda Rd.**

**LasVegas, Nevada  89119**

(Address of principal executive offices)

 

**(702) 584-7700**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  x  Yes   o  No

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post suchfiles).  o  Yes   o  No

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes   x  No

 

The number of shares of Common Stock, $0.10 parvalue, outstanding as of April 27, 2010, was 55,224,000 which do not include3,915,000 shares held in treasury.

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                                        | ** ** | **Page** |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                        | ** ** | **3**    |
|              |                                                                                                                              |       |     |
| Item 1.           | Financial Statements                                                                                                              |       |     |
|              |                                                                                                                              |       |     |
|              | Unaudited Condensed  Consolidated Balance Sheets as of March 31, 2010 and June 30, 2009                                 |       | 3        |
|              |                                                                                                                              |       |     |
|              | Unaudited Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  March 31, 2010 and 2009      |       | 4        |
|              |                                                                                                                              |       |     |
|              | Unaudited  Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months  Ended March 31, 2010 and 2009 |       | 5        |
|              |                                                                                                                              |       |     |
|              | Unaudited  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended  March 31, 2010 and 2009                |       | 6        |
|              |                                                                                                                              |       |     |
|              | Notes to  Unaudited Condensed Consolidated Financial Statements                                                                   |       | 8        |
|              |                                                                                                                              |       |     |
| Item 2.           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                       |       | 23       |
|              |                                                                                                                              |       |     |
| Item 3.           | Quantitative and  Qualitative Disclosures About Market Risk                                                                       |       | 36       |
|              |                                                                                                                              |       |     |
| Item 4.           | Controls and  Procedures                                                                                                          |       | 37       |
|              |                                                                                                                              |       |     |
| **PART II.** | **OTHER INFORMATION**                                                                                                             | ** ** | **38**   |
|              |                                                                                                                              |       |     |
| Item 1.           | Legal Proceedings                                                                                                                 |       | 38       |
|              |                                                                                                                              |       |     |
| Item 1A.          | Risk Factors                                                                                                                      |       | 38       |
|              |                                                                                                                              |       |     |
| Item 2.           | Unregistered Sales of  Equity Securities and Use of Proceeds                                                                      |       | 38       |
|              |                                                                                                                              |       |     |
| Item 6.           | Exhibits                                                                                                                          |       | 39       |
|              |                                                                                                                              |       |     |
| **SIGNATURES**    | ** **                                                                                                                        | ** ** | **40**   |

 

2

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Table of Contents

 

**PART I**

**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                            | ** ** | **March 31,********2010**                          | ** ** | **June 30,********2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **(in 000s, except share amounts)** | ** ** |
| **ASSETS**                                                                                                                                            |       |                                                    |       |                          |       |
| Current assets:                                                                                                                                       |       |                                                    |       |                          |       |
| Cash and cash equivalents                                                                                                                             |       | $                                                       | 75,993     |                          | $          | 55,886 |   |
| Restricted cash                                                                                                                                       |       | 7,278                                                   |       | 9,076                         |       |
| Accounts and notes  receivable, net of allowances for doubtful accounts of $10,103 and $8,897                                                         |       | 219,143                                                 |       | 174,653                       |       |
| Inventories                                                                                                                                           |       | 42,914                                                  |       | 52,887                        |       |
| Prepaid and refundable  income tax                                                                                                                    |       | 35,216                                                  |       | 43,756                        |       |
| Deferred income tax assets                                                                                                                            |       | 37,301                                                  |       | 35,802                        |       |
| Deferred cost of revenue                                                                                                                              |       | 17,493                                                  |       | 21,906                        |       |
| Prepaid assets                                                                                                                                        |       | 11,672                                                  |       | 7,347                         |       |
| Assets held for sale                                                                                                                                  |       | 46,068                                                  |       | 51,284                        |       |
| Other current assets                                                                                                                                  |       | 3,689                                                   |       | 13,010                        |       |
| Total current assets                                                                                                                                  |       | 496,767                                                 |       | 465,607                       |       |
| Restricted long-term  investments                                                                                                                     |       | 12,238                                                  |       | 12,097                        |       |
| Long-term receivables, net  of allowances for doubtful accounts of $5,169 and $0                                                                      |       | 30,222                                                  |       | 9,826                         |       |
| Property, plant and  equipment, net of accumulated depreciation of $49,269 and $43,777                                                                |       | 31,147                                                  |       | 33,410                        |       |
| Leased gaming equipment,  net of accumulated depreciation of $145,775 and $117,638                                                                    |       | 79,333                                                  |       | 95,012                        |       |
| Goodwill                                                                                                                                              |       | 161,700                                                 |       | 161,960                       |       |
| Intangible assets, net                                                                                                                                |       | 36,851                                                  |       | 32,198                        |       |
| Deferred income tax assets                                                                                                                            |       | 22,027                                                  |       | 17,276                        |       |
| Long-term deferred cost of  revenue                                                                                                                   |       | 33,707                                                  |       | 41,615                        |       |
| Other assets, net                                                                                                                                     |       | 11,202                                                  |       | 11,881                        |       |
| Total assets                                                                                                                                          |       | $                                                       | 915,194    |                          | $          | 880,882 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                         |       |                                                    |       |                          |       |
| Current liabilities:                                                                                                                                  |       |                                                    |       |                          |       |
| Accounts payable                                                                                                                                      |       | $                                                       | 22,364     |                          | $          | 19,864 |   |
| Accrued liabilities                                                                                                                                   |       | 42,434                                                  |       | 45,515                        |       |
| Customer deposits                                                                                                                                     |       | 10,164                                                  |       | 10,375                        |       |
| Jackpot liabilities                                                                                                                                   |       | 10,240                                                  |       | 12,171                        |       |
| Deferred revenue                                                                                                                                      |       | 42,040                                                  |       | 49,122                        |       |
| Income tax payable                                                                                                                                    |       | 784                                                     |       | 2,971                         |       |
| Liabilities related to  assets held for sale                                                                                                          |       | 2,404                                                   |       | 2,695                         |       |
| Current maturities of long-term  debt                                                                                                                 |       | 40,034                                                  |       | 35,337                        |       |
| Total current liabilities                                                                                                                             |       | 170,464                                                 |       | 178,050                       |       |
| Long-term debt, net of  current maturities                                                                                                            |       | 142,500                                                 |       | 173,750                       |       |
| Long-term deferred revenue                                                                                                                            |       | 45,501                                                  |       | 60,464                        |       |
| Other income tax liability                                                                                                                            |       | 19,885                                                  |       | 22,072                        |       |
| Other liabilities                                                                                                                                     |       | 8,386                                                   |       | 7,797                         |       |
| Total liabilities                                                                                                                                     |       | 386,736                                                 |       | 442,133                       |       |
| Commitments and  contingencies (Note 11)                                                                                                         |       |                                                    |       |                          |       |
| Stockholders’ equity:                                                                                                                            |       |                                                    |       |                          |       |
| Special stock, 10,000,000  shares authorized: Series E, $100 liquidation value; 115 shares issued  and outstanding                               |       | 12                                                      |       | 12                            |       |
| Common stock, $.10 par  value; 100,000,000 shares authorized; 59,060,000 and 57,091,000 shares  issued and 55,157,000 and 54,312,000 outstanding |       | 5,893                                                   |       | 5,703                         |       |
| Treasury stock at cost,  3,903,000 and 2,779,000 shares                                                                                               |       | (109,470                                                | )          | (64,727                       | )          |
| Additional paid-in capital                                                                                                                            |       | 378,777                                                 |       | 330,465                       |       |
| Accumulated other  comprehensive loss                                                                                                                 |       | (1,575                                                  | )          | (770                          | )          |
| Retained earnings                                                                                                                                     |       | 252,059                                                 |       | 165,623                       |       |
| Total Bally  Technologies, Inc. stockholders’ equity                                                                                        |       | 525,696                                                 |       | 436,306                       |       |
| Noncontrolling interests                                                                                                                              |       | 2,762                                                   |       | 2,443                         |       |
| Total stockholders’ equity                                                                                                                       |       | 528,458                                                 |       | 438,749                       |       |
| Total liabilities and  stockholders’ equity                                                                                                      |       | $                                                       | 915,194    |                          | $          | 880,882 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

3

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Table of Contents

 

**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                                  | ** ** | **Three Months Ended  March 31,**                 | ** ** | **Nine Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2010**                                                         | ** ** | **2009**                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                  | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Revenues:                                                                   |       |                                                             |       |                                            |       |   |   |   |   |
| Gaming equipment and  systems                                               |       | $                                                                | 120,917    |                                            | $          | 126,828 |   | $ | 373,333 |   | $ | 443,643 |   |
| Gaming operations                                                           |       | 69,723                                                           |       | 69,986                                          |       | 209,610 |   | 204,169 |   |
|                                                                        |       | 190,640                                                          |       | 196,814                                         |       | 582,943 |   | 647,812 |   |
| Costs and expenses:                                                         |       |                                                             |       |                                            |       |   |   |   |   |
| Cost of gaming equipment  and systems (1)                                   |       | 46,590                                                           |       | 55,620                                          |       | 150,765 |   | 198,152 |   |
| Cost of gaming operations                                                   |       | 19,865                                                           |       | 19,349                                          |       | 59,854 |   | 60,908 |   |
| Selling, general and  administrative                                        |       | 52,545                                                           |       | 50,168                                          |       | 151,462 |   | 161,231 |   |
| Research and development  costs                                             |       | 20,279                                                           |       | 19,291                                          |       | 59,321 |   | 58,493 |   |
| Impairment charges                                                          |       | 11,379                                                           |       | —                                          |       | 11,379 |   | — |   |
| Depreciation and  amortization                                              |       | 4,910                                                            |       | 4,943                                           |       | 14,442 |   | 14,014 |   |
|                                                                        |       | 155,568                                                          |       | 149,371                                         |       | 447,223 |   | 492,798 |   |
| Operating income                                                            |       | 35,072                                                           |       | 47,443                                          |       | 135,720 |   | 155,014 |   |
| Other income (expense):                                                     |       |                                                             |       |                                            |       |   |   |   |   |
| Interest income                                                             |       | 944                                                              |       | 696                                             |       | 2,268 |   | 2,779 |   |
| Interest expense                                                            |       | (3,069                                                           | )          | (4,181                                          | )          | (9,607 | ) | (15,462 | ) |
| Other, net                                                                  |       | (955                                                             | )          | (798                                            | )          | (1,897 | ) | (5,066 | ) |
| Income from continuing  operations before income taxes                      |       | 31,992                                                           |       | 43,160                                          |       | 126,484 |   | 137,265 |   |
| Income tax expense                                                          |       | (11,262                                                          | )          | (15,073                                         | )          | (43,973 | ) | (49,178 | ) |
| Income from continuing  operations                                          |       | 20,730                                                           |       | 28,087                                          |       | 82,511 |   | 88,087 |   |
| Discontinued operations:                                                    |       |                                                             |       |                                            |       |   |   |   |   |
| Income from discontinued  operations before income taxes                    |       | 3,431                                                            |       | 3,688                                           |       | 8,050 |   | 9,100 |   |
| Income tax expense                                                          |       | (1,068                                                           | )          | (1,159                                          | )          | (2,508 | ) | (2,860 | ) |
| Income from discontinued  operations                                        |       | 2,363                                                            |       | 2,529                                           |       | 5,542 |   | 6,240 |   |
| Net income                                                                  |       | 23,093                                                           |       | 30,616                                          |       | 88,053 |   | 94,327 |   |
| Less net income  attributable to noncontrolling interests                   |       | 534                                                              |       | 1,365                                           |       | 1,617 |   | 1,208 |   |
|                                                                        |       |                                                             |       |                                            |       |   |   |   |   |
| Net income attributable to  Bally Technologies, Inc.                   |       | $                                                                | 22,559     |                                            | $          | 29,251 |   | $ | 86,436 |   | $ | 93,119 |   |
| Basic earnings per share:                                                   |       |                                                             |       |                                            |       |   |   |   |   |
| Income from continuing  operations attributable to Bally Technologies, Inc. |       | $                                                                | 0.37       |                                            | $          | 0.50 |   | $ | 1.50 |   | $ | 1.61 |   |
| Discontinued operations  attributable to Bally Technologies, Inc.           |       | 0.04                                                             |       | 0.04                                            |       | 0.09 |   | 0.10 |   |
| Basic earnings  attributable to Bally Technologies, Inc. per share     |       | $                                                                | 0.41       |                                            | $          | 0.54 |   | $ | 1.59 |   | $ | 1.71 |   |
|                                                                        |       |                                                             |       |                                            |       |   |   |   |   |
| Diluted earnings per  share:                                                |       |                                                             |       |                                            |       |   |   |   |   |
| Income from continuing  operations attributable to Bally Technologies, Inc. |       | $                                                                | 0.36       |                                            | $          | 0.48 |   | $ | 1.42 |   | $ | 1.54 |   |
| Discontinued operations  attributable to Bally Technologies, Inc.      |       | 0.03                                                             |       | 0.04                                            |       | 0.08 |   | 0.09 |   |
| Diluted earnings  attributable to Bally Technologies, Inc. per share   |       | $                                                                | 0.39       |                                            | $          | 0.52 |   | $ | 1.50 |   | $ | 1.63 |   |
|                                                                        |       |                                                             |       |                                            |       |   |   |   |   |
| Weighted average shares  outstanding:                                       |       |                                                             |       |                                            |       |   |   |   |   |
| Basic                                                                       |       | 54,771                                                           |       | 54,204                                          |       | 54,517 |   | 54,567 |   |
| Diluted                                                                     |       | 57,716                                                           |       | 56,446                                          |       | 57,715 |   | 57,104 |   |
| Amounts attributable to  Bally Technologies, Inc. common stockholders:      |       |                                                             |       |                                            |       |   |   |   |   |
| Income from continuing  operations, net of tax                              |       | $                                                                | 20,577     |                                            | $          | 27,099 |   | $ | 81,778 |   | $ | 87,806 |   |
| Income from discontinued  operations, net of tax                            |       | 1,982                                                            |       | 2,152                                           |       | 4,658 |   | 5,313 |   |
| Net income                                                                  |       | $                                                                | 22,559     |                                            | $          | 29,251 |   | $ | 86,436 |   | $ | 93,119 |   |

 

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| (1)  | Cost of gaming equipment and systems exclude amortization related to  certain intangibles, including core technology and license rights, which are  included in depreciation and amortization. |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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Table of Contents

 

