Table of Contents

 

 

 

**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 thequarterly period ended September 30, 2008**

 

**OR**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**For thetransition period from       to       **

** **

**CommissionFile Number 0-4281**

 

**BALLY TECHNOLOGIES, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

**6601 S. Bermuda Rd.**

**Las Vegas, Nevada  89119**

(Address of principal executiveoffices)

 

**(702)584-7700**

(Registrant’s telephone number,including area 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 is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

o  Yes  x  No

 

The number of shares of Common Stock, $0.10 par value, outstanding asof November 3, 2008, according to the records of the registrant’sregistrar and transfer agent was 54,812,000 which do not include 1,913,000shares held in treasury.

 

 

 

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Table of Contents

 

**INDEX**

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

 

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**PART I**

**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                       | ** ** | **September ****30,**                              | ** ** | **June ****30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                       | ** ** | **2008**                                                | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                       | ** ** | **(in 000s, except share amounts)** | ** ** |
| ASSETS                                                                                                                                           |       |                                                    |       |                  |       |
| Current assets:                                                                                                                                  |       |                                                    |       |                  |       |
| Cash and cash equivalents                                                                                                                        |       | $                                                       | 57,316     |                  | $          | 66,570 |   |
| Restricted cash                                                                                                                                  |       | 12,500                                                  |       | 13,111                |       |
| Accounts and notes receivable, net of  allowances for doubtful accounts of $11,498 and $12,055                                                   |       | 207,071                                                 |       | 215,762               |       |
| Inventories                                                                                                                                      |       | 80,907                                                  |       | 94,238                |       |
| Income tax receivable                                                                                                                            |       | 11,810                                                  |       | 8,534                 |       |
| Deferred income tax assets                                                                                                                       |       | 68,816                                                  |       | 68,816                |       |
| Deferred cost of revenue                                                                                                                         |       | 54,036                                                  |       | 58,983                |       |
| Other current assets                                                                                                                             |       | 21,681                                                  |       | 21,673                |       |
| Total current assets                                                                                                                             |       | 514,137                                                 |       | 547,687               |       |
|                                                                                                                                             |       |                                                    |       |                  |       |
| Restricted long-term investments                                                                                                                 |       | 10,551                                                  |       | 10,469                |       |
| Long-term receivables                                                                                                                            |       | 10,870                                                  |       | 10,653                |       |
| Property, plant and equipment, net                                                                                                               |       | 70,710                                                  |       | 71,107                |       |
| Leased gaming equipment, net                                                                                                                     |       | 95,509                                                  |       | 101,280               |       |
| Goodwill                                                                                                                                         |       | 162,136                                                 |       | 162,727               |       |
| Intangible assets, net                                                                                                                           |       | 34,171                                                  |       | 36,249                |       |
| Deferred income tax assets                                                                                                                       |       | 10,746                                                  |       | 10,734                |       |
| Long-term deferred cost of revenue                                                                                                               |       | 35,820                                                  |       | 35,211                |       |
| Other assets, net                                                                                                                                |       | 18,884                                                  |       | 9,007                 |       |
| Total assets                                                                                                                                     |       | $                                                       | 963,534    |                  | $          | 995,124 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                        |       |                                                    |       |                  |       |
| Current liabilities:                                                                                                                             |       |                                                    |       |                  |       |
| Accounts payable                                                                                                                                 |       | $                                                       | 31,631     |                  | $          | 44,888 |   |
| Accrued liabilities                                                                                                                              |       | 49,895                                                  |       | 63,328                |       |
| Customer deposits                                                                                                                                |       | 19,357                                                  |       | 29,496                |       |
| Jackpot liabilities                                                                                                                              |       | 14,560                                                  |       | 13,614                |       |
| Deferred revenue                                                                                                                                 |       | 119,727                                                 |       | 129,909               |       |
| Current maturities of long-term debt and  capital leases                                                                                         |       | 35,306                                                  |       | 13,163                |       |
| Total current liabilities                                                                                                                        |       | 270,476                                                 |       | 294,398               |       |