**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

 
| ** **                                                                             | ** ** | **Common Stock** | ** ** | **Series E  Special** | ** ** | **Treasury** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Retained**          | ** ** | **Noncontrolling** | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|--------------|------------|-------------------------|------------|-----------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Shares**            | ** ** | **Dollars**                | ** ** | **Stock**    | ** ** | **Stock**               | ** ** | **Capital**                                               | ** ** | **(“OCI”)** | ** ** | **Earnings**       | ** ** | **Interests**                 | ** ** | **Equity** | ** ** |
| ** **                                                                             | ** ** | **(in 000s)**    | ** ** |
| Balances at June 30, 2008                                                         |       | 56,318                |       | $                          | 5,626      |         | $          | 12                      |       | $                                                         | (25,041    | )                     | $          | 302,146            |       | $                             | 1,268      |   | $ | 39,314 |   | $ | 1,782 |   | $ | 325,107 |   |
| Net income from continuing operations, net of tax                                      |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | —                |       | 87,806             |       | 281                           |       | 88,087 |   |
| Net income from discontinued operations, net of tax                                    |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | —                |       | 5,313              |       | 927                           |       | 6,240 |   |
| Foreign currency translation adjustment                                                |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | (1,750                | )          | —             |       | —                        |       | (1,750 | ) |
| Unrealized loss on derivative financial instruments,  net of tax                       |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | (1,194                | )          | —             |       | —                        |       | (1,194 | ) |
| Total comprehensive income                                                             |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | —                |       | —             |       | —                        |       | $ | 91,383 |   |
| Distributions to noncontrolling interests                                              |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | —                |       | —             |       | (859                          | )          | (859 | ) |
| Restricted stock issued                                                                |       | 100                   |       | 10                         |       | —       |       | —                  |       | (10                                                       | )          | —                |       | —             |       | —                        |       | — |   |
| Receipt of stock from exercise of stock options and  tax liability on restricted stock |       | —                |       | —                     |       | —       |       | (1,335                  | )          | —                                                    |       | —                |       | —             |       | —                        |       | (1,335 | ) |
| Purchase of common stock for treasury                                                  |       | —                |       | —                     |       | —       |       | (30,933                 | )          | —                                                    |       | —                |       | —             |       | —                        |       | (30,933 | ) |
| Share-based compensation                                                               |       |                  |       | —                     |       | —       |       | —                  |       | 10,907                                                    |       | —                |       | —             |       | —                        |       | 10,907 |   |
| Shares issued upon exercise of stock options                                           |       | 442                   |       | 44                         |       | —       |       | —                  |       | 7,638                                                     |       | —                |       | —             |       | —                        |       | 7,682 |   |
| Shares issued under ESPP plan                                                          |       | 71                    |       | 7                          |       | —       |       | —                  |       | 1,258                                                     |       | —                |       | —             |       | —                        |       | 1,265 |   |
| Tax benefit of employee stock option exercises                                         |       | —                |       | —                     |       | —       |       | —                  |       | 1,524                                                     |       | —                |       | —             |       | —                        |       | 1,524 |   |
| Balances at March 31, 2009                                                        |       | 56,931                |       | $                          | 5,687      |         | $          | 12                      |       | $                                                         | (57,309    | )                     | $          | 323,463            |       | $                             | (1,676     | ) | $ | 132,433 |   | $ | 2,131 |   | $ | 404,741 |   |
|                                                                                   |       |                  |       |                       |       |         |       |                    |       |                                                      |       |                  |       |               |       |                          |       |   |   |
| Balances at June 30, 2009                                                         |       | 57,091                |       | $                          | 5,703      |         | $          | 12                      |       | $                                                         | (64,727    | )                     | $          | 330,465            |       | $                             | (770       | ) | $ | 165,623 |   | $ | 2,443 |   | $ | 438,749 |   |
| Net income from continuing operations, net of tax                                      |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | —                |       | 81,778             |       | 733                           |       | 82,511 |   |
| Net income from discontinued operations, net of tax                                    |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | —                |       | 4,658              |       | 884                           |       | 5,542 |   |
| Foreign currency translation adjustment                                                |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | 846                   |       | —             |       | —                        |       | 846 |   |
| Unrealized loss on derivative financial instruments,  net of tax                       |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | (1,651                | )          | —             |       | —                        |       | (1,651 | ) |
| Total comprehensive income                                                             |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | —                |       | —             |       | —                        |       | $ | 87,248 |   |
| Distributions to noncontrolling interests                                              |       | —                |       | —                     |       | —       |       | —                  |       | —                                                    |       | —                |       | —             |       | (1,298                        | )          | (1,298 | ) |
| Restricted stock issued                                                                |       | 155                   |       | 12                         |       | —       |       | —                  |       | (12                                                       | )          | —                |       | —             |       | —                        |       | — |   |
| Receipt of stock from exercise of stock options and  tax liability on restricted stock |       | —                |       | —                     |       | —       |       | (524                    | )          | —                                                    |       | —                |       | —             |       | —                        |       | (524 | ) |
| Purchase of common stock for treasury                                                  |       | —                |       | —                     |       | —       |       | (44,219                 | )          | —                                                    |       | —                |       | —             |       | —                        |       | (44,219 | ) |
| Shares issued upon exercise of warrants                                                |       | 39                    |       | 1                          |       | —       |       | —                  |       | (1                                                        | )          | —                |       | —             |       | —                        |       | — |   |
| Share-based compensation                                                               |       | —                |       | —                     |       | —       |       | —                  |       | 10,600                                                    |       | —                |       | —             |       | —                        |       | 10,600 |   |
| Shares issued upon exercise of stock options                                           |       | 1,734                 |       | 173                        |       | —       |       | —                  |       | 23,230                                                    |       | —                |       | —             |       | —                        |       | 23,403 |   |
| Shares issued under ESPP plan                                                          |       | 41                    |       | 4                          |       | —       |       | —                  |       | 1,419                                                     |       | —                |       | —             |       | —                        |       | 1,423 |   |
| Tax benefit of employee stock option exercises                                         |       | —                |       | —                     |       | —       |       | —                  |       | 13,076                                                    |       | —                |       | —             |       | —                        |       | 13,076 |   |
| Balances at March 31, 2010                                                        |       | 59,060                |       | $                          | 5,893      |         | $          | 12                      |       | $                                                         | (109,470   | )                     | $          | 378,777            |       | $                             | (1,575     | ) | $ | 252,059 |   | $ | 2,762 |   | $ | 528,458 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                                         | ** ** | **Nine Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2010**                                        | ** ** | **2009** | ** ** |
| ** **                                                                                                         | ** ** | **(in 000s)**                              | ** ** |
| Cash flows from operating  activities:                                                                             |       |                                            |       |   |   |
| Net income                                                                                                         |       | $                                               | 88,053     |   | $ | 94,327 |   |
| Adjustments to net income  attributable to Bally Technologies, Inc. to net cash provided by operating  activities: |       |                                            |       |   |   |
| Income from discontinued  operations, net of tax                                                                   |       | (5,542                                          | )          | (6,240 | ) |
| Depreciation and  amortization                                                                                     |       | 55,438                                          |       | 50,463 |   |
| Impairment charges                                                                                                 |       | 11,379                                          |       | — |   |
| Share-based compensation                                                                                           |       | 10,502                                          |       | 10,812 |   |
| Amortization of deferred  debt issuance costs                                                                      |       | 2,108                                           |       | 1,405 |   |
| Income tax (benefit)  expense                                                                                      |       | (8,023                                          | )          | 1,076 |   |
| Provision for doubtful  accounts                                                                                   |       | 2,781                                           |       | 926 |   |
| Write-off of debt issuance  costs                                                                                  |       | —                                          |       | 786 |   |
| Inventory and other asset  write-downs                                                                             |       | 1,531                                           |       | 3,667 |   |
| Excess tax benefit of  stock option exercises                                                                      |       | (12,400                                         | )          | (760 | ) |
| Other                                                                                                              |       | 2,500                                           |       | 2,018 |   |
| Changes in operating  assets and liabilities:                                                                      |       |                                            |       |   |   |
| Accounts and notes  receivable                                                                                     |       | (62,855                                         | )          | 24,850 |   |
| Inventories                                                                                                        |       | (22,734                                         | )          | 5,584 |   |
| Prepaid and refundable  income tax and income tax payable                                                          |       | 19,429                                          |       | (15,327 | ) |
| Other current assets                                                                                               |       | 3,000                                           |       | 3,552 |   |
| Accounts payable                                                                                                   |       | 2,323                                           |       | (25,503 | ) |
| Accrued liabilities,  customer deposits and jackpot liabilities                                                    |       | (7,909                                          | )          | (40,223 | ) |
| Deferred revenue and  deferred cost of revenue                                                                     |       | (9,723                                          | )          | (31,647 | ) |
| Net cash provided by  operating activities                                                                         |       | 69,858                                          |       | 79,766 |   |
|                                                                                                               |       |                                            |       |   |   |
| Cash flows from investing  activities:                                                                             |       |                                            |       |   |   |
| Capital expenditures                                                                                               |       | (6,792                                          | )          | (16,220 | ) |
| Restricted cash and  investments                                                                                   |       | 1,657                                           |       | (2,679 | ) |
| Financing arrangements  with customers                                                                             |       | (15,750                                         | )          | — |   |
| Additions to other  long-term assets                                                                               |       | (4,784                                          | )          | (5,080 | ) |
| Net cash used in investing  activities                                                                             |       | (25,669                                         | )          | (23,979 | ) |
|                                                                                                               |       |                                            |       |   |   |
| Cash flows from financing  activities:                                                                             |       |                                            |       |   |   |
| Proceeds from revolving  credit facility                                                                           |       | —                                          |       | 25,000 |   |
| Payments on revolving  credit facility                                                                             |       | —                                          |       | (25,000 | ) |
| Capitalized debt issuance  costs                                                                                   |       | —                                          |       | (10,728 | ) |
| Pay-off of debt from  refinancing                                                                                  |       | —                                          |       | (14,553 | ) |
| Reduction of long-term  debt and capital leases                                                                    |       | (26,578                                         | )          | (20,125 | ) |
| Distributions to  noncontrolling interests                                                                         |       | (535                                            | )          | 136 |   |
| Purchase of treasury stock                                                                                         |       | (44,743                                         | )          | (32,268 | ) |
| Excess tax benefit of  stock option exercises                                                                      |       | 12,400                                          |       | 760 |   |
| Proceeds from exercise of  stock options and employee stock purchases                                              |       | 24,826                                          |       | 8,946 |   |
| Net cash used in financing  activities                                                                             |       | (34,630                                         | )          | (67,832 | ) |
|                                                                                                               |       |                                            |       |   |   |
| Effect of exchange rate  changes on cash                                                                           |       | 746                                             |       | (2,683 | ) |
|                                                                                                               |       |                                            |       |   |   |
| Net cash provided by  operating activities of discontinued operations                                              |       | 8,412                                           |       | 8,752 |   |
| Net cash used in investing  activities of discontinued operations                                                  |       | (718                                            | )          | (5,444 | ) |
| Net cash used in financing  activities of discontinued operations                                                  |       | (763                                            | )          | (995 | ) |
| Decrease (increase) in  cash and cash equivalents of discontinued operations                                       |       | 2,871                                           |       | (1,125 | ) |
|                                                                                                               |       | 9,802                                           |       | 1,188 |   |
| Cash and cash equivalents:                                                                                         |       |                                            |       |   |   |
| Increase (decrease) for  period                                                                                    |       | 20,107                                          |       | (13,540 | ) |
| Balance, beginning of  period                                                                                      |       | 55,886                                          |       | 59,991 |   |
| Balance, end of period                                                                                             |       | $                                               | 75,993     |   | $ | 46,451 |   |

 

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED****SUPPLEMENTAL CASH FLOW INFORMATION**

 

Thefollowing supplemental information is related to the unaudited condensedconsolidated statements of cash flows:

 
| ** **                                           | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                        | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **(in 000s)**                              | ** ** |
| Cash paid for interest                               |       | $                                               | 9,226      |   | $ | 20,294 |   |
| Cash paid for income taxes, net of refunds           |       | 28,317                                          |       | 63,776 |   |
|                                                 |       |                                            |       |   |   |
| Non-cash investing and financing transactions:       |       |                                            |       |   |   |
| Pay-off of debt from refinancing                     |       | $                                               | —     |   | $ | 275,000 |   |
| Transfer of inventory to leased gaming equipment (1) |       | 33,315                                          |       | 34,233 |   |
| Reclassify leased gaming equipment to inventory (1)  |       | 3,947                                           |       | 8,619 |   |
| Acquisition of Bally trademark                       |       | 7,500                                           |       | — |   |
| Accrual of capital expenditures                      |       | 1,214                                           |       | 968 |   |

 

----

(1)           As a result of the inability to separately identifythe cash flows associated with the construction of leased gaming equipment, theCompany has included all additions to leased gaming equipment as an increase ininventory under cash used in operating activities in the unaudited condensedconsolidated statement of cash flows. In addition, cash generated from the saleof used gaming equipment classified as leased gaming equipment is also includedin cash provided by operating activities in the unaudited condensedconsolidated statement of cash flows. The Company has one process to procureraw materials for the assembly of both inventory and leased gaming equipment.The materials requisition planning process considers the number of devices theCompany expects to build for sale and for use in its gaming operations divisionduring a particular period, but it does not separately earmark purchases forleased gaming equipment. Without such an earmarking process, the Company isunable to determine whether the parts used to construct leased gaming equipmentduring a particular period came from inventory on hand at the beginning of theperiod or was constructed from inventory procured during the period ofdeployment, thus requiring the expenditure of cash.

 

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**BALLY TECHNOLOGIES, INC.AND SUBSIDIARIES**

Notesto Unaudited Condensed Consolidated Financial Statements

 

**1.****            ****SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America (“U.S. GAAP”) for interim financial information andreflect all adjustments, consisting of normal recurring adjustments, whichmanagement believes are necessary to fairly present the financial 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.  Certaininformation and note disclosures normally included in annual financialstatements prepared in accordance with U.S. GAAP have been condensed or omittedpursuant to those rules and regulations. The results of operations for aninterim period are not necessarily indicative of the results that may beexpected for any other interim period or the year as a whole. The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and notes thereto in theCompany’s Annual Report on Form 10-K for the fiscal year ended June 30,2009. References to specific U.S. GAAP within this report cite topics withinthe FinancialAccounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

 

TheCompany is the general partner of Rainbow Casino Vicksburg Partnership (“RCVP”),which operates the Rainbow Casino. During the third quarter, the Companycommitted to a plan of disposition of the Rainbow Casino, and on April 5,2010, the Company entered into a definitive purchase agreement with Isle ofCapri Casinos, Inc. (“Isle”) to sell the Rainbow Casino pending regulatoryapproval.  Under the terms of theagreement, Isle will pay the Company approximately $80.0 million in an all-cashtransaction. The expected closing date is June 30, 2010.  The Company’s Casino Operations have beenclassified as discontinued operations in the accompanying financialstatements.  See Note 3 to unauditedcondensed consolidated financial statements, *Assets HeldFor Sale and Discontinued Operations*.

 

Thelimited partner is entitled to receive 10% of the net available cash flows ofRCVP after debt service and other items, as defined in the limited partnershipagreement, which increases to 20% of the net available cash flows based on the incrementalamount of revenues in excess of $35.0 million through December 31, 2010(the “Limited Partner Interest”). A projection of the Limited Partner Interestis payable on the closing date with a true up of the actual amount incurred assoon as practicable after December 31, 2010. The Company holds theremaining economic interest in the partnership. The Company consolidates RCVPand records an adjustment to reflect the portion of the earnings of RCVPattributable to the limited partner as a noncontrolling interest.

 

Allintercompany accounts and transactions have been eliminated in consolidation.

 

*Expense classification*

 

The classification of certain costs within theUnaudited Condensed Consolidated Statement of Operations for the three and ninemonths ended March 31, 2009 has been corrected to conform to the currentyear presentation. The reclassification reflects certain costs of servicesassociated with revenue presented in *Cost of gaming equipmentand systems* of $1.0 million and $3.7 million for the three and ninemonths ended March 31, 2009, respectively, that had previously beenpresented as a component of *Selling, general andadministrative expenses*. This correction was not material to thepreviously issued financial statements and did not have any impact on incomefrom continuing operations, earnings per share, retained earnings, or cashflows.

 

*Recently adopted accounting pronouncements - revenuerecognition*

 

EffectiveJuly 1, 2009, the Company adopted the provisions of two new AccountingStandards Updates (“ASU”) affecting revenue recognition: ASU No. 2009-13, *Multiple Deliverable Revenue Arrangements*and ASU No. 2009-14,*Certain Revenue Arrangements That Include SoftwareElements.*The Company has elected to adopt these ASUs prior to therequired effective date using the prospective method as permitted under theguidance. Accordingly, this guidance is being applied to all new or materiallymodified revenue arrangements entered into since the start of the Company’sfiscal year of adoption, which is July 1, 2009.

 

ASUNo. 2009-13 replaces and significantly changes the existing separationcriteria for multiple-deliverable revenue arrangements by eliminating thecriterion for objective and reliable evidence of fair value for the undeliveredproducts or services to determine a unit of accounting. Instead, revenuearrangements with multiple deliverables should be divided into separate unitsof accounting if the deliverables meet both of the following criteria:

 

·      The delivered items havevalue to the customer on a standalone basis. The item or items have value on astandalone basis if they are sold separately by any vendor or the customercould resell the delivered item(s) on a standalone basis; and

·      If the arrangement includesa general right of return relative to the delivered items, delivery orperformance of the undelivered items is considered probable and substantiallyin the control of the vendor.

 

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ASUNo 2009-13 also eliminates the use of the residual method of allocation andrequires, instead, that arrangement consideration be allocated, at theinception of the arrangement, to all deliverables based on their relativeselling price (i.e., the relative selling price method). When applying therelative selling price method, a hierarchy is used for estimating the sellingprice based first on vendor-specific objective evidence (“VSOE”), thenthird-party evidence (“TPE”) and finally management’s estimate of the sellingprice (“ESP”).

 

ASUNo 2009-14 amends the scope of software revenue recognition to exclude alltangible products containing both software and nonsoftware components thatfunction together to deliver the product’s essential functionality. As aresult, certain products that were previously accounted for under the scope ofsoftware revenue recognition guidance are no longer accounted for as software.Prior to July 1, 2009, the Company determined its gaming devices includedsoftware that was “more than incidental” to the product as a whole;accordingly, the sales of gaming devices was accounted for under the scope ofsoftware revenue recognition guidance. Application of the new guidance resultedin the Company determining that gaming devices no longer fall under the scopeof software revenue recognition guidance. Under the new guidance, which appliesto new or modified arrangements since July 1, 2009, revenue related tosystems arrangements that contain software and nonsoftware deliverables requirean allocation of the arrangement fee to the separate deliverables using therelative selling price method. Revenue for the software deliverables continueto be recognized under the software revenue recognition guidance, while revenuefor the nonsoftware deliverables, such as gaming devices and other hardware,are no longer accounted for under the software revenue recognition guidance.

 

Theimpact of applying the new accounting guidance to new or materially modified arrangementsentered into since July 1, 2009, is as follows:

 
| ** **                   | ** ** | **Three Months Ended  March 31, 2010** | ** ** | **Nine Months Ended  March 31, 2010**                                                             | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **As Reported**                                  | ** ** | **Pro Forma Basis as  if the Previous  Accounting  Guidance Were in  Effect** | ** ** | **As Reported** | ** ** | **Pro Forma Basis as  if the Previous  Accounting  Guidance Were in  Effect** | ** ** |
| ** **                   | ** ** | **(in 000s)**                                    | ** ** |
| Revenues:                    | ** ** | ** **                                            | ** ** | ** **                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gaming Equipment             |       | $                                                     | 69,393     |                                                                                                             | $          | 61,212 |   | $ | 210,187 |   | $ | 194,861 |   |
| Systems                      |       | 51,524                                                |       | 51,992                                                                                                           |       | 163,146 |   | 162,764 |   |
| Gaming equipment and systems |       | $                                                     | 120,917    |                                                                                                             | $          | 113,204 |   | $ | 373,333 |   | $ | 357,625 |   |

 

Theimpact on future periods is dependent upon the prevalence of multipledeliverable arrangements whereby a combination of gaming devices, hardware,software, maintenance and product support fees and consulting services are soldunder one arrangement and the software license is time-based. Under sucharrangements, all revenue was previously recognized ratably over the term ofthe time-based license as the Company was unable to establish VSOE of fairvalue for the software maintenance and product support, which runscontemporaneously with the license period. Under the new guidance, revenue fromnon-software elements delivered under such multiple deliverable arrangementswill no longer be deferred if VSOE of fair value does not exist for anundelivered element. Rather, the revenue allocated to the non-software elementsusing the relative selling price method would be recognized upon delivery andcustomer acceptance, and only the revenue allocated to the software elementswill be deferred and recognized over the term of the time-based license.

 

Theimpact on current and future periods is also dependent upon the prevalence ofextended payment term arrangements. Under the new guidance, revenue fromnon-software elements is no longer accounted for under software revenuerecognition guidance; accordingly, the existence of extended payment terms tocustomers with appropriate credit does not impact the recognition ofrevenue.  Under the previous guidance extended payment terms in excess of24 months would be deferred as the arrangements were not considered to havefixed and determinable fees. Accordingly, revenue was previously recorded in accordance with theterms of sale for contracts with payment terms of 24 months or less, or ascash was received for contracts with payment terms in excess of 24 months.Under the new guidance, revenue from non-software elements will no longer bedeferred based on the existence of extended payment terms provided sufficientevidence exists to determine collectability is probable.

 

Inallocating the arrangement fees to separate deliverables under the newaccounting guidance, the Company used VSOE of selling price for gaming devices,maintenance and professional services; a combination of TPE and ESP forhardware, and ESP for system software deliverables. ESP for system software wasdetermined based upon the Company’s normal pricing and discounting practices.

 

*Other recently adopted accounting pronouncements*

 

On July 1, 2009, theCompany adopted the new FASB ASC which establishes two levels of U.S. GAAP:authoritative and nonauthoritative. The ASC is now the single source ofauthoritative nongovernmental U.S. GAAP. All other literature is considerednon-authoritative. The Company’s adoption of this statement had no impact onthe consolidated results of operations, financial position and cash flows, butrather changes the reference used to cite specific FASB accounting literature.

 

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OnJuly 1, 2009, the Company adopted new accounting guidance related tobusiness combinations which clarifies the accounting for certain separatelyidentifiable intangible assets which an acquirer does not intend to activelyuse. This guidance requires an acquirer in a business combination to accountfor a defensive intangible asset as a separate unit of accounting which shouldbe amortized to expense over the period the asset diminishes in value. Futureeffects will be dependent upon acquisitions of defensive intangible assets, ifany, at that time. In addition, there is new guidance for determining theuseful life of a recognized intangible asset. This guidance is appliedprospectively to intangible assets acquired after the effective date. However,the disclosure requirements are applied prospectively to all intangible assetsrecognized in financial statements. In addition, the new guidance requires thatan acquiring entity recognize all of the assets acquired and liabilitiesassumed in a transaction at the acquisition-date fair value with limitedexceptions, requires the expense of acquisition costs, and also includes asubstantial number of new disclosure requirements. The Company’s adoption ofthis guidance did not have a significant impact on the disclosures or theconsolidated results of operations, financial position and cash flows for thethree and nine months ended March 31, 2010.

 

OnJuly 1, 2009, the Company adopted new accounting and reporting standardsfor the noncontrolling interest in a subsidiary and for the deconsolidation ofa subsidiary. Specifically, this guidance requires the recognition of anoncontrolling interest (minority interest) as equity in the consolidatedfinancial statements and separate from the parent’s equity. The amount of netincome attributable to the noncontrolling interest will be included inconsolidated net income on the face of the income statement. This guidance alsoclarifies 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 and requires that a parent recognize a gain orloss in net income when a subsidiary is deconsolidated. Such gain or loss will bemeasured using the fair value of the noncontrolling equity investment on thedeconsolidation date. The guidance also includes expanded disclosurerequirements regarding the interests of the parent and its noncontrollinginterest. The adoption of this statement did not have a material impact on theconsolidated results of operations, financial position and cash flows, but didaffect presentation and disclosure. As a result of the adoption, the Companyreclassified noncontrolling interests in the amount of $2.4 million fromminority interest to equity in the June 30, 2009 Unaudited CondensedConsolidated Balance Sheets and Statements of Stockholders’ Equity. Certainreclassifications to the Unaudited Condensed Consolidated Statements ofOperations and Unaudited Condensed Consolidated Statements of Cash Flows havebeen made to prior period amounts to conform to the presentation of the currentperiod. Recorded amounts for prior periods previously presented as Net incomewhich are now presented as Net income attributable to Bally Technologies, Inc.,have not changed as a result of the adoption of this guidance.

 

OnJuly 1, 2009, the Company adopted new accounting guidance requiringadditional disclosures about fair value of financial instruments in interim andannual financial statements. The Company’s adoption of this guidance resultedin the disclosure of information about the fair value of financial instrumentsconsistent with the disclosures in the Company’s most recent annual financialstatements.

 

*Fair value of financial instruments*

 

Thefair value of a financial instrument is the amount at which the instrumentcould be exchanged in a current transaction between willing parties, other thanin a forced sale or liquidation. The carrying amounts reflected in the accompanyingunaudited condensed consolidated balance sheets for cash equivalents, accountsand notes receivable, investment to fund jackpot liabilities, accounts payable,jackpot liabilities and long-term debt approximate their respective fairvalues.

 

Allfinancial assets and liabilities are recognized or disclosed at fair valueusing a fair value hierarchy that maximizes the use of observable inputs andminimizes the use of unobservable inputs when measuring fair value. A financialinstrument’s categorization within the fair value hierarchy is based upon thelowest level of input that is significant to the fair value measurement. Thereare three levels of inputs that may be used to measure fair value:

 

·      Level 1:  quoted prices in active markets for identicalassets or liabilities;

 

·      Level 2:  inputs other than Level 1 that areobservable, either directly or indirectly, such as quoted prices in activemarkets for similar assets or liabilities, quoted prices for identical orsimilar assets or liabilities in markets that are not active, or other inputsthat are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities; or

 

·      Level 3:  unobservable inputs that are supported bylittle or no market activity and that are significant to the fair value of theassets or liabilities.

 

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TheCompany’s only significant financial asset or liability measured at fair valueon a recurring basis, excluding accrued interest components, consisted of acash flow hedge related to a variable rate debt instrument as of March 31,2010 (which is included in accrued liabilities in the unaudited condensedconsolidated balance sheets) as follows:

 
| ** **                      | ** ** | **Fair Value Measurements  Using Input Type** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Level 1**                                                  | ** ** | **Level 2** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **(in  000s)**                                                    | ** ** |
| Liability:                      |       |                                                              |       |   |   |   |   |
| Derivative financial instrument |       | $                                                                 | —     |   | $ | 2,148 |   | $ | — |   |
|                                 |            |                                                                   |            |  |  |  |  |  |  |  |

 

AtJune 30, 2009, the derivative financial instrument was a level 2 assetvalued at $255,000. The valuation techniques used to measure the fair value ofthe derivative financial instrument above in which the counterparties have highcredit ratings, were derived from pricing models, such as discounted cash flowtechniques, with all significant inputs derived from or corroborated byobservable market data. The Company’s discounted cash flow techniques useobservable market inputs, such as LIBOR-based yield curves. See Note 6 tounaudited condensed consolidated financial statements, *Long-TermDebt*.

 

*Accounting for Derivative Instruments and HedgingActivity*

 

TheCompany assesses, both at the inception of each hedge and on an on-going basis,whether the derivatives that are used in hedging transactions are highlyeffective in offsetting changes in cash flows of the hedged items. Such highlyeffective derivatives are granted hedge accounting treatment. The derivativefinancial instrument meets these requirements and is accounted for as a cashflow hedge.

 

The impact of the cashflow hedge on the unaudited condensed consolidated financial statements isdepicted below:

 

Fiscal 2010:

 
| ** **                                              | ** ** | **Amount of Loss  Recognized in OCI on  Derivative (Effective Portion)** | ** ** | **Location of Loss** | ** ** | **Amount of Loss  Reclassified from Accumulated  OCI into Income (Effective  Portion)** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| **Derivative in Cash Flow Hedging** | ** ** | **Three Months  Ended**                                                                                | ** ** | **Nine Months  Ended**    | ** ** | **Reclassified from Accumulated  OCI into Income (Effective**                                     | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
| **Relationship**                                        | ** ** | **March 31, 2010**                                                                                | ** ** | **March 31, 2010**   | ** ** | **Portion)**                                                                                                               | ** ** | **March 31, 2010** | ** ** | **March 31, 2010** | ** ** |
| ** **                                              | ** ** | **(in 000s)**                                                                                          | ** ** |
| ** **                                              | ** ** | ** **                                                                                                  | ** ** | ** **                     | ** ** | ** **                                                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate swap agreement                            |       | $                                                                                                           | (1,892     | )                              | $          | (4,690                                                                                                                     | )          | Interest  expense |   | $ | (784 | ) | $ | (2,287 | ) |
|                                                         |            |                                                                                                             |            |                                |            |                                                                                                                            |            |  |  |  |  |  |  |  |  |

 

Fiscal2009:

 
| ** **                                              | ** ** | **Amount of Loss  Recognized in OCI on  Derivative (Effective Portion)** | ** ** | **Location of Loss** | ** ** | **Amount of Loss  Reclassified from Accumulated  OCI into Income (Effective  Portion)** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| **Derivative in Cash Flow Hedging** | ** ** | **Three Months  Ended**                                                                                | ** ** | **Nine Months  Ended**    | ** ** | **Reclassified from Accumulated  OCI into Income (Effective**                                     | ** ** | **Three Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
| **Relationship**                                        | ** ** | **March 31, 2009**                                                                                | ** ** | **March 31, 2009**   | ** ** | **Portion)**                                                                                                               | ** ** | **March 31, 2009** | ** ** | **March 31, 2009** | ** ** |
| ** **                                              | ** ** | **(in 000s)**                                                                                          | ** ** |
| ** **                                              | ** ** | ** **                                                                                                  | ** ** | ** **                     | ** ** | ** **                                                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate swap agreement                            |       | $                                                                                                           | (750       | )                              | $          | (1,430                                                                                                                     | )          | Interest  expense |   | $ | (236 | ) | $ | (236 | ) |
|                                                         |            |                                                                                                             |            |                                |            |                                                                                                                            |            |  |  |  |  |  |  |  |  |

 

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*Recently issued accounting pronouncements not yetadopted*

 

In April 2010, the FASB issued ASU No. 2010-16,  *Accruals for CasinoJackpot Liabilities*. Specifically, the guidance clarifies that an entityshould not accrue jackpot liabilities, or portions thereof, before a jackpot iswon if the entity can avoid paying the jackpot. Jackpots should be accrued andcharged to revenue when an entity has the obligation to pay the jackpot. Theguidance applies to both base and progressive jackpots. The new guidance iseffective for fiscal years beginning on or after December 15, 2010. Thenew guidance  will be applied byrecording a cumulative-effect adjustment to opening retained earnings in theperiod of adoption. The Company expects to adopt the guidance in fiscal year2012 and is currently in the process of evaluating the impact the guidance willhave on its consolidated results of operations, financial position and cashflows.

 

*Inventories*

 

Inventoriesare stated at the lower of cost, determined on a first in, first out basis, ormarket. Cost elements included in work-in-process and finished goods includeraw materials, direct labor and manufacturing overhead. Inventories consist ofthe following:

 
| ** **      | ** ** | **March 31,  2010** | ** ** | **June 30,  2009** | ** ** |
|-----------------|------------|--------------------------|------------|-------------------------|------------|
| ** **      | ** ** | **(in 000s)**       | ** ** |
| Raw materials   |       | $                        | 35,601     |                    | $          | 40,662 |   |
| Work-in-process |       | 1,572                    |       | 1,432                   |       |
| Finished goods  |       | 5,741                    |       | 10,793                  |       |
| Total           |       | $                        | 42,914     |                    | $          | 52,887 |   |

 

Thefinished goods inventory at the Rainbow Casino of $61,000 and $55,000 wasclassified as held for sale as of March 31, 2010 and June 30, 2009,respectively. See note 3 to unaudited condensed consolidated financialstatements, *Assets Held For Sale and Discontinued Operations.*

 

*Accounts and notes receivable and allowance fordoubtful accounts*

 

Accountsand notes receivable are stated at face value less an allowance for doubtfulaccounts. The Company evaluates its receivables and establishes an allowancefor doubtful accounts based on a combination of factors including, but notlimited to, historical customer collection experience, economic conditions, andcustomers’ financial condition.

 

The Company grants customers credit terms forperiods of 120 days or less or may grant extended credit terms to somecustomers for periods up to 36 months, with interest at prevailing rates, whichare generally collateralized by the related equipment sold, although the valueof such equipment, if repossessed, may be less than the receivable balanceoutstanding.

 

TheCompany also provides development financing loans to select customers to assistin funding new or expanding gaming opportunities, generally under terms ofthree to five years with interest recognized at prevailing rates. Certainagreements may also include provisions for the facility to reserve a percentageof its total gaming footprint for the placement of the Company’s gaming devices.

 

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**2.****            ****EARNINGSPER SHARE**

 

Basic earnings per shareare computed by dividing earnings by the weighted average number of shares ofcommon stock outstanding during the period. Diluted earnings per share reflectthe additional dilution from all potentially dilutive securities.

 

The following computationof basic and diluted earnings per share applicable to the Company’s commonstock is as follows:

 
| ** **                                                                       | ** ** | **Three Months Ended  March 31,**                 | ** ** | **Nine Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2010**                                                         | ** ** | **2009**                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                       | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Income from continuing operations attributable to  Bally Technologies, Inc. |       | $                                                                | 20,577     |                                            | $          | 27,099 |   | $ | 81,778 |   | $ | 87,806 |   |
| Income from discontinued operations attributable  to Bally Technologies, Inc.    |       | 1,982                                                            |       | 2,152                                           |       | 4,658 |   | 5,313 |   |
| Net income attributable to Bally  Technologies, Inc.                        |       | $                                                                | 22,559     |                                            | $          | 29,251 |   | $ | 86,436 |   | $ | 93,119 |   |
| After tax interest expense on convertible debt                                   |       | —                                                           |       | 14                                              |       | 14 |   | 145 |   |
| Diluted earnings attributable to Bally  Technologies, Inc.                  |       | $                                                                | 22,559     |                                            | $          | 29,265 |   | $ | 86,450 |   | $ | 93,264 |   |
|                                                                             |       |                                                             |       |                                            |       |   |   |   |   |
| Weighted average common shares outstanding                                       |       | 54,771                                                           |       | 54,204                                          |       | 54,517 |   | 54,567 |   |
| Dilutive effect of:                                                              |       |                                                             |       |                                            |       |   |   |   |   |
| Stock options, Restricted Stock Units (“RSU”) and  restricted stock    |       | 2,942                                                            |       | 2,120                                           |       | 3,152 |   | 2,332 |   |
| Warrants                                                                         |       | 3                                                                |       | —                                          |       | 17 |   | 7 |   |
| Convertible debt (1)                                                             |       | —                                                           |       | 122                                             |       | 29 |   | 198 |   |
| Weighted average diluted shares outstanding                                      |       | 57,716                                                           |       | 56,446                                          |       | 57,715 |   | 57,104 |   |
|                                                                             |       |                                                             |       |                                            |       |   |   |   |   |
| Basic earnings per share:                                                        |       |                                                             |       |                                            |       |   |   |   |   |
| Income from continuing operations attributable to  Bally Technologies, Inc. |       | $                                                                | 0.37       |                                            | $          | 0.50 |   | $ | 1.50 |   | $ | 1.61 |   |
| Income from discontinued operations attributable  to Bally Technologies, Inc.    |       | 0.04                                                             |       | 0.04                                            |       | 0.09 |   | 0.10 |   |
| Basic earnings attributable to Bally  Technologies, Inc. per share     |       | $                                                                | 0.41       |                                            | $          | 0.54 |   | $ | 1.59 |   | $ | 1.71 |   |
|                                                                             |       |                                                             |       |                                            |       |   |   |   |   |
| Diluted earnings per share:                                                      |       |                                                             |       |                                            |       |   |   |   |   |
| Income from continuing operations attributable to  Bally Technologies, Inc. |       | $                                                                | 0.36       |                                            | $          | 0.48 |   | $ | 1.42 |   | $ | 1.54 |   |
| Income from discontinued operations attributable  to Bally Technologies, Inc.    |       | 0.03                                                             |       | 0.04                                            |       | 0.08 |   | 0.09 |   |
| Diluted earnings attributable to Bally  Technologies, Inc. per share        |       | $                                                                | 0.39       |                                            | $          | 0.52 |   | $ | 1.50 |   | $ | 1.63 |   |

 

----

(1)   The Company had certain related party debt outstandingwhich was convertible into common stock at the Company’s discretion. Therelated party debt was paid in full in December 2009. See Note 7 tounaudited condensed consolidated financial statements, *RelatedParty Transactions*.

 

Certainsecurities were excluded from the diluted per share calculation because theirinclusion would be anti-dilutive. Such securities consist of the following:

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                         | ** ** | **2009**                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                              | ** ** | **(in 000s)**                               | ** ** |
| Stock options, RSU and restricted stock |       | 426                                              |       | 2,589                                           |       | 349 |   | 2,061 |   |
| Warrants                                |       | —                                           |       | 100                                             |       | — |   | — |   |
|                                    |       | 426                                              |       | 2,689                                           |       | 349 |   | 2,061 |   |

 

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**3.****            ****ASSETSHELD FOR SALE AND DISCONTINUED OPERATIONS**

 

Duringthe third quarter, the Company committed to a plan of disposition of theRainbow Casino. On April 5, 2010, the Company finalized a definitivepurchase agreement with Isle to sell the Rainbow Casino pending regulatoryapproval.  Under the terms of theagreement, Isle will pay the Company $80.0 million in an all-cash transaction.The expected closing date is June 30, 2010.