|                                                                                                                                             |       |                                                    |       |                  |       |
| Long-term debt and capital leases, net of  current maturities                                                                                    |       | 253,457                                                 |       | 291,341               |       |
| Long-term deferred revenue                                                                                                                       |       | 58,649                                                  |       | 55,691                |       |
| Other income tax liability                                                                                                                       |       | 18,750                                                  |       | 18,750                |       |
| Other liabilities                                                                                                                                |       | 7,730                                                   |       | 9,837                 |       |
| Total liabilities                                                                                                                                |       | 609,062                                                 |       | 670,017               |       |
| Minority interest                                                                                                                                |       | 902                                                     |       | 1,782                 |       |
| Commitments and contingencies (Note 8)                                                                                                           |       |                                                    |       |                  |       |
| 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; 56,722,000 and 56,318,000 shares issued and 55,202,000 and  55,144,000 outstanding |       | 5,666                                                   |       | 5,626                 |       |
| Treasury stock at cost, 1,520,000 and  1,174,000 shares                                                                                          |       | (36,716                                                 | )          | (25,041               | )          |
| Additional paid-in capital                                                                                                                       |       | 314,694                                                 |       | 302,146               |       |
| Accumulated other comprehensive income                                                                                                           |       | 296                                                     |       | 1,268                 |       |
| Retained earnings                                                                                                                                |       | 69,618                                                  |       | 39,314                |       |
| Total stockholders’ equity                                                                                                                  |       | 353,570                                                 |       | 323,325               |       |
| Total liabilities and stockholders’ equity                                                                                                  |       | $                                                       | 963,534    |                  | $          | 995,124 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                        | ** ** | **Three Months Ended**                                 | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **September 30,**                                           | ** ** |
| ** **                                        | ** ** | **2008**                                                         | ** ** | **2007** | ** ** |
| ** **                                        | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Revenues:                                         |       |                                                             |       |   |   |
| Gaming equipment and systems                      |       | $                                                                | 159,574    |   | $ | 123,532 |   |
| Gaming operations                                 |       | 67,776                                                           |       | 54,078 |   |
| Casino operations                                 |       | 10,048                                                           |       | 11,420 |   |
|                                              |       | 237,398                                                          |       | 189,030 |   |
| Costs and expenses:                               |       |                                                             |       |   |   |
| Cost of gaming equipment and systems (1)          |       | 75,592                                                           |       | 54,663 |   |
| Cost of gaming operations                         |       | 20,560                                                           |       | 18,059 |   |
| Direct cost of casino operations                  |       | 4,355                                                            |       | 4,712 |   |
| Selling, general and administrative               |       | 58,437                                                           |       | 52,271 |   |
| Research and development                          |       | 19,871                                                           |       | 13,309 |   |
| Depreciation and amortization                     |       | 5,106                                                            |       | 4,854 |   |
|                                              |       | 183,921                                                          |       | 147,868 |   |
| Operating income                                  |       | 53,477                                                           |       | 41,162 |   |
|                                              |       |                                                             |       |   |   |
| Other income (expense):                           |       |                                                             |       |   |   |
| Interest income                                   |       | 1,156                                                            |       | 977 |   |
| Interest expense                                  |       | (5,093                                                           | )          | (7,237 | ) |
| Other, net                                        |       | (2,566                                                           | )          | 877 |   |
|                                              |       |                                                             |       |   |   |
| Income before income taxes and minority  interest |       | 46,974                                                           |       | 35,779 |   |
| Income tax expense                                |       | (17,137                                                          | )          | (13,109 | ) |
| Minority interest                                 |       | 467                                                              |       | (1,388 | ) |
|                                              |       |                                                             |       |   |   |
| Net income                                        |       | $                                                                | 30,304     |   | $ | 21,282 |   |
|                                              |       |                                                             |       |   |   |
| Basic and diluted earnings per share:             |       |                                                             |       |   |   |
| Basic earnings per share                          |       | $                                                                | 0.55       |   | $ | 0.39 |   |
| Diluted earnings per share                        |       | $                                                                | 0.52       |   | $ | 0.37 |   |
|                                              |       |                                                             |       |   |   |
| Weighted average shares outstanding:              |       |                                                             |       |   |   |
| Basic                                             |       | 55,070                                                           |       | 54,043 |   |
| Diluted                                           |       | 58,124                                                           |       | 57,416 |   |