 

Theassets and liabilities of the Rainbow Casino were classified as held for saleas of March 31, 2010 and June 30, 2009 and the results of its operationsfor the three and nine months ended March 31, 2010 and 2009 wereclassified as discontinued operations because the Company does not expect tocontinue to receive significant cash flows from the Rainbow Casino.Inter-segment revenues, eliminated in consolidation, were $0.3 million and $0.1million and $0.4 million and $1.2 million for the three and nine months ended March 31,2010 and 2009, respectively. The following table summarizes the assets held forsale and liabilities related to assets held for sale in the accompanyingconsolidated balance sheets as of March 31, 2010 and June 30, 2009:

** **
| ** **                                                                             | ** ** | **March 31,********2010**       | ** ** | **June 30,********2009** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **(in 000s,  except share amounts)** | ** ** |
|                                                                                   |       |                                 |       |                          |       |
| Cash and cash equivalents                                                              |       | $                                    | 5,841      |                          | $          | 8,712 |   |
| Accounts and notes  receivable, net of allowances for doubtful accounts of $55 and $42 |       | 11                                   |       | 45                            |       |
| Inventories                                                                            |       | 61                                   |       | 55                            |       |
| Prepaid assets                                                                         |       | 85                                   |       | 184                           |       |
| Deferred income tax assets                                                             |       | 250                                  |       | 312                           |       |
| Other current assets                                                                   |       | 7                                    |       | 8                             |       |
| Total current assets                                                                   |       | 6,255                                |       | 9,316                         |       |
| Property, plant and  equipment, net of accumulated depreciation of $20,838 and $20,336 |       | 41,324                               |       | 43,479                        |       |
| Deferred income tax assets(1)                                                          |       | (1,903                               | )          | (1,903                        | )          |
| Other assets, net                                                                      |       | 392                                  |       | 392                           |       |
| Total assets                                                                           |       | $                                    | 46,068     |                          | $          | 51,284 |   |
|                                                                                   |       |                                 |       |                          |       |
| Accounts payable                                                                       |       | $                                    | 622        |                          | $          | 710 |   |
| Accrued liabilities                                                                    |       | 1,674                                |       | 1,890                         |       |
| Jackpot liabilities                                                                    |       | 108                                  |       | 95                            |       |
| Total current liabilities                                                              |       | 2,404                                |       | 2,695                         |       |
| Total liabilities                                                                      |       | $                                    | 2,404      |                          | $          | 2,695 |   |

 

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(1)   Noncurrent deferred incometax liability of the Rainbow Casino offset against noncurrent deferred incometax assets in consolidation.

 

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Thefollowing table summarizes income from discontinued operations for the threeand nine months ended March 31, 2010 and 2009:

** **
| ** **                                                                         | ** ** | **Three Months Ended  March 31,**                 | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2010**                                                         | ** ** | **2009**                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                         | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Revenues:                                                                          |       |                                                             |       |                                            |       |   |   |   |   |
| Casino operations                                                                  |       | $                                                                | 10,372     |                                            | $          | 10,769 |   | $ | 28,027 |   | $ | 30,463 |   |
| Costs and expenses:                                                                |       |                                                             |       |                                            |       |   |   |   |   |
| Direct cost of casino  operations                                                  |       | 3,937                                                            |       | 4,227                                           |       | 11,426 |   | 12,902 |   |
| Selling, general and  administrative                                               |       | 1,773                                                            |       | 1,955                                           |       | 5,355 |   | 6,126 |   |
| Depreciation and  amortization                                                     |       | 928                                                              |       | 889                                             |       | 2,873 |   | 2,382 |   |
|                                                                               |       | 6,638                                                            |       | 7,071                                           |       | 19,654 |   | 21,410 |   |
| Operating income                                                                   |       | 3,734                                                            |       | 3,698                                           |       | 8,373 |   | 9,053 |   |
|                                                                               |       |                                                             |       |                                            |       |   |   |   |   |
| Other income (expense):                                                            |       |                                                             |       |                                            |       |   |   |   |   |
| Interest income                                                                    |       | 1                                                                |       | 2                                               |       | 7 |   | 22 |   |
| Other, net                                                                         |       | (304                                                             | )          | (12                                             | )          | (330 | ) | 25 |   |
|                                                                               |       |                                                             |       |                                            |       |   |   |   |   |
| Income from discontinued  operations before income taxes                           |       | 3,431                                                            |       | 3,688                                           |       | 8,050 |   | 9,100 |   |
| Income tax expense                                                                 |       | (1,068                                                           | )          | (1,159                                          | )          | (2,508 | ) | (2,860 | ) |
| Income from discontinued  operations                                               |       | 2,363                                                            |       | 2,529                                           |       | 5,542 |   | 6,240 |   |
| Less income attributable  to noncontrolling interests                              |       | 381                                                              |       | 377                                             |       | 884 |   | 927 |   |
|                                                                               |       |                                                             |       |                                            |       |   |   |   |   |
| Income from discontinued  operations attributable to Bally Technologies, Inc. |       | $                                                                | 1,982      |                                            | $          | 2,152 |   | $ | 4,658 |   | $ | 5,313 |   |

 

**4.****            ****IMPAIRMENTCHARGES**

 

Thelegality of charitable bingo gaming in Alabama is under challenge by the state’sgovernor. Legislation to put the legality question to a public referendum inAlabama failed to pass the recently concluded legislative session. There arealso several lawsuits pending before the State’s Supreme Court which couldnegatively affect charitable gaming in Alabama. Several of the charitable bingoproperties voluntarily ceased operations during the quarter pending resolutionof the matter while two others continue to operate. As a result of these recentactions, the Company concluded it is unlikely that gaming will continue in itspresent form thereby impacting the recoverability of the associated assets. Assuch, the Company recorded a charge of $11.4 million during the quarter ended March 31,2010, which included full allowances for notes and accounts receivable of $5.5million and an impairment of $5.9 million in long-lived assets.

 

Recoverabilityof the long-lived assets and notes and accounts receivable were measured by acomparison of the carrying amount of the related asset to future net cash flowsexpected to be generated by the related asset. The impairment recognized wasmeasured by the amount by which the carrying amount of the assets exceeded the estimatedfair value of the assets.

 

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**5.****            ****GOODWILLAND INTANGIBLE ASSETS**

 

Intangible assets consistof the following:

 
| ** **                           | ** ** | ** **                      | ** ** | **March 31, 2010** | ** ** | **June 30, 2009**   | ** ** |
|--------------------------------------|------------|---------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **Useful  Life  (Years)**       | ** ** | **Gross  Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| ** **                           | ** ** | **(dollars in 000s)** | ** ** |
| Computer software                    |       | 3 - 9                 |       | $                            | 35,479     |                          | $          | (27,090 | ) | $ | 8,389 |   | $ | 27,488 |   | $ | (19,083 | ) | $ | 8,405 |   |
| License rights                       |       | 3 - 5                 |       | 3,703                        |       | (2,013                        | )          | 1,690 |   | 2,117 |   | (1,814 | ) | 303 |   |
| Trademarks                           |       | 5                               |       | 2,203                        |       | (1,957                        | )          | 246 |   | 2,203 |   | (1,693 | ) | 510 |   |
| Core technology                      |       | 5 - 8                 |       | 22,763                       |       | (9,406                        | )          | 13,357 |   | 22,763 |   | (6,585 | ) | 16,178 |   |
| Contracts                            |       | 10                              |       | 10,918                       |       | (6,153                        | )          | 4,765 |   | 10,043 |   | (5,364 | ) | 4,679 |   |
| Other intangibles                    |       | 3 - 7                 |       | 1,898                        |       | (994                          | )          | 904 |   | 7,627 |   | (5,504 | ) | 2,123 |   |
| Total finite lived intangible assets |       |                            |       | 76,964                       |       | $                             | (47,613    | ) | $ | 29,351 |   | $ | 72,241 |   | $ | (40,043 | ) | $ | 32,198 |   |
| Trademark                            |       | indefinite                      |       | 7,500                        |       | —                        |       | 7,500 |   | — |   | — |   | — |   |
| Total                                |       |                            |       | $                            | 84,464     |                          | $          | (47,613 | ) | $ | 36,851 |   | $ | 72,241 |   | $ | (40,043 | ) | $ | 32,198 |   |

 

InSeptember 2009, the Company recorded an intangible asset of approximately$7.5 million related to one-time consideration given for a perpetual,world-wide license for the use of the Bally trademark in connection with theCompany’s business. Consideration for this intangible asset includedapproximately $5.0 million related to the delivery of gaming devices and $2.5million in forgiveness of certain customer receivable balances. Previously, aroyalty fee was paid and expensed based upon the number of units produced andsold using the trademark.

 

Total amortizationexpense related to finite lived intangible assets for the three months ended March 31,2010 and 2009 was $2.6 million for both periods which included computersoftware amortization expense of $0.9 million and $1.0 million,respectively. Total amortization expense related to finite lived intangible assetsfor the nine months ended March 31, 2010 and 2009 was $7.6 million and$7.1 million, respectively, which included computer software amortizationexpense of $3.2 million and $3.0 million, respectively. Futureamortization of finite lived intangible assets is scheduled as follows:

 
| **Year Ended June 30,**       | ** ** | **(in 000s)** | ** ** |
|----------------------------------------------|------------|--------------------|------------|
| 2010 (remaining three months of fiscal year) |       | $                  | 2,741      |   |
| 2011                                         |       | 9,140              |       |
| 2012                                         |       | 6,882              |       |
| 2013                                         |       | 5,641              |       |
| 2014                                         |       | 1,603              |       |
| Thereafter                                   |       | 3,344              |       |
| Total                                        |       | $                  | 29,351     |   |

 

All goodwill isassociated with continuing operations. The changes in the carrying amount of goodwillfor the nine months ended March 31, 2010, are as follows:

 
| ** **                              | ** ** | **(in 000s)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| Balance at June 30, 2009           |       | $                  | 161,960    |   |
| Foreign currency translation adjustment |       | (260               | )          |
| Balance at March 31, 2010          |       | $                  | 161,700    |   |

 

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**6.****            ****LONG-TERMDEBT**

 

Long-termdebt consists of the following:

 
| ** **                                | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2010**           | ** ** | **2009**          | ** ** |
| ** **                                | ** ** | **(in 000s)** | ** ** |
| Term loan facility                        |       | $                  | 182,500    |              | $          | 206,250 |   |
| Related party debt (see Note7)            |       | —             |       | 2,800             |       |
| Other, generally unsecured                |       | 34                 |       | 37                |       |
| Long-term debt                            |       | 182,534            |       | 209,087           |       |
| Less current maturities                   |       | (40,034            | )          | (35,337           | )          |
| Long-term debt, net of current maturities |       | $                  | 142,500    |              | $          | 173,750 |   |

 

OnSeptember 29, 2008, the Company entered into a $225.0 million termloan and a $75.0 million revolving credit facility (collectively, the “CreditFacility”). The Credit Facility matures in September 2012. The proceedsfrom the Credit Facility and cash-on-hand of $14.6 million were used torepay the then existing bank term loans totaling $289.6 million. TheCompany also used cash-on-hand to pay for transaction fees and expensestotaling $10.7 million, which are being amortized to interest expense overthe term of the Credit Facility.

 

Asof March 31, 2010, there was $75.0 million of undrawn availabilityunder the revolving credit facility. Availability under the revolving creditfacility is reduced to the extent of outstanding letters of credit.

 

Subsequent to March 31,2010, the Company entered into a new $75.0 million revolving credit facility,which matures in March 2014, and increases the Company’s total undrawnrevolver capacity to $150.0 million. The new revolver has the same terms,security, pricing and conditions as the existing Credit Facility. The Companypaid approximately $0.9 million in fees and expenses related to the newrevolving credit facility which was executed on April 9, 2010.

 

Theinterest rate on the term loan is subject to a leverage-based pricing grid. Ifthe Company’s leverage ratio, as defined under the term loan, is greater than1.5, the interest rate will be LIBOR plus a margin of 3.25%; if the leverageratio is between 1.0 and 1.5, the interest rate will be LIBOR plus a margin of3.00%; and if the leverage ratio is below 1.0, the interest rate will be LIBORplus a margin of 2.75%. In December 2008, the Company entered into afloating-to-fixed interest rate swap, as discussed below, fixing the interestrate of the term loan at 1.89% plus the applicable margin (2.75% at March 31,2010) for the remaining term.

 

Subsequent to March 31,2010, the Company amended the Credit Facility to, among other items, changethe leverage-based pricing grid. If the leverage ratio, as defined under theterm loan, is greater than 2.5, the interest rate will be LIBOR plus a marginof 3.25%; if the leverage ratio is between 2.0 and 2.5, the interest rate willbe LIBOR plus a margin of 3.00%; if the leverage ratio is between 1.5 and 2.0,the interest rate will be LIBOR plus a margin of 2.75%; if the leverage ratiois between 1.0 and 1.5, the interest rate will be LIBOR plus a margin of 2.50%;and if the leverage ratio is below 1.0, the interest rate will be LIBOR plus amargin of 2.25%.

 

The Company paidapproximately $1.85 million in fees and expenses for the amendment which wasexecuted on April 9, 2010. The amendment did not affect the floating-to-fixedinterest rate swap.

 

Theterm loan is in its second year and requires quarterly principal reductions of$8.75 million through September 30, 2010 and $11.25 millionquarterly during each of the third and fourth years of the agreement, with aballoon payment due at maturity in September 2012. The Credit Facility iscollateralized by substantially all of the Company’s domestic property and isguaranteed by each of the Company’s domestic subsidiaries, excluding anynoncontrolling interests, and is secured by a pledge agreement.

 

TheCredit Facility contains a number of covenants that, among other things,restrict the ability of the Company and certain of its subsidiaries to disposeof assets, incur additional indebtedness or issue preferred stock, paydividends or make other distributions, enter into certain acquisitions,repurchase equity interests or subordinated indebtedness, issue or sell equityinterests of the Company’s subsidiaries, engage in mergers or acquisitions orcertain transactions with subsidiaries and affiliates, and that otherwiserestrict corporate activities.

 

Thefinancial covenants under the Credit Facility consist of a leverage ratio and afixed charges coverage ratio. The leverage ratio is computed as total debtoutstanding at the end of the quarter divided by the trailing twelve monthsEarnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”),excluding certain cash and non-cash charges. The fixed charges coverage ratiois computed as EBITDA, adjusted for the trailing twelve months capitalexpenditures, share repurchases and cash taxes paid, divided by the trailingtwelve months interest charges plus all payments of principal made during theprevious twelve months.

 

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Abreach of any of the covenants or the inability to comply with the requiredfinancial ratios could result in a default under the Credit Facility. In theevent of any such default, the lenders could elect to declare all borrowingsoutstanding under the Credit Facility, together with any accrued interest andother fees, to be due and payable. If the Company were unable to repay theindebtedness upon its acceleration, the lenders could proceed against theunderlying collateral.

 

TheCompany was in compliance with all of the Credit Facility covenants as of March 31,2010.

 

TheCompany’s related party debt, which totaled approximately $2.8 million asof June 30, 2009, was paid in full in December 2009. It consisted of thedebt owed to the former principals of Sierra Design Group (“SDG”). SeeNote 7 to the unaudited condensed consolidated financial statements, *Related Party Transactions*.

 

*Interest Rate Swap Agreement*

 

InDecember 2008, the Company entered into a floating-to-fixed interest rateswap agreement with an original notional value of $218.8 million and amaturity date of September 26, 2012. This interest rate swap serves to fixthe floating LIBOR based debt under the term loan to fixed rate debt at aninterest rate of 1.89% plus the applicable margin to manage the risk exposureto interest rate fluctuations.

 

TheCompany has documented and designated this interest rate swap as a cash flowhedge. Based on the assessment of effectiveness using statistical regression,the Company determined that the interest rate swap is effective. Effectivenesstesting of the hedge relationship and measurement to quantify ineffectivenessis performed each fiscal quarter using the hypothetical derivative method. Asthe interest rate swap qualifies as a cash flow hedge, the Company adjusts thecash flow hedge on a quarterly basis to its fair value with a correspondingoffset to accumulated OCI. The interest rate swap has been and is expected toremain highly effective for the life of the hedge. Effective amounts are reclassifiedto interest expense as the related hedged expense is incurred. Anyineffectiveness is reclassified from accumulated other comprehensive income toother income (expense). As of March 31, 2010, the Company had noineffectiveness on its cash flow hedge. Amounts related to the swap expected tobe reclassified from other comprehensive income to interest expense in the nexttwelve months total $2.3 million.

 

Additionalinformation on the Company’s interest rate swap is as follows:

 
| **Interest Rate Swaps**                          | ** ** | **Balance Sheet Location** | ** ** | **Fair Value  (in 000s)** | ** ** | **Location of Offsetting Balance** | ** **                            |
|------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|---------------------------------------------------|---------------------------------------|
| Cash flow hedge—$182.5 million LIBOR based  debt |       | Accrued Liabilities                  |       | $                                   | 2,148      |                                              | Accumulated  other comprehensive loss |   |
|                                                            |            |                                      |            |                                     |            |                                                   |                                       |  |

 

**7.****            ****RELATED PARTYTRANSACTIONS**

 

Inconnection with the acquisition of SDG, the consideration paid includedsubordinated debt issued to the former principals of SDG. Certain of the formerprincipals are now employees of the Company. At the Company’s discretion, theprincipal and accrued interest thereon could have been paid in cash, orconverted into shares of the Company’s common stock using the average stockprice for the 20 business days prior to the delivery of such shares. As of June 30,2009, the subordinated debt totaled $2.8 million, all of which was included incurrent maturities. The subordinated debt was paid in full in December 2009.

 

**8.****            ****SHARE****-BASEDCOMPENSATION**

 

*Employee Stock Purchase Plan*

 

InFebruary 2008, the Company’s stockholders approved the 2008 Employee StockPurchase Plan (the “2008 ESPP”). The 2008 ESPP provides that eligible employeesare able to contribute up to 10% of their eligible earnings towards thequarterly purchase of the Company’s common stock. The employee’s purchase priceis equal to 85% of the fair market value on date of purchase. During the ninemonths ended March 31, 2010 and 2009, employees purchased 40,671 sharesand 71,530 shares of common stock for approximately $1.4 million and $1.3million, respectively, under the 2008 ESPP.

 

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*Share-BasedAward Plans*

 

Stock option activity as ofand for the nine months ended March 31, 2010 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, 2009  |       | 6,903              |       | $                         | 17.96      |                             |       |   | $ | 85,222 |   |
| Granted                                       |       | 326                |       | 40.19                     |       |                             |       |   |   |
| Exercised                                     |       | (1,734             | )          | 13.49                     |       |                             |       |   |   |
| Forfeited or expired                          |       | (38                | )          | 27.45                     |       |                             |       |   |   |
| Balance outstanding as of March 31, 2010 |       | 5,457              |       | $                         | 20.64      |                             | 4.83       |   | $ | 109,401 |   |
| Exercisable as of March 31, 2010         |       | 4,163              |       | $                         | 18.14      |                             | 4.49       |   | $ | 93,553 |   |

 

Restricted stock and RSUactivity as of and for the nine months ended March 31, 2010 is summarizedbelow:

 
| ** **                                    | ** ** | **Restricted  Stock** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **RSUs**           | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|--------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **(in 000s)**    | ** ** | **(per share)**                          | ** ** | **(in 000s)** | ** ** | **(per share)**                          | ** ** |
| Balance  outstanding as of June 30, 2009 |       | 310                   |       | $                                             | 30.42      |               | 623        |                                          | $          | 17.71 |   |
| Granted                                       |       | 139                   |       | 40.10                                         |       | 42                 |       | 38.98                                         |       |
| Released                                      |       | (72                   | )          | 24.61                                         |       | (16                | )          | 41.60                                         |       |
| Forfeited or expired                          |       | —                |       | —                                        |       | —             |       | —                                        |       |
| Balance outstanding as of March 31, 2010 |       | 377                   |       | $                                             | 35.10      |               | 649        |                                          | $          | 18.49 |   |
| Vested as of March 31, 2010              |       |                  |       |                                          |       | 540                |       | $                                             | 16.33      |   |

 

*Share-BasedCompensation*

 

The following table presentsshare-based compensation expense from continuing operations included in theCompany’s unaudited condensed consolidated statements of operations:

 
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                         | ** ** | **2009**                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **(in 000s)**                               | ** ** |
| Selling, general and administrative                  |       | $                                                | 2,518      |                                            | $          | 2,975 |   | $ | 7,927 |   | $ | 8,699 |   |
| Research and development                             |       | 856                                              |       | 745                                             |       | 2,452 |   | 2,004 |   |
| Cost of gaming equipment and systems and  operations |       | 47                                               |       | 41                                              |       | 123 |   | 109 |   |
| Share-based compensation expense before tax          |       | 3,421                                            |       | 3,761                                           |       | 10,502 |   | 10,812 |   |
| Income tax benefit                                   |       | 1,197                                            |       | 1,317                                           |       | 3,676 |   | 3,785 |   |
| Net share-based compensation expense                 |       | $                                                | 2,224      |                                            | $          | 2,444 |   | $ | 6,826 |   | $ | 7,027 |   |

 

Share-based compensationexpense from discontinued operations before income tax was $48,000 and $50,000and $98,000 and $95,000 for the three and nine months ended March 31, 2010and 2009, respectively.

 

As of March 31,2010, there was $12.9 million of total unrecognized compensation expensefrom continuing operations related to the unvested portion of stock optionswhich will be recognized over the subsequent 1.88 years. In addition, as of March 31,2010, there was $9.8 million of total unrecognized compensation expensefrom continuing operations related to the unvested portion of restricted stockand RSUs which will be recognized over the subsequent 1.63 years.

 

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**9****.****            ****STOCKHOLDERS’ EQUITY, WARRANTS ANDRIGHTS**

 

*Warrants*

 

TheCompany issued 100,000 stock purchase warrants in February 2004 inconnection with an acquisition. The strike price of the warrant is $24.69 witha term of seven years. During the nine months ended March 31, 2010, 91,765stock purchase warrants were exercised and converted into 38,619 shares of theCompany’s common stock. The exercises were cashless and net shares were issuedfor the difference between the strike price of the warrant and the market valueof the Company’s common stock upon exercise.

 

*Share Repurchase Plan*

 

On January 28, 1999,the Company’s Board of Directors approved a share repurchase plan under which,subject to price and market conditions, purchases of shares could be made fromtime to time in the open market or in privately negotiated transactions usingavailable cash. The Company’s share repurchase limit was set on August 12,2008 under this share repurchase plan at $100 million. On December 2,2009, the Board of Directors approved a new share repurchase plan to purchaseup to $100 million of common stock effective January 1,2010. The current plan replaced the Company’s previously existing $100million share repurchase plan under which Bally had repurchased approximately$69.3 million of common stock from August 12, 2008 through December 31,2009.

 

During the nine months endedMarch 31, 2010 and 2009, the Company repurchased 1,116,451 shares and1,291,216 shares of common stock for $44.2 million and $30.9 million,respectively, under the share repurchase plans. As of March 31, 2010, $86.8 millionwas available for repurchases under the share repurchase plan. On April 4,2010, the Company’s Board of Directors approved a new share repurchase plan topurchase up to $150 million of common stock which replaced the previous plan.

 

*Special Stock*

 

TheCompany’s Articles of Incorporation authorize the issuance of up to 10,000,000shares of special stock (“Special Stock”). The Special Stock may be issued fromtime to time in one or more series, each having such designations, preferencesand relative, participating, optional or other special rights, qualifications,limitations or restrictions as shall be stated and expressed in the resolutionproviding for the issuance of Special Stock or any series thereof adopted bythe Board of Directors. Special Stock consists of non-voting stock where noholder of the Special Stock shall be entitled to vote at any meeting ofstockholders or otherwise, except as may be specifically provided by law or asapproved by the Board of Directors in certain limited circumstances at the timeof the stock issuance.

 

Todate, there have been four series of Special Stock authorized for issuance: theInitial Series, the Series B, the Series E and the Series F. In June 1996,the Company issued shares of Series E Special Stock to certain holders ofthe Company’s 71/2% ConvertibleSubordinated Debentures (which were retired in 1996) who elected to receivesuch stock in lieu of receiving common stock. The holders of shares of Series ESpecial Stock have no voting rights except as required by law. A total of 115shares of Series E Special Stock remain outstanding. No other shares ofSpecial Stock remain outstanding.

 

**10.****         ****INCOME TAXES**

 

The provision for income taxes for interimperiods is based on the current estimate of the annual effective tax rateexpected to be applicable for the full fiscal year and the impact of discreteitems, if any, and is adjusted as necessary for quarterly events. The effectiveincome tax rate was approximately 34.8% and 34.6% for the three months ended March 31,2010 and 2009, respectively, and 34.5% and 35.6% for the nine months ended March 31,2010 and 2009, respectively. The lower rate in fiscal 2010 predominantlyreflects changes in the forecasted geographical mix of taxable income for thefiscal year.

 

The Internal RevenueService (“IRS”) commenced examination of the Company’s United States federalincome tax returns for 2003 through 2005 in the fourth quarter of 2006.Throughout the examination, the IRS has proposed, and management has agreed to,certain adjustments related to the open tax years that have been recorded inthe income tax provision. In January 2009, the IRS completed its fieldexamination of the open tax years and issued a Revenue Agent’s Report (“RAR”).Also in January 2009, the Company paid $3.4 million in tax and$1.2 million in interest to the IRS to settle certain agreed adjustments.The Company filed a formal protest regarding certain unagreed adjustments andthe case was assigned to the IRS Laguna Niguel Appeals Office in August 2009.The Company held its opening conference with IRS Appeals in March 2010. Following this conference, it is likely that within the next twelve months theCompany will resolve the matters presently under consideration with IRS Appealswhich will impact the Company’s unrecognized tax benefits. The Company hasapproximately $6.0 million of unrecognized tax benefits provided for the IRSAppeals issues.

 

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As mentioned above, it islikely that within the next twelve months the Company will resolve the matterspresently under consideration with IRS Appeals which will impact unrecognizedtax benefits for the exam years and future years.  However, an estimate of such increase ordecrease cannot reasonably be made.

 

As of March 31,2010, the Company has $17.0 million related to uncertain tax positions,excluding related accrued interest and penalties, $15.2 million of which,if recognized, would impact the effective tax rate. As of March 31, 2010,the Company has $5.6 million accrued for the payment of interest and penalties.

 

**11.          COMMITMENTS AND CONTINGENCIES**

 

***Litigation***

 

Liabilitiesfor loss contingencies arising from claims, assessments, litigation, fines andpenalties, or other sources are recorded when it is probable that a liabilityhas been incurred and the amount of the liability can be reasonably estimated.The Company has not recorded any loss accruals for these contingencies.

 

OnDecember 7, 2004, International Game Technology (“IGT”) filed a patentinfringement lawsuit against the Company in the United States District Courtfor the District of Nevada. The complaint asserted that the Company’swheel-based games, such as Monte CarloTM, Lucky WheelTM and Cash For LifeTM, itsgames with a reel in the top box, such as Bonus FrenzyTM, and its iVIEWTMproducts infringed on patents held by IGT, and sought injunctive relief anddamages in unspecified amounts. As part of the defense, the Company assertedcounterclaims seeking damages and other relief against IGT, including claimsthat IGT’s patents were invalid, unenforceable and not infringed, as well asseveral claims that IGT engaged in anti-competitive conduct in violation ofstate and federal antitrust laws. In October 2008, the court granted theCompany’s motions for summary judgment, ruling that IGT’s two “wheel” patentsand a touch-screen player-tracking patent were invalid; that even if thepatents were valid, the Company’s wheel-based games at issue would notinfringe; and that certain of its iVIEW products do not infringe the twoasserted player-tracking patents. The court also found issues of material factregarding IGT’s alleged inequitable conduct before the U.S. Patent andTrademark Office and denied IGT’s motions to dismiss those claims, leaving themfor trial. However, the court postponed the trial until after IGT has appealedthe court’s summary judgments on patent infringement and validility. IGTappealed, and on October 22, 2009, the U.S. Court of Appeals for theFederal Circuit affirmed the District Court’s decision in its entirety. TheDistrict Court is now reviewing the parties’ earlier requests for summaryjudgment on the remaining claims in the action, principally Bally’s anti-trustclaims against IGT.

 

InApril 2006, IGT filed a patent infringement lawsuit against the Company inthe United States District Court for the District of Delaware. The complaintasserted that the Company’s Bally Power BonusingTM products infringe patentsheld by IGT, and sought injunctive relief and damages in unspecified amounts.Of the nine patents and 200 claims originally filed in the case by IGT, all butthree patents and eight claims have been dismissed. On April 28, 2009, theDistrict Court issued an order finding that the Company’s Power Promotions,Power Bank, and SDS/CMP Power Winners products do not infringe IGT’s patents.The court also found that the Company’s ACSC Power Winners and ACSC PowerReward products infringe some patent claims asserted by IGT, but not others.Appeals by both parties are expected. In the meantime, the Company hasundertaken technical changes to ensure non-infringement for the two productspartially in question, and on December 22, 2009, the court denied IGT’smotion for a permanent injunction against the products. The Company does notbelieve that potential infringement damages, if any, would be material to itsfinancial position as the revenues from these two products to date have notbeen material.

 

InSeptember 2006, the Company filed a patent infringement lawsuit againstIGT in the United States District Court for the District of Nevada. Thecomplaint asserted that certain of IGT’s bonus wheel games infringe a patentheld by the Company, and sought injunctive relief and damages. IGT filed ananswer generally denying the claims and filed a motion for summary judgmentwhich was granted in September 2008 declaring the wheel patent “obvious”and therefore invalid. On October 22, 2009, the U.S. Court of Appeals forthe Federal Circuit affirmed the District Court’s decision.

 

The Company is also a party to variouslawsuits relating to routine matters incidental to its business. Managementdoes not believe that the outcome of such litigation, including the mattersdiscussed above, in the aggregate, will have a material adverse effect on itsconsolidated financial position, results of operations or cash flows.

 

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**12.****         ****SEGMENTAND GEOGRAPHICAL INFORMATION**

 

TheCompany has continuing operations from Bally Gaming Equipment and Systems whichdesigns, manufactures, assembles, distributes and operates gaming devices andlicenses computerized monitoring and bonusing systems for gaming devices.  During the third quarter, the Company committedto a plan of disposition of the Rainbow Casino, and on April 5, 2010, theCompany entered into a definitive purchase agreement with Isle to sell theRainbow Casino pending regulatory approval. As of March 31, 2010, theRainbow Casino and its operations are classified as assets held for sale andliabilities related to assets held for sale in the Company’s Unaudited CondensedConsolidated Balance Sheets, and as discontinued operations in the Company’sUnaudited Condensed Consolidated Statements of Operations (see Note 3 to theunaudited condensed consolidated financial statements, *Assets Heldfor Sale and Discontinued Operations*).

 

Thefollowing is a breakdown of Bally Gaming Equipment and Systems’ revenues andgross margin by division:

 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **2010**                                         | ** ** | **2009**                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                   | ** ** | **(in 000s)**                               | ** ** |
| Revenues:                    |       |                                             |       |                                            |       |   |   |   |   |
| Gaming Equipment and Systems |       |                                             |       |                                            |       |   |   |   |   |
| Gaming Equipment             |       | $                                                | 69,393     |                                            | $          | 70,188 |   | $ | 210,187 |   | $ | 278,763 |   |
| Gaming Operations            |       | 69,723                                           |       | 69,986                                          |       | 209,610 |   | 204,169 |   |
| Systems                      |       | 51,524                                           |       | 56,640                                          |       | 163,146 |   | 164,880 |   |
| Total revenues               |       | $                                                | 190,640    |                                            | $          | 196,814 |   | $ | 582,943 |   | $ | 647,812 |   |
|                         |       |                                             |       |                                            |       |   |   |   |   |
| Gross Margin(1):             |       |                                             |       |                                            |       |   |   |   |   |
| Gaming Equipment and Systems |       |                                             |       |                                            |       |   |   |   |   |
| Gaming Equipment             |       | $                                                | 35,545     |                                            | $          | 31,253 |   | $ | 106,457 |   | $ | 128,541 |   |
| Gaming Operations            |       | 49,858                                           |       | 50,637                                          |       | 149,756 |   | 143,261 |   |
| Systems                      |       | 38,782                                           |       | 39,955                                          |       | 116,111 |   | 116,950 |   |
| Total gross margin           |       | $                                                | 124,185    |                                            | $          | 121,845 |   | $ | 372,324 |   | $ | 388,752 |   |

 

Revenuesfrom discontinued operations were $10.4 million and $10.8 million and $28.0million and $30.5 million for the three and nine months ended March 31,2010 and 2009, respectively. Gross margin from discontinued operations was $6.4million and $6.5 million and $16.6 million and 17.6 million for the three andnine months ended March 31, 2010 and 2009, respectively.

 

TheCompany has operations based primarily in the United States as well assignificant sales and distribution offices based in Europe, and other foreignlocations, including South America. The table below presents information as tothe Company’s revenues and operating income from continuing operations bygeographic region which is determined by country of destination:

 

| ** **               | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **               | ** ** | **2010**                                         | ** ** | **2009**                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **               | ** ** | **(in 000s)**                               | ** ** |
| Revenues:                |       |                                             |       |                                            |       |   |   |   |   |
| United States and Canada |       | $                                                | 149,799    |                                            | $          | 150,893 |   | $ | 466,849 |   | $ | 535,283 |   |
| International            |       | 40,841                                           |       | 45,921                                          |       | 116,094 |   | 112,529 |   |
| Total revenues           |       | $                                                | 190,640    |                                            | $          | 196,814 |   | $ | 582,943 |   | $ | 647,812 |   |
|                     |       |                                             |       |                                            |       |   |   |   |   |
| Operating income:        |       |                                             |       |                                            |       |   |   |   |   |
| United States and Canada |       | $                                                | 25,716     |                                            | $          | 34,472 |   | $ | 106,148 |   | $ | 127,518 |   |
| International            |       | 9,356                                            |       | 12,971                                          |       | 29,572 |   | 27,496 |   |
| Total operating income   |       | $                                                | 35,072     |                                            | $          | 47,443 |   | $ | 135,720 |   | $ | 155,014 |   |

 

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**ITEM 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

Webegin this section with a summary of our key operating business divisions as ofMarch 31, 2010. The overview is followed by a detailed analysis of ourresults of operations and our financial condition and liquidity as of and forthe three and nine months ended March 31, 2010 and 2009. References to “we,”“our,” “us,” or the “Company” refer to Bally Technologies, Inc. and itssubsidiaries.