 

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(1) Costof gaming equipment and systems exclude amortization related to certain intangibles,including core technology and license rights, which are included indepreciation and amortization.

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **(in 000s)**                                   | ** ** |
| Cash flows from operating activities:                                              |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 30,304     |   | $ | 21,282 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                      |       | 17,649                                               |       | 14,115 |   |
| Share-based compensation                                                           |       | 3,558                                                |       | 3,734 |   |
| Tax benefit of stock option exercises                                              |       | —                                               |       | 30 |   |
| Excess tax benefit of stock option  exercises                                      |       | (580                                                 | )          | (2,057 | ) |
| Excess tax liability of stock option  exercises                                    |       | —                                               |       | 191 |   |
| Deferred income tax (benefit) expense                                              |       | (3,288                                               | )          | (33 | ) |
| Provision for doubtful accounts                                                    |       | (800                                                 | )          | (316 | ) |
| Write-off of debt issuance costs                                                   |       | 786                                                  |       | — |   |
| Inventory and other asset write-downs                                              |       | 2,841                                                |       | 2,058 |   |
| Other                                                                              |       | 77                                                   |       | 1,141 |   |
| Changes in operating assets and  liabilities:                                      |       |                                                 |       |   |   |
| Accounts and notes receivable                                                      |       | 11,463                                               |       | 13,103 |   |
| Inventories                                                                        |       | 5,656                                                |       | (36,459 | ) |
| Other current assets                                                               |       | 70                                                   |       | (1,053 | ) |
| Accounts payable                                                                   |       | (13,343                                              | )          | 111 |   |
| Accrued liabilities and jackpot liabilities                                        |       | (26,335                                              | )          | 9,967 |   |
| Deferred revenue and deferred cost of  revenue                                     |       | (2,886                                               | )          | (16 | ) |
| Net cash provided by operating activities                                          |       | 25,172                                               |       | 25,798 |   |
|                                                                               |       |                                                 |       |   |   |
| Cash flows from investing activities:                                              |       |                                                 |       |   |   |
| Capital expenditures                                                               |       | (3,968                                               | )          | (3,891 | ) |
| Restricted cash and investments                                                    |       | 671                                                  |       | (267 | ) |
| Additions to other long-term assets                                                |       | (166                                                 | )          | (754 | ) |
| Net cash used in investing activities                                              |       | (3,463                                               | )          | (4,912 | ) |
|                                                                               |       |                                                 |       |   |   |
| Cash flows from financing activities:                                              |       |                                                 |       |   |   |
| Capitalized debt issuance costs                                                    |       | (10,728                                              | )          | — |   |
| Pay-off of debt from refinancing                                                   |       | (14,553                                              | )          | — |   |
| Reduction of long-term debt and capital  leases                                    |       | (1,188                                               | )          | (17,125 | ) |
| Purchase of treasury stock                                                         |       | (11,675                                              | )          | — |   |
| Excess tax benefit of stock option  exercises                                      |       | 580                                                  |       | 2,057 |   |
| Excess tax liability of stock option  exercises                                    |       | —                                               |       | (191 | ) |
| Proceeds from exercise of stock options and  employee stock purchases              |       | 7,476                                                |       | 4,774 |   |
| Net cash used in financing activities                                              |       | (30,088                                              | )          | (10,485 | ) |
|                                                                               |       |                                                 |       |   |   |
| Effect of exchange rate changes on cash                                            |       | (875                                                 | )          | 351 |   |
|                                                                               |       |                                                 |       |   |   |
| Cash and cash equivalents:                                                         |       |                                                 |       |   |   |
| Increase (decrease) for period                                                     |       | (9,254                                               | )          | 10,752 |   |
| Balance, beginning of period                                                       |       | 66,570                                               |       | 40,842 |   |
| Balance, end of period                                                             |       | $                                                    | 57,316     |   | $ | 51,594 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED SUPPLEMENTAL CASH FLOW INFORMATION**

 

The following supplemental information is related to the unauditedcondensed consolidated statements of cash flows:

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                                 | ** ** | **(in 000s)**                                   | ** ** |
| Cash paid for interest                                     |       | $                                                    | 9,833      |   | $ | 6,961 |   |
| Cash paid for income taxes                                 |       | 18,398                                               |       | 10,969 |   |
|                                                       |       |                                                 |       |   |   |
| Non-cash investing and financing  transactions:            |       |                                                 |       |   |   |
| Pay-off of debt from refinancing                           |       | $                                                    | 275,000    |   | $ | — |   |
| Transfer of inventory to leased gaming  equipment (1)      |       | 10,308                                               |       | 20,325 |   |
| Reclassify property, plant and equipment to  inventory (1) |       | 5,009                                                |       | 3,059 |   |
| Accrual of capital expenditures                            |       | 577                                                  |       | 613 |   |
| Consolidation of variable interest entities                |       | 198                                                  |       | 213 |   |

 

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(1)                                  As a result of the inability to separatelyidentify the cash flows associated with the construction of leased gamingequipment, the Company has included all additions to leased gaming equipment asan increase in inventory under cash used in operating activities in theunaudited condensed consolidated statement of cash flows. In addition, cashgenerated from the sale of used gaming equipment classified as leased gaming equipmentis also included in cash provided by operating activities in the unauditedcondensed consolidated statement of cash flows. The Company has one process toprocure raw materials for the assembly of both inventory and leased gamingequipment. The materials requisition planning process considers the number ofdevices the Company expects to build for sale and for use in its gamingoperations division during a particular period, but it does not separatelyearmark purchases for leased gaming equipment. Without such an earmarkingprocess, the Company is unable to determine whether the parts used to constructleased gaming equipment during a particular period came from inventory on handat the beginning of the period or was constructed from inventory procuredduring the period of deployment, thus requiring the expenditure of cash.