 

**ForwardLooking Statements**

 

Certain statements made or incorporated byreference in this Quarterly Report on Form 10-Q, in our other filings withthe Securities and Exchange Commission (“SEC”), in our press releases and instatements made by or with the approval of authorized personnel constitute “forwardlooking statements” within the meaning of Section 27A of the SecuritiesAct of 1933, as amended (the “Securities Act”) and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), and aresubject to the safe harbor created thereby. Forward looking statements reflectintent, belief or current expectations with respect to, among other things,future events and financial trends affecting us. Forward looking statements aretypically identified by words such as “believes,” “estimates,” “expects,” “anticipates,”“plans,” “should,” “would” 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. These differences can arise as a result of therisks described in Item 1A, Risk Factors included in our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2009 (the “2009 10-K”), as well asother factors such as the impact of competition, the impact of any prolongeddownturn in the economy or the financial markets, our ability to service debt,product development, foreign operations, dependence on key personnel, theability to integrate future acquisitions, regulation by gaming authorities, theoutcome of pending litigation matters, gaming taxes, market risks and thepotential adverse effects to our financial condition, results of operations orprospects.

 

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 otherwiserequired by law, we undertake no obligation to publicly update or revise theseforward looking statements, whether as a result of new information, futureevents or otherwise. In light of these risks and uncertainties, we cannotassure you that the forward looking statements contained in this QuarterlyReport on Form 10-Q will, in fact, transpire.

 

**Business Overview**

 

We are a diversified,worldwide gaming company that designs, manufactures, distributes and operatesgaming devices and computerized monitoring and accounting systems for gamingdevices. In addition to selling our gaming devices, we also offer our customersa wide range of rental options. Our primary technologies include gaming devicesfor land-based, riverboat and Native American casinos, video lottery andcentral determination markets and specialized system-based hardware andsoftware products. Our specialized system-based hardware and software productsprovide casinos with a wide range of marketing, data management, accounting,security and other software applications and tools to more effectively managetheir operations. We also own and operate the Rainbow Casino, a docksideriverboat casino in Vicksburg, Mississippi. During the third quarter, wecommitted to a plan of disposition of the Rainbow Casino, and on April 5,2010, we entered into a definitive purchase agreement with Isle of CapriCasinos, Inc. (“Isle”) to sell the Rainbow Casino pending regulatoryapproval.  Under the terms of theagreement, Isle will pay approximately $80.0 million in an all-cashtransaction. The expected closing date is June 30, 2010.  As a result of the pending sale, our CasinoOperations have been classified as discontinued operations in the accompanyingfinancial statements.  See Note 3 tounaudited condensed consolidated financial statements, *Assets HeldFor Sale and Discontinued Operations*.

 

We derive our revenuefrom continuing operations from the following three sources:

 

| · | *Gaming  Equipment*  | — | Sale of gaming devices  and related equipment, parts and conversion kits;                                                                   |
|--------|----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
| · | *Gaming  Operations* | — | Operation of linked  progressive systems, video lottery and centrally determined systems and the  rental of gaming devices and content; and |
| · | *Systems*            | — | Sale of computerized  monitoring systems and related recurring hardware and software maintenance  revenue.                                  |

 

Wereport our revenue and income from continuing operations under Bally GamingEquipment and Systems, which includes our Gaming Equipment, Gaming Operationsand Systems divisions. Our Casino Operations are now classified as assets heldfor sale and 

 

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liabilitiesrelated to assets held for sale in our Unaudited Condensed Consolidated BalanceSheets, and as discontinued operations in our Unaudited Condensed ConsolidatedStatements of Operations. Our total revenues from continuing operations were$190.6 million and $196.8 million for the three months ended March 31,2010 and 2009, respectively, and $582.9 million and $647.8 million for the ninemonths ended March 31, 2010 and 2009, respectively. Our total revenuesfrom discontinued operations were $10.4 million and $10.8 million for the threemonths ended March 31, 2010 and 2009, respectively, and $28.0 million and$30.5 million for the nine months ended March 31, 2010 and 2009,respectively.

 

Wereview certain financial measures in assessing our financial condition andoperating performance not only in connection with creating our forecasts and inmaking comparisons to financial results from prior periods, but also in makingcomparisons to our competitors’ financial results. We focus on fluctuations inrevenue, cost and gross margin and also pay close attention to changes inconsolidated operating income, net income, diluted earnings per share, adjustedEBITDA (earnings before interest, taxes, depreciation and amortization,including asset charges and share-based compensation), cash flows fromoperations and free cash flow (cash flows from operating activities lesscapital expenditures) as they are key indicators of our success in growing ourbusiness. We also measure changes in selling, general and administrative (“SG&A”)expenses as a percent of revenue, which indicate management’s ability tocontrol costs, as well as changes in research and development expenses as apercent of revenue, which demonstrate investment in our technology assets. Themeasures listed above are not a comprehensive list of all factors considered byus in assessing our financial condition and operating performance, and we mayconsider other individual measures as required by trends and discrete eventsarising in a specific period, but they are the key indicators that we generallyweigh most heavily from period to period.

 

Weare currently operating in a challenging economic environment. The combinationof economic uncertainty, lower demand for replacement products and reducedopportunities from new or expanded markets has negatively impacted ourconsolidated results. The gaming sector was and continues to be negativelyimpacted by lower consumer spending and limited resources available to fundcapital projects. As a result of the challenging economic environment, we beganand have continued to provide a greater amount of extended payment terms toselect customers. This expanded extended payment term program is expected tocontinue throughout fiscal 2010.

 

Gamesales revenues were $69.4 million and $70.2 million during the three monthsended March 31, 2010 and 2009, respectively, and $210.2 million and $278.8million during the nine months ended March 31, 2010 and 2009,respectively. The replacement cycle for gaming machines in North Americacontinues to be sluggish, but we are cautiously optimistic that gamingoperators’ replacement game buying demand will begin to improve in calendar2010. In calendar year 2010, we will be releasing a series of new Pro Series cabinetswhich will be state of the art for the industry with regards to ergonomics,processing power, display technology, input device, operating system, sound andserviceability. These new platforms will allow us to develop new, morecompelling games and also be our download solution for customers. During thethree months ended March 31, 2010 and 2009, we sold 2,449 and 2,759 newgaming devices in the United States and Canada, respectively, and during thenine months ended March 31, 2010 and 2009, we sold 8,209 and 12,847 newgaming devices in the United States and Canada, respectively.

 

Systemsrevenues were $51.5 million and $56.6 million for the three monthsended March 31, 2010 and 2009, respectively, and $163.1 million and $164.8million for the nine months ended March 31, 2010 and 2009, respectively.Maintenance revenue increased 14% in the three months ended March 31,2010, and 15% in the nine months ended March 31, 2010, when compared tothe same periods in the prior year, as a result of an increased installed baseof customers on our systems. Period over period systems sales were negativelyimpacted by customers delaying purchases due to the challenging economicenvironment. However, the new SDS® Version11, which runs on both Unix and Windows off the same code base, our iVIEW DisplayManagerTM, and our Power Bonusing products are generating positive interest.During fiscal 2010, we released Version 11.0 systems products, added newinternational contracts, and in October 2009, a large resort and casino insouthern California signed an agreement with us to allow them to purchase up to5,000 iVIEW Display Manager controllers. Over the last few years, we continuedour focus on the basics of enterprise software development, delivery, customersupport and services discipline, on improving core products, providing qualityupgrade options for our customers, and increasing customer satisfaction levelsthrough better service and support which are all serving us well in thesedifficult economic times.

 

Despitethe challenging economic conditions and the uncertainty in the charitable bingomarket in Alabama (see Note 4 to the unaudited condensed consolidated financialstatements, *Impairment Charges*), gaming operationsrevenues were consistent at $69.7 million and $70.0 million duringthe three months ended March 31, 2010 and 2009, respectively, andincreased to $209.6 million from $204.2 million for the nine months ended March 31,2010 and 2009, respectively. Revenues were consistent with the same quarterlast year and stronger year over year due primarily to the continuedperformance of existing and new premium game titles and expansion in ourcentrally determined business. In addition, we experienced significant growthin the installed base of our centrally determined systems which increased by approximately2,608 units over March 31, 2009 due primarily to increased placements,especially in the Class II and centrally determined markets. We recentlyreleased or are about to release some new products including our newspinning-wheel game, Cash WheelTM, including Hot Shots Cash WheelTM, our all newDigital Tower Series platform, which includes 77777 JackpotTM, FireballTM,Cash Spin, the first title using our U-SpinTM feature, and our Jumbo andDualVisionTM cabinets. We continue to focus our efforts on the introduction ofnew and innovative games and cabinets both for our video and stepper platforms.

 

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Internationalrevenues were $40.8 million and $45.9 million for the three monthsended March 31, 2010 and 2009, respectively, and $116.1million and $112.5million for the nine months ended March 31, 2010 and 2009, respectively.

 

Therehave been several recent developments fueled by the recession that we believewill benefit us in the long term. Domestically, we are focused on new jurisdictionalopportunities in Ohio, Illinois, Kansas, Iowa, Maryland, Florida, New York andCalifornia, and potential new markets including Massachusetts, Kentucky andMaine. The breadth and timing of such opportunities remains uncertain due tothe legislative process in these jurisdictions, as well as the difficult creditenvironment facing certain of our customers and the risk of continued economicuncertainty. We are also engaged in expanding our position in Mexico as itmoves to Class III gaming and, in the future, the new Italian VLTmarket,  Australia and potentiallyBrazil. Further, as we continue to grow and gain market share in Asia, opportunitiesare anticipated to arise in that region which would enable us to further expandinternationally.

 

Netcash provided by operating activities from continuing operations decreased 12%to $69.9 million from $79.8 million during the nine months ended March 31,2010 and 2009, respectively. Excluding impairment charges, each fiscal periodhad similar operating results, but the current fiscal period’s cash flow fromoperations was negatively impacted primarily by increases in accounts and notesreceivable as we have continued to provide a greater amount of extended paymentterms to select customers due to the challenging economic environment, whencompared to the same period last year. Since March 31, 2009, we have alsoreduced our debt by $87.3 million, including paying down the revolvingline of credit to zero.

 

Managementcontinuously monitors and reviews its SG&A expenses in comparison torevenues. SG&A expenses from continuing operations increased as apercentage of revenue to 28% and 26% during the three and nine months ended March 31,2010, respectively, when compared to 26% and 25% during each of the sameperiods in the prior year, respectively. The increase in SG&A as apercentage of revenue during the three months ended March 31, 2010 was dueprimarily to increases travel and advertising and promotional expenditures dueprimarily to the Systems user conference held during the third quarter, as wellas increases in bad debt expense. The increase in SG&A as a percentage ofrevenue during the nine months ended March 31, 2010 was due primarily to a $3.0 million insurance reimbursementrecognized during the nine months ended March 31, 2009. The reimbursementwas from claims for the 2005 U.S. Gulf Coast hurricanes, which destroyed ortemporarily shut down our gaming operations in the region when our rental anddaily fee games were destroyed in third party locations and reduced SG&Aexpenses during the nine months ended March 31, 2009.

 

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**Resultsof Operations**

 

Ourresults of continuing operations are summarized below:

 
| ** **                          | ** ** | **Overall Consolidated Operating Results** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Three Months Ended March 31,**      | ** ** | **Nine Months Ended March 31,** | ** ** |
| ** **                          | ** ** | **2010**                                   | ** ** | **% Rev** | ** ** | **2009** | ** ** | **% Rev** | ** ** | **2010** | ** ** | **% Rev** | ** ** | **2009** | ** ** | **% Rev** | ** ** |
| ** **                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                            |       | $                                          | 190.6      |   | 100 | % | $ | 196.8 |   | 100 | % | $ | 582.9 |   | 100 | % | $ | 647.8 |   | 100 | % |
| Selling, general and administrative |       | 52.5                                       |       | 28 | % | 50.2 |   | 26 | % | 151.5 |   | 26 | % | 161.3 |   | 25 | % |
| Research and development costs      |       | 20.3                                       |       | 11 | % | 19.3 |   | 10 | % | 59.3 |   | 10 | % | 58.5 |   | 9 | % |
| Impairment charges                  |       | 11.4                                       |       | 6 | % | — |   | — |   | 11.4 |   | 2 | % | — |   | — |   |
| Operating income                    |       | 35.1                                       |       | 18 | % | 47.4 |   | 24 | % | 135.7 |   | 23 | % | 155.0 |   | 24 | % |
| Income from continuing operations   |       | $                                          | 20.7       |   | 11 | % | $ | 28.1 |   | 14 | % | $ | 82.5 |   | 14 | % | $ | 88.1 |   | 14 | % |

 

Weare one of the leading providers of technology to the gaming industry. BallyGaming and Systems consists of three primary sub-groups: Gaming Equipment,which includes the sale of gaming devices and related equipment, parts andconversion kits; Gaming Operations, which includes the operation of wide-areaprogressive, video lottery and centrally determined systems and the rental ofgaming devices and content; and Systems, which includes the sale and support ofcomputerized monitoring systems and related recurring hardware and softwaremaintenance revenue.

 

Thesummary financial results and operating statistics are as follows:

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                             | ** ** | **%**                                               | ** ** | **2009** | ** ** | **%** | ** ** | **2010** | ** ** | **%** | ** ** | **2009** | ** ** | **%** | ** ** |
| ** **                                | ** ** | **(dollars in millions)**                  | ** ** |
| Revenues:                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment                          |       | $                                                    | 69.4       |                                                | 36         | % | $ | 70.2 |   | 36 | % | $ | 210.2 |   | 36 | % | $ | 278.8 |   | 43 | % |
| Gaming Operations                         |       | 69.7                                                 |       | 37                                                  | %          | 70.0 |   | 35 | % | 209.6 |   | 36 | % | 204.2 |   | 32 | % |
| Systems                                   |       | 51.5                                                 |       | 27                                                  | %          | 56.6 |   | 29 | % | 163.1 |   | 28 | % | 164.8 |   | 25 | % |
| Total revenues                            |       | $                                                    | 190.6      |                                                | 100        | % | $ | 196.8 |   | 100 | % | $ | 582.9 |   | 100 | % | $ | 647.8 |   | 100 | % |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross Margin:                             |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment (1)                      |       | $                                                    | 35.5       |                                                | 51         | % | $ | 31.2 |   | 45 | % | $ | 106.4 |   | 51 | % | $ | 128.5 |   | 46 | % |
| Gaming Operations                         |       | 49.9                                                 |       | 72                                                  | %          | 50.7 |   | 72 | % | 149.8 |   | 71 | % | 143.3 |   | 70 | % |
| Systems (1)(2)                            |       | 38.8                                                 |       | 75                                                  | %          | 40.0 |   | 71 | % | 116.1 |   | 71 | % | 117.0 |   | 71 | % |
| Total gross margin                        |       | $                                                    | 124.2      |                                                | 65         | % | $ | 121.9 |   | 62 | % | $ | 372.3 |   | 64 | % | $ | 388.8 |   | 60 | % |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative(2)(3) |       | $                                                    | 52.5       |                                                | 28         | % | $ | 50.2 |   | 26 | % | $ | 151.5 |   | 26 | % | $ | 161.3 |   | 25 | % |
| Research and development costs            |       | 20.3                                                 |       | 11                                                  | %          | 19.3 |   | 10 | % | 59.3 |   | 10 | % | 58.5 |   | 9 | % |
| Impairment charges                        |       | 11.4                                                 |       | 6                                                   | %          | — |   | — |   | 11.4 |   | 2 | % | — |   | — |   |
| Depreciation and amortization(3)          |       | 4.9                                                  |       | 2                                                   | %          | 5.0 |   | 2 | % | 14.4 |   | 3 | % | 14.0 |   | 2 | % |
| Operating income                          |       | $                                                    | 35.1       |                                                | 18         | % | $ | 47.4 |   | 24 | % | $ | 135.7 |   | 23 | % | $ | 155.0 |   | 24 | % |

 

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(1)          Gross Margin from GamingEquipment and Systems excludes amortization related to certain intangiblesincluding core technology and license rights, which are included indepreciation and amortization.

(2)          Certain costs of systemsales previously included in selling, general and administrative expenses havebeen reclassified in the prior year to conform to the current yearpresentation. See Note 1 to the unaudited condensed consolidated financialstatements, *Summary of Significant Accounting Policies*.

(3)          Costs previously included inthe Parent Company’s selling, general and administrative and depreciation andamortization in the prior year have been consolidated with Bally GamingEquipment and Systems in the current period.

 

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| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                              | ** ** | **2010**                                         | ** ** | **2009**                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Operating Statistics                                    | ** ** | ** **                                       | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| New gaming devices                                      |       | 4,571                                            |       | 4,368                                           |       | 13,504 |   | 17,065 |   |
| Original Equipment Manufacturer (“OEM”) units |       | —                                           |       | —                                          |       | — |   | 505 |   |
| New unit Average Selling Price (“ASP”)        |       | $                                                | 13,979     |                                            | $          | 14,191 |   | $ | 14,134 |   | $ | 14,263 |   |
|                                                         |            |                                                  |            |                                                 |            |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **As of March 31,** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2010**                      | ** ** | **2009** | ** ** |
| End of period installed base:          |       |                          |       |   |   |
| Gaming monitoring units installed base |       | 381,000                       |       | 355,000 |   |
| Systems managed cashless games         |       | 318,000                       |       | 306,000 |   |
|                                   |       |                          |       |   |   |
| Wide-area progressive                  |       | 985                           |       | 1,029 |   |
| Local-area progressive                 |       | 25                            |       | 192 |   |
| Total linked progressive systems       |       | 1,010                         |       | 1,221 |   |
|                                   |       |                          |       |   |   |
| Rental and daily-fee games             |       | 12,514                        |       | 12,208 |   |
| Lottery systems                        |       | 7,774                         |       | 8,152 |   |
| Centrally determined systems           |       | 50,245                        |       | 47,637 |   |

 

**Three Months Ended March 31, 2010 Compared to Three Months Ended March 31,2009**

 

Totalrevenues decreased $6.2 million, or 3%, in the three months ended March 31,2010, when compared to the same period last year, as a result of the following:

 

*Gaming Equipment Revenue**.*Gaming Equipment revenue decreased $0.8 million, or 1%, toapproximately $69.4 million. Sales of new gaming devices increased 5% to 4,571units in the three months ended March 31, 2010, when compared to 4,368units in the same period last year. The increase in new gaming device unitsales was offset by increases of $3.3 million of trade-in allowances andcustomer discounts, when compared to the same period last year. ASP decreasedto $13,979 in the three months ended March 31, 2010 compared to $14,191 inthe same period last year. The 1% decrease in ASP was primarily as a result oflower priced shipments to one international market where we also earn arecurring fee.

 

*Gaming Equipment Gross Margin*. GamingEquipment gross margin increased to 51% in the three months ended March 31,2010 from 45%, in the same period last year, primarily as a result of improvedpurchasing and manufacturing efficiencies. In addition, royalty expensedecreased $1.6 million in the three months ended March 31, 2010 whencompared to the same period last year, due to a reduction in fees associatedwith unit sales and game conversions with third party titles. There was also a$0.5 million decrease in inventory write-downs during the period as a result of improved materialplanning efforts and a concentrated effort to convert or rework slower movinginventory, when compared to the same period last year.

 

*Gaming Operations Revenue**.*Gaming Operations revenue was $69.7 million and $70.0 million for thethree months ended March 31, 2010 and 2009, respectively. Improvements inrental and license revenue were offset by increases in customer allowances andpromotions during the same period.

 

*Gaming Operations Gross Margin*. Gross margin wasconsistent at 72% in both the three months ended March 31, 2010  and 2009. During the current period, therewas a $1.6 million increase in progressive jackpot expense which was offset bydecreases in gaming taxes, parts and other costs during the period.

 

*Systems Revenue**.*Systems revenue decreased$5.1 million, or 9%, to approximately $51.5 million in the three months ended March 31,2010, when compared to the same period last year, primarily as a result of areduction in the number of installations during the period. Decreases inhardware and software revenue were partially offset by an increase inmaintenance revenue by $1.9 million, or 14%, in the three months ended March 31,2010, when compared to the same period last year, as a result of the increasedinstalled base of customers using our systems.

 

*Systems Gross Margin.*Systems gross marginincreased to 75% in the three months ended March 31, 2010 from 71%, in thesame period last year, primarily as a result of a change in the mix of productssold in the comparative periods and a reduction in hardware cost year overyear.

 

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*Selling, General and Administrative Expenses.*Selling, general and administrativeexpenses increased $2.3 million, or 5%, in the three months ended March 31,2010, when compared to the same period last year, due primarily to a increasein advertising and trade show expenditures and bad debt expense which waspartially offset by a decrease in consulting and legal fees. Advertising andtrade show expense increased due primarily to costs associated with the systemsuser conference held during the quarter. Bad debt expense increased dueprimarily to increase in accounts and leases receivable and the write-off ofcertain notes receivable during the quarter. Consulting fees decreased due to acompany-wide initiative to reduce external consulting and convert individualsto full time positions only where necessary and legal fees decreased due to areduction in services provided during the same period.

 

*Research and Development Costs*. Research and development costs increased$1.0 million, or 5%, in the three months ended March 31, 2010, whencompared to the same period last year. We remain focused on our technologyassets due to the competitive landscape that requires a continual investment infuture generations of gaming products and systems.

 

*Impairment Charges*. Impairment charges of$11.4 million were recorded during the three months ended March 31, 2010due to the evolving circumstances in Alabama where the legality of charitablebingo gaming is under challenge by the state’s governor and there are alsoseveral lawsuits pending before the State’s Supreme Court which couldnegatively affect charitable gaming in the state. See Note 4 to the unauditedcondensed consolidated financial statements, *ImpairmentCharges*.

 

*Depreciation and Amortization Expense*. Depreciation andamortization expense was consistent at $4.9 million and $5.0 million in thethree months ended March 31, 2010 and 2009, respectively.

 

**Nine Months Ended March 31, 2010 Compared to Nine Months Ended March 31,2009**

 

Totalrevenues decreased $64.9 million, or 10%, in the nine months ended March 31,2010, when compared to the same period last year, as a result of the following:

 

*Gaming Equipment Revenue**.*Gaming Equipment revenue decreased by $68.6 million, or 25%, toapproximately $210.2 million primarily as a result of a 21% decrease in newgaming device sales to 13,504 units in the nine months ended March 31,2010. New gaming device sales decreased due to a continued sluggish NorthAmerica replacement market and fewer new casino openings and expansions duringthis period as compared to the same period last year. During the nine monthsended March 31, 2010, trade-in allowances and customer discounts increased$6.3 million, when compared to the same period last year. In addition, duringthe nine months ended March 31, 2009, we sold 505 OEM units. ASP decreased1% to $14,134 in the nine months ended March 31, 2010 compared to $14,263in the same period last year. The decrease in ASP was primarily as a result oflower priced shipments to one international market where we also earn arecurring fee.

 

*Gaming Equipment Gross Margin*. GamingEquipment gross margin increased to 51% in the nine months ended March 31,2010 from 46%, in the same period last year, primarily as a result of improvedpurchasing and manufacturing efficiencies. In addition, royalty expensedecreased $5.3 million in the nine months ended March 31, 2010 whencompared to the same period last year, due to a reduction in fees associatedwith unit sales and game conversions with third party titles. There was also a$1.9 million decrease in inventory write-downs during the period as a result of improved materialplanning efforts and a concentrated effort to convert or rework slower movinginventory, when compared to the same period last year.

 

*Gaming Operations Revenue**.*Gaming Operations revenue increased $5.4 million, or 3%, toapproximately $209.6 million in the nine months ended March 31, 2010, whencompared to the same period last year, primarily as a result of an increase inparticipation and license revenue. The improvement in participation revenue wasprimarily due to an increase in premium revenue units and from our installedbase of devices connected to our centrally determined systems (Class II,Video Lottery and iVIEW network) that increased 5% from 47,637 units as of March 31,2009 to 50,245 units as of March 31, 2010. The improvement in licenserevenue was predominately from Florida and Washington.

 

*Gaming Operations Gross Margin*. Gross margin increased to71% in the nine months ended March 31, 2010 from 70%, in the same periodlast year, primarily as a result of the increases in participation and licenserevenue which had little associated variable costs. During the nine monthsended March 31, 2010, progressive jackpot expense increased $1.9 million,when compared to the same period last year.

 

*Systems Revenue**.*Systems revenue decreased$1.7 million, or 1%, to approximately $163.1 million in the nine months ended March 31,2010, when compared to the same period last year, primarily as a result of areduction in the number of installations during the period. Decreases inhardware revenue were partially offset by an increase in maintenance revenue by$5.5 million, or 15%, in the nine months ended March 31, 2010, whencompared to the same period last year, as a result of the increased installedbase of customers on our systems.

 

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*Systems Gross Margin.*Systems gross margin wasconsistent at 71% in both periods.

 

*Selling,General and Administrative Expenses.*Selling, general and administrative expenses decreased$9.8 million, or 6%, in the nine months ended March 31, 2010, whencompared to the same period last year, due primarily to decreases inconsulting, accounting and legal fees and partially offset by an increases ininsurance expense and bad debt expense during the same period. Insuranceexpense increased due primarily to a $3.0 million insurance reimbursementrecognized in the same period last year. The reimbursement was from claims forthe 2005 U.S. Gulf Coast hurricanes which destroyed or temporarily shut downour gaming operations in the region when our rental and daily fee games weredestroyed in third party locations and was recorded as a reduction in SG&A.Bad debt expense increased due primarily to increase in accounts and leases receivableand the write-off of certain notes receivable during the same period. Thedecrease in consulting expense was due to a company-wide initiative to reduceexternal consulting and convert individuals to full time positions only wherenecessary. Accounting fees and legal fees decreased due to a reduction inservices provided during the same period as a result of improved internalcontrols.

 

*Research and Development Costs*. Research and development costs increased$0.8 million, or 1%, in the nine months ended March 31, 2010, whencompared to the same period last year. We remain focused on our technologyassets due to the competitive landscape that requires a continual investment infuture generations of gaming products and systems.

 

*Impairment Charges*. Impairment charges of$11.4 million were recorded during the nine months ended March 31, 2010due to the evolving circumstances in Alabama where the legality of charitablebingo gaming is under challenge by the state’s governor and there are alsoseveral lawsuits pending before the State’s Supreme Court which couldnegatively affect charitable gaming in the state. See Note 4 to the unauditedcondensed consolidated financial statements, *ImpairmentCharges*.

 

*Depreciation and Amortization Expense*. Depreciation andamortization expense increased $0.4 million, or 3%, in the nine months ended March 31,2010, when compared to same period last year, primarily as a result ofadditions of property and equipment and leased gaming equipment year over year.

 

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*** ***

***Other Income (Expense), Income Tax Expense and NetIncome Attributable to Noncontrolling Interests***

 

Other income (expense)and income tax expense from continuing operations and net income (loss)attributable to noncontrolling interests was as follows:

 
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **(dollars in millions)**                  | ** ** |
| Other income (expense)                               |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                                      |       | $                                                    | 0.9        |                                                | $          | 0.7 |   | $ | 2.3 |   | $ | 2.8 |   |
| Interest expense                                     |       | (3.1                                                 | )          | (4.2                                                | )          | (9.6 | ) | (15.5 | ) |
| Other, net                                           |       | (1.0                                                 | )          | (0.8                                                | )          | (1.9 | ) | (5.0 | ) |
| Total other expense                                  |       | $                                                    | (3.2       | )                                                   | $          | (4.3 | ) | $ | (9.2 | ) | $ | (17.7 | ) |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax expense                                   |       | $                                                    | (11.3      | )                                                   | $          | (15.1 | ) | $ | (44.0 | ) | $ | (49.2 | ) |
| Net income attributable to noncontrolling  interests |       | $                                                    | (0.5       | )                                                   | $          | (1.4 | ) | $ | (1.6 | ) | $ | (1.2 | ) |

 

**Three Months Ended March 31, 2010 Compared to Three Months Ended March 31,2009**

 

*Other Income (Expense).*Other expense decreased $1.1 million, or 26%, inthe three months ended March 31, 2010, when compared to the same periodlast year, due primarily to a decrease in interest expense during the sameperiod. Interest expense decreased $1.1 million due to a reduction in both theprincipal balance and the interest rate on the term loan which decreased from5.14% in three months ended March 31, 2009 to 4.64% in the same periodthis year. In December 2008, we entered into a floating-to-fixed interestrate swap to fix the interest rate at 1.89% plus an applicable margin (2.75% atMarch 31, 2010) until the term loan’s maturity in September 2012.

 

*Income Tax Expense.*The effective income tax rate for the three monthsended March 31, 2010 and 2009 was 34.8% and 34.6%, respectively. At theend of 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.

 

*Net income (loss) attributable to noncontrolling interests.*Net incomeattributable to noncontrolling interests decreased in the three months ended March 31,2010, when compared to the same period last year, due primarily to a decreasein net earnings from certain noncontrolling interests.

 

**Nine Months Ended March 31, 2010 Compared to Nine Months Ended March 31,2009**

 

*Other Income (Expense).*Other expense decreased$8.5 million, or 48%, in the nine months ended March 31, 2010, whencompared to the same period last year, due primarily to a decrease in interestexpense and a decrease in losses incurred on foreign currency transactions as aresult of the weakening U.S. dollar. Interest expense decreased $5.9 million,or 38%, due to a reduction in both the principal balance and the interest rateon the term loan which decreased from 6.61% in nine months ended March 31,2009 to 4.64% in the same period this year. Losses on foreign currencytransactions decreased $2.3 million during the same period. In addition, otherexpense was higher in the prior period due to the write-off of previouslycapitalized debt issuance costs of $0.8 million with the financing of our termloan and revolving credit facility in September 2008.

 

*Income Tax Expense.*The effective income tax rate for the nine monthsended March 31, 2010 and 2009 was 34.5% and 35.6%, respectively. At theend of 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.

 

*Net income attributable to noncontrolling interests.*Net incomeattributable to noncontrolling interests increased in the nine months ended March 31,2010, when compared to the same period last year, due primarily to an increasein net earnings from certain noncontrolling interests.

 

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***Discontinued Operations***

 

Duringthe third quarter, we committed to a plan of disposition of our Rainbow Casino.On April 5, 2010, we entered into a definitive purchase agreement withIsle of Capri Casinos, Inc. (“Isle”) to sell the Rainbow Casino pendingregulatory approval. Under the terms of the agreement, Isle will pay usapproximately $80.0 million in an all-cash transaction.  The expected closing date is June 30,2010.

 

Theassets and liabilities of the Rainbow Casino were classified as held for saleas of March 31, 2010 and June 30, 2009 and the results of its operationsfor the three and nine months ended March 31, 2010 and 2009 wereclassified as discontinued operations because we do not expect to continue toreceive significant cash flows from the Rainbow Casino after the planned sale.

 

Rainbow’srevenues, reported in discontinued operations for the three and nine monthsended March 31, 2010 and 2009, were $10.4 million and $10.8 million and$28.0 million and $30.5 million, respectively. We recorded income fromdiscontinued operations, net of income taxes, for the three and nine monthsended March 31, 2010 and 2009 of $2.4 million and $2.5 million and $5.5million and $6.2 million, respectively. Inter-segment revenues, eliminated inconsolidation, were $0.3 million and $0.1 million and $0.4 million and $1.2million for the three and nine months ended March 31, 2010 and 2009,respectively. See Note 3 to the unaudited condensed consolidated financialstatements, *Assets Held For Sale and Discontinued Operations.*

 

**Financial Condition and Liquidity**

 

***Working Capital***

 

| ** **                                          | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **Increase (decrease)** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **2010**           | ** ** | **2009**          | ** ** | **Amount**                   | ** ** | **%** | ** ** |
| ** **                                          | ** ** | **(in 000s)** | ** ** |
| Cash and cash equivalents                           |       | $                  | 75,993     |              | $          | 55,886                       |       | $ | 20,107 |   | 36 | % |
|                                                |       |               |       |              |       |                         |       |   |   |
| Total long-term debt,  including current maturities |       | $                  | 182,534    |              | $          | 209,087                      |       | $ | (26,553 | ) | (13 | )% |
|                                                |       |               |       |              |       |                         |       |   |   |
| Total current assets                                |       | $                  | 496,767    |              | $          | 465,607                      |       | $ | 31,160 |   | 7 | % |
| Total current liabilities                           |       | 170,464            |       | 178,050           |       | (7,586                       | )          | (4 | )% |
| Net working capital                                 |       | $                  | 326,303    |              | $          | 287,557                      |       | $ | 38,746 |   | 13 | % |

 

As of March 31, 2010 and June 30, 2009, wehad $76.0 million and $55.9 million, respectively, in consolidated cash andcash equivalents from continuing operations. Cash from the Rainbow Casino,classified as assets held for sale, was $5.8 million and $8.7 million as of March 31,2010 and June 30, 2009, respectively, and included approximately $3.3million and $3.1 million, respectively, of cash that is held in vaults, cagesor change banks.

 

Pursuant to various state gaming regulations,certain cash accounts are maintained to ensure availability of funds to paywide-area progressive jackpot awards in installments, rather than in onelump-sum. At March 31, 2010 and June 30, 2009, these accounts had anaggregate value of approximately $7.3 million and $9.1 million, respectively,which are classified as restricted cash in our unaudited condensed consolidatedbalance sheets. In addition, we purchase U.S. Treasury Strip Securities for thebenefit of jackpot winners who elect to receive winnings in annual or weeklyinstallment payments. These securities are included in restricted long-terminvestments in the accompanying unaudited condensed consolidated balancesheets, and totaled $12.2 million and $12.1 million as of March 31, 2010and June 30, 2009, respectively.

 

Ournet working capital increased $38.7 million in the nine months ended March 31,2010, when compared to the same period last year, and was primarily affected byan increase of $20.1 million in cash and cash equivalents and by the followingcomponents:

 

·                  An increase of $44.5 million in currentaccounts and notes receivable due primarily to certain new systems contracts,the extension of payment terms and international sales during the period and anincrease of $2.1 million in notes receivable for the current portion of loansmade to customers;

 

·                  A decrease of $8.5 million in prepaidand refundable income tax due to tax refunds and the use of prior yearoverpayments for current year estimated taxes;

 

·                  A decrease of $10.0 millionin inventories due primarily to a decline in expenditures due to improvedprocesses in managing inventory, including the continuous improvement ofpurchasing and inventory controls;

 

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·                  A combined decrease of $5.0 million inprepaid and other current assets due primarily to amortization of expenseduring the period and the reclassification of certain deposits to long-term dueto the extension of terms;

 

·                  A decrease of $7.1 million in currentdeferred revenue, partially offset by a $4.4 million decrease in currentdeferred cost of revenue, due to the recognition of previously deferred salesand related costs in accordance with our revenue recognition policy; and

 

·                  An increase of $4.7 million in currentmaturities of long-term debt due primarily to the increase in quarterlyprincipal payments from $6.25 million to $8.75 million beginning in December 2009that increases to $11.25 million in December 2010, which was offset bydecrease of $2.8 million in related party debt which was paid in full in December 2009.