 

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**BALLY TECHNOLOGIES, INC.**

**FORM 10-Q**

Notesto Unaudited Condensed Consolidated Financial Statements

 

**1.             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Principles of presentation and consolidation*

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally accepted in the United States of America(“U.S. GAAP”) and reflect all adjustments, consisting of normal recurringadjustments, which management believes are necessary to fairly present thefinancial position, results of operations and cash flows of Bally Technologies, Inc.(“Bally” or the “Company”), a Nevada corporation, and its subsidiaries for therespective periods presented. Certain information and note disclosures normallyincluded in annual financial statements prepared in accordance with U.S. GAAPhave been condensed or omitted pursuant to those rules and regulations.The results of operations for an interim period are not necessarily indicativeof the results that may be expected for any other interim period or the year asa whole. The accompanying unaudited condensed consolidated financial statementsshould be read in conjunction with the consolidated financial statements andnotes thereto in the Company’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2008.

 

The Company is thegeneral partner of Rainbow Casino Vicksburg Partnership (“RCVP”), whichoperates the Rainbow Casino. The limited partner is entitled to receive 10% ofthe net available cash flows of RCVP after debt service and other items, asdefined in the limited partnership agreement, which increases to 20% of the netavailable cash flows based on the incremental amount of revenues in excess of$35.0 million, payable quarterly through December 31, 2010. The Companyholds the remaining economic interest in the partnership. The Companyconsolidates RCVP and records an adjustment to reflect the portion of theearnings of RCVP attributable to the limited partner as minority interest.

 

The Company consolidates certain Atlantic City progressive trusts (the “Trusts”).  The Trusts are consolidated based on thepremise they do not have sufficient equity investment at risk to permit theTrusts to finance their activities without additional financial support fromthe Company. As of September 30, 2008 and June 30, 2008, the Companyconsolidated $6.6 million and $6.4 million, respectively, in total assets andliabilities, primarily consisting of restricted cash accounts and restrictedinvestments (included in other assets in the unaudited condensed consolidatedbalance sheets) and related jackpot liabilities. The following revenues andcosts were also consolidated:
| ** **                | ** ** | **Three Months Ended  September 30,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|
| ** **                | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                | ** ** | **(in 000s)**                                   | ** ** |
| Gaming operations revenue |       | $                                                    | 910        |   | $ | 1,681 |   |
| Cost of gaming operations |       | 1,515                                                |       | 548 |   |
|                           |            |                                                      |            |  |  |  |  |

 

All intercompany accounts and transactions have been eliminated inconsolidation.

 

*Recently adopted accounting pronouncements*

 

On July 1, 2008, the Company adopted Financial AccountingStandards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 157,*Fair Value Measurements,* for allfinancial assets and liabilities that are recognized or disclosed at fair valuein its consolidated financial statements.  SFAS No. 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles, and expands disclosuresabout fair value measurements. This statement does not require any new fairvalue measurements, but provides guidance on how to measure fair value byproviding a fair value hierarchy used to classify the source of theinformation.

 

The Company has not adopted all the provisions of SFAS No. 157 asthe FASB delayed the effective date of the application of SFAS No. 157 tononfinancial assets and liabilities until fiscal years beginning after November 15,2008.  The partial adoption of SFAS No. 157did not have a material impact on the Company’s consolidated financialstatements. The Company is currently in the process of evaluating the impact ofadopting the remaining provisions of SFAS No. 157 on its consolidatedresults of operations, financial position and cash flows.

 

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SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities — Including an amendment of FASB Statement No. 115*,became effective for the Company on July 1, 2008 and provides for anirrevocable option to elect fair value for the initial and subsequentmeasurement for certain financial assets and liabilities on acontract-by-contract basis with the difference between the carrying valuebefore election of the fair value option and the fair value recorded uponelection as an adjustment to beginning retained earnings.  The Company chose not to elect the fair valueoption to any of its financial instruments.

 

*Fair value of financial instruments*

 

The fair valueof a financial instrument is the amount at which the instrument could beexchanged in a current transaction between willing parties, other than in aforced 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 variable rate long-term debt approximate theirrespective fair values.

 

*Inventories*

 

Inventories are stated at the lower of cost, determined on a first in,first out basis, or market. Cost elements included in work-in-process andfinished goods include raw materials, direct labor and manufacturing overhead.Inventories consist of the following:
| ** **      | ** ** | **September 30,  2008** | ** ** | **June 30,  2008** | ** ** |
|-----------------|------------|------------------------------|------------|-------------------------|------------|
| ** **      | ** ** | **(in 000s)**           | ** ** |
| Raw materials   |       | $                            | 57,240     |                    | $          | 59,423 |   |
| Work-in-process |       | 1,502                        |       | 709                     |       |
| Finished goods  |       | 22,165                       |       | 34,106                  |       |
| Total           |       | $                            | 80,907     |                    | $          | 94,238 |   |

 

The Company recorded inventory write-downs totaling approximately $2.8million and $2.1 million for the three months ended September 30, 2008 and2007, respectively. These charges are classified in cost of gaming equipmentand systems in the unaudited condensed consolidated statements of operations.