 

OnSeptember 29, 2008, we entered into a $225.0 million term loan and a$75.0 million revolving credit facility (collectively, the “CreditFacility”). The proceeds from the Credit Facility and cash on hand of$14.6 million were used to repay the then existing bank term loanstotaling $289.6 million. We used cash-on-hand to pay for fees and expensestotaling $10.7 million which are being amortized over the term of theCredit Facility.

 

Asof March 31, 2010, there was approximately $75.0 million of undrawnavailability under the revolving credit facility. Availability under therevolving credit facility is reduced to the extent of outstanding letters ofcredit.

 

Subsequent to March 31, 2010,we entered into a new $75.0 million revolving credit facility, which matures inMarch 2014, which increased our total undrawn revolver capacity to $150.0million. The new revolver has the same terms, security, pricing andconditions as the existing Credit Facility, which was executed on April 9, 2010.We paid approximately $0.9 million in fees and expenses.

 

Theinterest rate on the term loan is subject to a leverage based pricing grid. Ifour leverage ratio, as defined under the term loan, is greater than 1.5, theinterest rate will be LIBOR plus a margin of 3.25%; if the leverage ratio isbetween 1.0 and 1.5, the interest rate will be LIBOR plus a margin of 3.00%;and if the leverage ratio is below 1.0, the interest rate will be LIBOR plus amargin of 2.75%. In December 2008, we entered into a floating-to-fixedinterest rate swap to fix the floating LIBOR based debt under the term loan tofixed rate debt at an interest rate of 1.89% plus an applicable margin (2.75%,as of March 31, 2010) for the remaining term.

 

Subsequent to March 31,2010, we amended the Credit Facility to, among other items, change theleverage-based pricing grid. If the leverage ratio, as defined under the termloan, is greater than 2.5, the interest rate will be LIBOR plus a margin of3.25%; if the leverage ratio is between 2.0 and 2.5, the interest rate will beLIBOR plus a margin of 3.00%; if the leverage ratio is between 1.5 and 2.0, theinterest rate will be LIBOR plus a margin of 2.75%; if the leverage ratio isbetween 1.0 and 1.5, the interest rate will be LIBOR plus a margin of 2.50%;and if the leverage ratio is below 1.0, the interest rate will be LIBOR plus amargin of 2.25%. Wepaid approximately $1.85 million in fees and expenses for the amendment whichwas executed on April 9, 2010. The amendment did not effect thefloating-to-fixed interest rate swap.

 

Theterm loan is in its second year and requires quarterly principal reductions of$8.75 million through September 30, 2010 and $11.25 millionquarterly during each of the third and fourth years of the agreement, with aballoon payment due at maturity in September 2012. The Credit Facility iscollateralized by substantially all of our domestic property and is guaranteedby each of our domestic subsidiaries, excluding any noncontrolling interests,and is secured by a pledge agreement.

 

TheCredit Facility contains a number of covenants that, among other things,restrict our ability and certain of our subsidiaries to dispose of assets,incur additional indebtedness or issue preferred stock, pay dividends or makeother distributions, enter into certain acquisitions, repurchase equityinterests or subordinated indebtedness, issue or sell equity interests of oursubsidiaries, engage in mergers or acquisitions or certain transactions withsubsidiaries and affiliates, and that otherwise restrict corporate activities.

 

Thefinancial covenants under the Credit Facility consist of a leverage ratio and afixed charges coverage ratio. The leverage ratio is computed as total debtoutstanding at the end of the quarter divided by the trailing twelve monthsEarnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”),excluding certain cash and non-cash charges. The fixed charges coverage ratiois computed as EBITDA, adjusted for the trailing twelve months capitalexpenditures, share repurchases and cash taxes paid, divided by the trailingtwelve months interest charges plus all payments of principal made during theprevious twelve months. We were in compliance with all of the covenants underthe Credit Facility as of March 31, 2010.

 

Management believes thatcash flows from current operating activities will provide us with sufficientcapital resources and liquidity to operate our business for at least the next12 months.

 

At March 31, 2010,we had no material commitments for capital expenditures.

 

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***Cash Flow Summary***

 

Cashflows from continuing operating activities are derived primarily from BallyGaming Equipment and Systems which consists of three primary cash flow sources:Gaming Equipment, which includes the sale of gaming devices and relatedequipment, parts and conversion kits; Gaming Operations, which includes theoperation of linked progressive systems, video lottery and centrally determinedsystems and the rental of gaming devices and content; and Systems, whichincludes the sale and support of computerized monitoring systems and relatedrecurring hardware and software maintenance revenue. Cash flows fromdiscontinued operating activities, or Casino Operations, are derived from theoperation of the Rainbow Casino. We utilize our cash to acquire materials forthe manufacture of goods for resale, to pay payroll, interest, taxes andselling, general and administrative expenses and to fund research anddevelopment activities.

 

Ourprimary sources of liquidity include existing cash and cash equivalents, cashflows from all operating activities and the availability of funds under ourrevolving credit facility. Cash flow from all operating activities is netincome adjusted for certain non-cash items and changes in operating assets andliabilities.

 

Cashflows provided by continuing operating activities were $69.9 million inthe nine months ended March 31, 2010 as compared to $79.8 million in thesame period last year, a $9.9 million decrease. Excluding impairmentcharges, each fiscal period had similar operating results, but the currentfiscal period’s cash flow from operations was negatively impacted primarily byincreases in accounts and notes receivable as we have continued to provide agreater amount of extended payment terms to select customers due to thechallenging economic environment, when compared to the same period last year. Cashflows provided by discontinued operating activites were $8.4 million and $8.8million in the nine months ended March 31, 2010 and 2009, respectively.

 

Cashutilized for investing activities from continuing operations is primarily foradditions to property, plant and equipment for purchases of furniture,fixtures, office and gaming equipment and improvements in leaseholds, financingarrangements with customers and investments in technology assets. During thenine months ended March 31, 2010, we made capital expenditures of$6.8 million. In addition, we purchased $4.8 million in intangibleassets and loaned $15.8 million to customers during the same period. Cashutilized for investing activities from discontinued operations was primarilyfor additions to property, plant and equipment and was $0.1 million during thenine months ended March 31, 2010.

 

Cashutilized for financing activities from continuing operations is primarily forthe payment of principal on our debt, distributions to noncontrollinginterests, as well as for the purchase of shares of our common stock. We madepayments of $26.6 million on our notes payable and purchased 1,116,451 sharesof our common stock for $44.2 million under our share repurchase plan duringthe nine months ended March 31, 2010.

 

Cashprovided by financing activities is primarily from proceeds from the exerciseof stock options and purchases of stock under our Employee Stock Purchase Plan(“ESPP”) and excess tax benefits of stock option exercises. During the ninemonths ended March 31, 2010, employees exercised options for1,734,342 shares of common stock for $23.4 million and purchased40,671 shares of common stock for $1.4 million under our ESPP.

 

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**Critical Accounting Policies**

 

Adescription of our critical accounting policies can be found in Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations in the 2009 10-K. With exception to revenue recognition which isdiscussed below, there were no material changes to those policies during thenine months ended March 31, 2010.

 

**Recently adopted accounting pronouncements — Revenuerecognition**

 

EffectiveJuly 1, 2009, we adopted the provisions of two new Accounting StandardsUpdates (“ASU”) affecting revenue recognition: ASU No. 2009-13, *Multiple Deliverable Revenue Arrangements*and ASU No. 2009-14,*Certain Revenue Arrangements That Include SoftwareElements.*We elected to adopt these ASUs prior to the requiredeffective date using the prospective method as permitted under the guidance.Accordingly, this guidance is being applied to all new or materially modified revenuearrangements entered into since the start of our fiscal year of adoption, whichis July 1, 2009.

 

ASUNo. 2009-13 replaces and significantly changes the existing separationcriteria for multiple-deliverable revenue arrangements by eliminating the criterionfor objective and reliable evidence of fair value for the undelivered productsor services to determine a unit of accounting. Instead, revenue arrangementswith multiple deliverables should be divided into separate units of accountingif the deliverables meet both of the following criteria:

 

·                  The delivereditems have value to the customer on a standalone basis. The item or items havevalue on a standalone basis if they are sold separately by any vendor or thecustomer could resell the delivered item(s) on a standalone basis; and

·                  If thearrangement includes a general right of return relative to the delivered items,delivery or performance of the undelivered items is considered probable andsubstantially in the control of the vendor.

 

ASUNo 2009-13 also eliminates the use of the residual method of allocation andrequires, instead, that arrangement consideration be allocated, at theinception of the arrangement, to all deliverables based on their relativeselling price (i.e., the relative selling price method). When applying therelative selling price method, a hierarchy is used for estimating the sellingprice based first on vendor-specific objective evidence (“VSOE”), thenthird-party evidence (“TPE”) and finally management’s estimate of the sellingprice (“ESP”).

 

ASUNo. 2009-14 amends the scope of software revenue recognition to excludeall tangible products containing both software and nonsoftware components thatfunction together to deliver the product’s essential functionality. As aresult, certain products that were previously accounted for under the scope ofsoftware revenue recognition guidance are no longer accounted for as software.Prior to July 1, 2009, we determined our gaming devices included softwarethat was “more than incidental” to the product as a whole; accordingly, thesale of gaming devices were accounted for under the scope of software revenuerecognition guidance. Application of the new guidance resulted in ourdetermination that gaming devices no longer fall under the scope of softwarerevenue recognition guidance. Under the new guidance, which applies to new ormodified arrangements, revenue related to systems arrangements that containsoftware and nonsoftware deliverables require an allocation of the arrangementfee to the separate deliverables using the relative selling price method.Revenue for the software deliverables continue to be recognized under thesoftware revenue recognition guidance, while revenue for the nonsoftwaredeliverables are no longer accounted for under the software revenue recognitionguidance.

 

Theimpact of applying the new accounting guidance to new or materially modifiedarrangements entered into since July 1, 2009, is as follows:

 
| ** **                   | ** ** | **Three Months Ended  March 31, 2010** | ** ** | **Nine Months Ended  March 31, 2010**                           | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **As  Reported**                                      | ** ** | **Pro  Forma Basis as  if the Previous  Accounting  Guidance Were in  Effect** | ** ** | **As  Reported** | ** ** | **Pro  Forma Basis as  if the Previous  Accounting  Guidance Were in  Effect** | ** ** |
| ** **                   | ** ** | **(in 000s)**                                    | ** ** |
| Revenues:                    | ** ** | ** **                                            | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gaming Equipment             |       | $                                                     | 69,393     |                                                                           | $          | 61,212 |   | $ | 210,187 |   | $ | 194,861 |   |
| Systems                      |       | 51,524                                                |       | 51,992                                                                         |       | 163,146 |   | 162,764 |   |
| Gaming equipment and systems |       | $                                                     | 120,917    |                                                                           | $          | 113,204 |   | $ | 373,333 |   | $ | 357,625 |   |

 

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Theimpact on future periods is dependent upon the prevalence of multipledeliverable arrangements whereby a combination of gaming devices, hardware,software, maintenance and product support fees and consulting services are soldunder one arrangement and the software license is time-based. Under sucharrangements, all revenue was previously recognized ratably over the term ofthe time-based license as we were unable to establish VSOE of fair value forthe software maintenance and product support, which runs contemporaneously withthe license period. Under the new guidance, revenue from non-software elementsdelivered under such multiple deliverable arrangements will no longer bedeferred if VSOE of fair value does not exist for an undelivered element.Rather, the revenue allocated to the non-software elements using the relativeselling price method would be recognized upon delivery and customer acceptance,and only the revenue allocated to the software elements will be deferred and recognizedover the term of the time-based license.

 

Theimpact on current and future periods is also dependent upon the prevalence ofextended payment term arrangements. Under the new guidance, revenue fromnon-software elements is no longer accounted for under software revenuerecognition guidance; accordingly, the existence of extended payment terms tocustomers with appropriate credit does not impact the recognition ofrevenue.  Under the previous guidance extended payment terms in excess of24 months would be deferred as the arrangements were not considered to havefixed and determinable fees. Accordingly, revenue was previously recorded in accordance with theterms of sale for contracts with payment terms of 24 months or less, or ascash was received for contracts with payment terms in excess of 24 months.Under the new guidance, revenue from non-software elements will no longer bedeferred based on the existence of extended payment terms provided sufficientevidence exists to determine collectability is probable.

 

Inallocating the arrangement fees to separate deliverables under the newaccounting guidance, we used VSOE of selling price for gaming devices,maintenance and professional services; a combination of TPE and ESP forhardware, and ESP for system software deliverables. ESP for system software wasdetermined based upon our normal and discounting pricing practices.

 

**Other Recently Issued Accounting Pronouncements**

 

For a description ofother recently issued accounting pronouncements, see Note 1 to the unauditedcondensed consolidated financial statements, Summary of Significant AccountingPolicies.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

*Interest Rate Risk*

 

As of March 31, 2010, we had total debtoutstanding of approximately $182.5 million, consisting primarily of $182.5million outstanding under our term loan and $34,000 in other debt. See Note 6to unaudited condensed consolidated financial statements, *Long-TermDebt*. See “Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk” in the 2009 10-K, to which there were no material changes duringthe period covered by this Quarterly Report on Form 10-Q.

 

*Foreign Currency Exchange Rate Risk*

 

Ourforeign subsidiaries generally use their domestic currency as their functionalcurrency. A 10% fluctuation in the exchange rates of these currencies againstthe U.S. dollar would result in a corresponding change in earnings reported inthe consolidated group of approximately $0.8 million.

 

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# **Tableof Contents**

 

# **ITEM4.  CONTROLS AND PROCEDURES**

# ** **

**Evaluation of Disclosure Controls and Procedures**

 

Asrequired by Rule 13a-15(b) promulgated under the Exchange Act, ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofour disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) and15d-15(e) as of the end of the periodcovered by this report.

 

Basedon this evaluation our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of March 31,2010.

 

It should be noted that any system of controls,however well designed and operated, can provide only reasonable and notabsolute assurance that the objectives of the system will be met. In addition,the design of any control system is based in part upon certain assumptionsabout the likelihood of future events. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, have been detected orthat judgments in decision-making are not based on faulty input.

 

**Changes in Internal Control Over Financial Reportingduring the Quarter Ended March 31, 2010**

 

Althoughwe update our internal controls as necessary to accommodate any modificationsto our business processes and accounting procedures as part of our normaloperations, there were no changes in our internal control over financialreporting that occurred in the three months ended March 31, 2010 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II**

 

# **ITEM1.**          LEGAL PROCEEDINGS

# ** **

For a description of ourlegal proceedings, see Note 11 to the unaudited condensed consolidatedfinancial statements, *Commitments andContingencies*, which is incorporated by reference in response tothis item.

 

**ITEM 1A.       RISK FACTORS**

 

The Company is subject to risks and uncertaintiesthat could cause our actual results to differ materially from the expectationsexpressed in the forward looking statements. Factors that could cause ouractual results to differ from expectations are described under “Item 1A. RiskFactors” in the 2009 10-K, to which there were no material changes duringthe period covered by this Quarterly Report on Form 10-Q.

 

**ITEM 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

 

On December 2, 2009,the Board of Directors approved a new share repurchase plan to purchase up to$100 million of common stock effective January 1, 2010 that replacedthe Company’s previously existing $100 million share repurchase plan. On April 4,2010, the Company’s Board of Directors approved a new share repurchase plan topurchase up to $150 million of common stock which replaced the previous plan.Purchases of shares can be made under the plan from time to time in the openmarket or in privately negotiated transactions using available cash, subject toprice and market conditions. Our quarterly share repurchases under the currentplan, 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** | ** **  |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
|                                              |       |                                                          |       |                                                          |       |                                                                                                                                                    |       | $                                                                                                                                                                                             | 100,000,000 |   |
| January 1 - January 31, 2010  |       | 134,382                                                       |       | $                                                             | 43.20      |                                                                                                                                                    | 134,382    |                                                                                                                                                                                          | $           | 94,194,555 |   |
| February 1 -  February 28, 2010    |       | 153,200                                                       |       | $                                                             | 39.17      |                                                                                                                                                    | 153,200    |                                                                                                                                                                                          | $           | 88,194,233 |   |
| March 1 — March 31, 2010 |       | 35,000                                                        |       | $                                                             | 38.63      |                                                                                                                                                    | 35,000     |                                                                                                                                                                                          | $           | 86,842,286 |   |
| Total                                             |       | 322,582                                                       |       | $                                                             | 40.79      |                                                                                                                                                    | 322,582    |                                                                                                                                                                                          |        |   |

 

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**ITEM 6.  EXHIBITS**

 
| **Exhibits** | ** ** | **Description**                                                                                                                                                 |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                            |
| 10.1*        |       | Bally Technologies, Inc. 2010 Long Term Incentive Plan                                                                                                     |
|         |       |                                                                                                                                                            |
| 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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*      Denotesmanagement contract or compensatory plan or arrangement.

 

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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 3, 2010 |
|-------------------------------|-----------------------------------------------------------------|-------------------|
|                          |                                                            |              |
|                          |                                                            |              |
| 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 Officer)                                   |              |   |

 

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