 

*Recently issued accounting pronouncements notyet adopted*

 

In April 2008, the FASB issued FSP No. 142-3, *Determinationof the Useful Life of Intangible Assets*, which amends the factorsthat should be considered in developing renewal or extension assumptions usedto determine the useful life of a recognized intangible asset under SFAS No.142, *Goodwill and Other Intangible Assets.*FSP 142-3 is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008, and interim periods within those fiscalyears. The Company expects to adopt FSP 142-3 beginning in fiscal 2010.  The guidance contained in this FSP fordetermining the useful life of a recognized intangible asset shall be appliedprospectively to intangible assets acquired after the effective date. However,the disclosure requirements of FSP 142-3 must be applied prospectively to allintangible assets recognized in the Company’s financial statements as of theeffective date. The Company does not believe that the adoption of FSP 142-3will have a material effect on its consolidated results of operations,financial position and cash flows.

 

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

 

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InDecember 2007, the FASB issued SFAS No. 141 (Revised 2007), *Business Combinations.* SFAS No. 141Rwill significantly change the accounting for business combinations. Under SFAS No. 141R,an acquiring entity is required to recognize all of the assets acquired andliabilities assumed in a transaction at the acquisition-date fair value withlimited exceptions. SFAS No. 141R also includes a substantial number ofnew disclosure requirements. SFAS No. 141R applies prospectively tobusiness combinations for which the acquisition date is on or after the beginningof the first annual reporting period beginning on or after December 15,2008, and accordingly, the Company expects to adopt SFAS No. 141Rbeginning in fiscal 2010. The Company expects that SFAS No. 141R will havean impact on accounting for business combinations once adopted, but thesignificance of the effect is dependent upon acquisitions, if any, at thattime.

 

InDecember 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated FinancialStatements—An Amendment of ARB No. 51.* SFAS No. 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary.Specifically, this statement requires the recognition of a noncontrollinginterest (minority interest) as equity in the consolidated financial statementsand separate from the parent’s equity. The amount of net income attributable tothe noncontrolling interest will be included in consolidated net income on theface of the income statement. SFAS No. 160 clarifies that changes in aparent’s ownership interest in a subsidiary that do not result indeconsolidation are equity transactions if the parent retains its controllingfinancial interest. In addition, this statement requires that a parentrecognize a gain or loss in net income when a subsidiary is deconsolidated.Such gain or loss will be measured using the fair value of the noncontrollingequity investment on the deconsolidation date. SFAS No. 160 also includesexpanded disclosure requirements regarding the interests of the parent and itsnoncontrolling interest. SFAS No. 160 is effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008, and accordingly, the Company expects to adopt SFAS No. 160 beginningin fiscal 2010. The Company is currently in the process of evaluating theimpact SFAS No. 160 will have on its consolidated results of operations,financial position and cash flows.

 

**2.             EARNINGSPER SHARE**

 

Basicearnings per share is computed by dividing reported earnings by the weightedaverage number of shares of common stock outstanding during the period. Dilutedearnings per share reflect the additional dilution from all potentiallydilutive securities.

 

Thefollowing computation of basic and diluted earnings per share applicable to theCompany’s common stock is as follows:

 
| ** **                                                                    | ** ** | **Three Months Ended   September 30,**       | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                                         | ** ** | **2007** | ** ** |
| ** **                                                                    | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Net income                                                                    |       | $                                                                | 30,304     |   | $ | 21,282 |   |
| After tax interest expense on convertible debt                                |       | 69                                                               |       | 86 |   |
| Dilutive earnings                                                             |       | $                                                                | 30,373     |   | $ | 21,368 |   |
|                                                                          |       |                                                             |       |   |   |
| Weighted average common shares outstanding                                    |       | 55,070                                                           |       | 54,043 |   |
| Dilutive effect of:                                                           |       |                                                             |       |   |   |
| Stock options, Restricted Stock Units  (“RSU”) and restricted stock |       | 2,835                                                            |       | 3,083 |   |
| Warrants                                                                      |       | 21                                                               |       | 16 |   |
| Convertible debt (1)                                                          |       | 198                                                              |       | 274 |   |
| Weighted average diluted shares outstanding                                   |       | 58,124                                                           |       | 57,416 |   |
|                                                                          |       |                                                             |       |   |   |
| Basic earnings per share                                                      |       | $                                                                | 0.55       |   | $ | 0.39 |   |
| Diluted earnings per share                                                    |       | $                                                                | 0.52       |   | $ | 0.37 |   |

 

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(1) The Company has certain related party debtoutstanding which is convertible into common stock at the Company’s discretion.See Note 5, Related Party Transactions.

 

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Certain securities were excluded from the diluted per share calculationbecause their inclusion would be anti-dilutive. Such securities consist of thefollowing:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** |
| ** **                              | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                              | ** ** | **(in 000s)**               | ** ** |
| Stock options, RSU and restricted stock |       | 632                              |       | 3 |   |

 

**3.             GOODWILLAND INTANGIBLE ASSETS**

 

Intangibleassets consist of the following:

 
| ** **                            | ** ** | ** **                      | ** ** | **September 30, 2008** | ** ** | **June 30, 2008**   | ** ** |
|---------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **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                 |       | $                                | 25,454     |                          | $          | (15,465 | ) | $ | 9,989 |   | $ | 25,207 |   | $ | (14,506 | ) | $ | 10,701 |   |
| License rights                        |       | 3 - 5                 |       | 2,116                            |       | (1,637                        | )          | 479 |   | 2,199 |   | (1,630 | ) | 569 |   |
| Capitalized regulatory approval costs |       | 3                               |       | 563                              |       | (514                          | )          | 49 |   | 563 |   | (503 | ) | 60 |   |
| Trademarks                            |       | 5                               |       | 2,203                            |       | (1,903                        | )          | 300 |   | 2,203 |   | (1,792 | ) | 411 |   |
| Core technology                       |       | 5 - 8                 |       | 19,595                           |       | (3,827                        | )          | 15,768 |   | 19,595 |   | (2,949 | ) | 16,646 |   |
| Contracts                             |       | 10                              |       | 10,043                           |       | (4,610                        | )          | 5,433 |   | 10,043 |   | (4,359 | ) | 5,684 |   |
| Other intangibles                     |       | 5 - 7                 |       | 7,085                            |       | (4,932                        | )          | 2,153 |   | 7,113 |   | (4,935 | ) | 2,178 |   |
| Total                                 |       |                            |       | $                                | 67,059     |                          | $          | (32,888 | ) | $ | 34,171 |   | $ | 66,923 |   | $ | (30,674 | ) | $ | 36,249 |   |

 

Totalamortization expense related to intangible assets was $2.2 million and$1.6 million for the three months ended September 30, 2008 and 2007,respectively, which included computer software amortization expense of$1.0 million and $0.7 million for the three months ended September 30,2008 and 2007, respectively. Future amortization of intangible assets isscheduled as follows:

 
| **Year Ended June 30,**      | ** ** | **(in 000s)** | ** ** |
|---------------------------------------------|------------|--------------------|------------|
| 2009 (remaining nine months of fiscal year) |       | $                  | 6,979      |   |
| 2010                                        |       | 8,664              |       |
| 2011                                        |       | 6,728              |       |
| 2012                                        |       | 4,858              |       |
| 2013                                        |       | 4,377              |       |
| Thereafter                                  |       | 2,565              |       |
| Total                                       |       | $                  | 34,171     |   |

 

Allgoodwill is associated with the Gaming Equipment and Systems segment. Thechanges in the carrying amount of goodwill for the three months ended September 30,2008, are as follows:

 
| ** **                              | ** ** | **(in 000s)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| Balance at June 30, 2008           |       | $                  | 162,727    |   |
| Foreign currency translation adjustment |       | (591               | )          |
| Balance at September 30, 2008      |       | $                  | 162,136    |   |

 

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**4.             LONG-TERMDEBT AND CAPITAL LEASES**

 

Long-termdebt and capital leases consist of the following:

 
| ** **                                                  | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                  | ** ** | **2008**               | ** ** | **2008**          | ** ** |
| ** **                                                  | ** ** | **(in 000s)**     | ** ** |
| Revolving credit facility                                   |       | $                      | 50,000     |              | $          | — |   |
| Term loan facility                                          |       | 225,000                |       | 289,553           |       |
| Capital lease obligations                                   |       | 8,089                  |       | 9,262             |       |
| Related party debt (see Note 5)                             |       | 5,600                  |       | 5,600             |       |
| Other, generally unsecured                                  |       | 74                     |       | 89                |       |
| Long-term debt and capital leases                           |       | 288,763                |       | 304,504           |       |
| Less current maturities                                     |       | (35,306                | )          | (13,163           | )          |
| Long-term debt and capital leases, less  current maturities |       | $                      | 253,457    |              | $          | 291,341 |   |

 

OnSeptember 29, 2008, the Company entered into a new $225.0 million termloan and a new $75.0 million revolving credit facility (collectively, the “CreditFacility”). The Company also has the option to request an increase in the sizeof the term loan and/or revolving credit facility by up to $50.0 million in theaggregate provided that certain conditions are met.  The proceeds from theCredit Facility were used to repay existing bank term loans totaling $290.0million and to pay for transaction fees and expenses totaling $10.7 millionwhich are being amortized over the term of the Credit Facility.

 

Asof September 30, 2008, there was $25.0 million of undrawn availabilityunder the revolving credit facility. Availability under the revolving credit facility is reduced to theextent of outstanding letters of credit. As of September 30, 2008, there were no outstanding letters ofcredit.

 

Theinterest rate on the Credit Facility is set at LIBOR plus 3.25% through March 2009(7.30% at September 30, 2008) and thereafter is subject to a leveragebased pricing grid. If the Company’s leverage ratio, as defined under theCredit Facility, is greater than 1.5, the interest rate will be LIBOR plus3.25%; if the leverage ratio is between 1.0 and 1.5, the interest rate will beLIBOR plus 3.00%; and if the leverage ratio is below 1.0, the interest ratewill be LIBOR plus 2.75%.

 

Theterm loan requires quarterly principal reductions of $6.25 million during thefirst year, $8.75 million during the second year and $11.25 million during eachof the third and fourth years, with a balloon payment due in September 2012.The Credit Facility matures in September 2012.  The Credit Facility is collateralized bysubstantially all of the Company’s domestic property and is guaranteed by eachof the Company’s domestic subsidiaries, other than the entity that holds theCompany’s interest in its Rainbow Casino, and is secured by a pledge agreement.The Credit Facility contains a number of maintenance and other covenants that, amongother things, restrict the ability of the Company and certain of itssubsidiaries to dispose of assets, incur additional indebtedness or issuepreferred stock, pay dividends or make other distributions, enter into certainacquisitions, repurchase equity interests or subordinated indebtedness, issueor sell equity interests of the Company’s subsidiaries, engage in mergers oracquisitions or certain transactions with subsidiaries and affiliates, and thatotherwise restrict corporate activities. The Company was in compliance withthese covenants as of September 30, 2008.

 

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 trailingtwelve months Earnings Before Interest, Taxes, Depreciation andAmortization (“EBITDA”), excluding certain cash and non-cash charges. TheCompany’s leverage ratio as of September 30, 2008 was 1.00 versus amaximum allowable of 2.50 through March 31, 2009. From April 1, 2009 to March 31, 2010, the Company’s maximumleverage ratio is 2.25; from April 1, 2010 and thereafter, the maximumleverage ratio is 2.00 until maturity of the Credit Facility. The fixed chargescoverage ratio is computed as EBITDA, adjusted for both the trailing twelvemonths capital expenditures and cash taxes paid, divided by the trailing twelvemonths interest charges plus all payments of principal made during the previoustwelve months. The fixed charges coverage ratio as of September 30, 2008was 3.34 versus the covenant minimum of 2.00.

 

Capitallease obligations represent amounts owed under lease or sale-lease backtransactions primarily related to equipment used in the Company’s GamingEquipment and Systems segment. Based on different installation dates over afour month period, three separate payment streams of thirty six equalinstallments were created with an aggregate monthly payment of approximately$655,000 at an average interest rate of 9.11%.

 

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TheCompany’s related party debt, which totaled approximately $5.6 million asof September 30, 2008 and June 30, 2008, consists primarily of thedebt owed to the former principals of Sierra Design Group (“SDG”).  See Note 5, Related Party Transactions.

 

**5.             RELATED PARTY TRANSACTIONS**

 

Inconnection with the previous 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. The following table presents theoutstanding related party debt and interest rates as of September 30, 2008and June 30, 2008:

 
| ** **                                  | ** ** | **September 30, 2008** | ** ** | **June 30, 2008** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **Interest  Rate**               | ** ** | **Outstanding  Debt**       | ** ** | **Interest  Rate** | ** ** | **Outstanding  Debt** | ** ** |
| ** **                                  | ** ** | **(in 000s)**               | ** ** |
| SDG                                         |       | 7. 24                            | %          | $                           | 5,600      |   | 7.24 | % | $ | 5,600 |   |
| Less current maturities                     |       |                             |       | (2,800                      | )          |   |   | (2,800 | ) |
| Related party debt, less current maturities |       |                             |       | $                           | 2,800      |   |   |   | $ | 2,800 |   |

 

The notes payable to the former principals of SDG are payable in annualinstallments plus interest at LIBOR plus 2% through calendar year 2009. At theCompany’s discretion, the principal and accrued interest thereon can be paid incash, or can be converted into shares of the Company’s common stock using theaverage stock price for the 20 business days prior to the delivery of suchshares.

 

InNovember 2007, the Company repurchased 149,253 shares of common stock for$6.0 million from Mr. Robert Luciano, a former principal of SDG andthe Company’s Chief Technology Officer. The shares are included in treasurystock.

 

The Company leases a warehouse and office facility from an entity ownedby Mr. Luciano. Rental payments totaled $120,000 and $112,000 for thethree months ended September 30, 2008 and 2007, respectively.

 

**6.             STOCKHOLDERS’EQUITYAND SHARE-BASED AWARD PLANS AND COMPENSATION**

 

*Share Repurchase Plan*

 

The Company’sBoard of Directors approved a share repurchase plan under which, subject toprice and market conditions, purchases of shares can be made from time to timein the open market or in privately negotiated transactions using availablecash. On February 14, 2008, the Company’s Board of Directors increased theamount of common stock authorized to be repurchased to $75 million.  On August 12, 2008, the Company’s Boardof Directors reset the limit under its existing share repurchase plan to$100 million.

 

During thethree months ended September 30, 2008, the Company repurchased 326,000shares of common stock for $11.0 million under the share repurchase plan.As of September 30, 2008, $89.0 million was authorized to berepurchased in future periods.

 

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*Share-Based Award Plans*

 

Stock optionactivity as of and for the three months ended September 30, 2008 issummarized 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,  2008      |       | 7,087              |       | $                         | 17.61      |                             |       |   | $ | 115,883 |   |
| Granted                                            |       | 18                 |       | 29.36                     |       |                             |       |   |   |
| Exercised                                          |       | (388               | )          | 18.48                     |       |                             |       |   |   |
| Forfeited or expired                               |       | (16                | )          | 22.93                     |       |                             |       |   |   |
| Balance outstanding as of  September 30, 2008 |       | 6,701              |       | $                         | 17.58      |                             | 6.30       |   | $ | 63,342 |   |
| Exercisable as of September 30, 2008          |       | 4,589              |       | $                         | 16.59      |                             | 5.95       |   | $ | 45,525 |   |

 

Restrictedstock and RSU activity as of and for the three months ended September 30,2008 is summarized below:

 
| ** **                                         | ** ** | **Restricted  Stock** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **RSUs**    | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|-------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **(in 000s)**    | ** ** | **(per share)**                          | ** ** | **(years)** | ** ** | **(in 000s)**                            | ** ** |
| Balance outstanding as of June 30,  2008      |       | 385                   |       | $                                             | 26.64      |        | 556        |                                          | $          | 17.07 |   |
| Granted                                            |       | 5                     |       | 33.96                                         |       | —      |       | —                                        |       |
| Vested                                             |       | (84                   | )          | 16.30                                         |       | —      |       | —                                        |       |
| Forfeited or expired                               |       | —                |       | —                                        |       | —      |       | —                                        |       |
| Balance outstanding as of  September 30, 2008 |       | 306                   |       | $                                             | 29.58      |        | 556        |                                          | $          | 17.07 |   |
| Vested as of September 30, 2008               |       | —                |       | —                                        |       | 534         |       | $                                             | 16.04      |   |

 

*Share-Based Compensation*

 

The followingtable presents share-based compensation expense included in the Company’sunaudited condensed consolidated statements of operations:

 
| ** **                                           | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(in 000s)**                                   | ** ** |
| Selling, general and administrative                  |       | $                                                    | 2,895      |   | $ | 3,250 |   |
| Research and development                             |       | 626                                                  |       | 450 |   |
| Cost of gaming equipment and systems and  operations |       | 37                                                   |       | 34 |   |
| Share-based compensation expense before tax          |       | 3,558                                                |       | 3,734 |   |
| Income tax benefit                                   |       | 1,245                                                |       | 1,307 |   |
| Net share-based compensation expense                 |       | $                                                    | 2,313      |   | $ | 2,427 |   |

 

Asof September 30, 2008, there was $16.0 million of total unrecognizedcompensation expense related to the unvested portion of stock options whichwill be recognized over the subsequent 1.69 years. In addition, as of September 30,2008, there was $7.0 million of total unrecognized compensation expenserelated to the unvested portion of restricted stock and RSUs which will berecognized over the subsequent 1.59 years.

 

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**7.             INCOME TAXES**

 

The provisionfor income taxes for interim periods is based on the current estimate of theannual effective tax rate expected to be applicable for the full fiscal yearand the impact of discrete items, if any, and is adjusted as necessary forquarterly events. The effective income tax rate was approximately 36% and 37%for the three months ended September 30, 2008 and 2007, respectively.

 

TheInternal Revenue Service (“IRS”) commenced examination of the Company’s UnitedStates federal income tax returns for 2003 through 2005 in the fourth quarterof 2006. To date, the IRS has proposed, and management has agreed to, certainadjustments related to the open tax years that have been recorded in the incometax provision. It is reasonably possible that within the next twelve months theCompany will resolve some of the matters presently under consideration with theIRS which may increase or decrease unrecognized tax benefits for the open taxyears. However, an estimate of such increase or decrease cannot reasonably bemade.

 

Asof September 30, 2008, other liabilities include $22.4 millionrelated to uncertain tax positions, $18.2 million of which, if recognized,would impact the effective tax rate.

 

**8.             COMMITMENTS AND CONTINGENCIES**

 

***Litigation***

 

In February 2005, theSecurities and Exchange Commission (the “SEC”) initiated an informal inquiryand requested documents and information regarding matters related to the allegationsin a class action suit brought against the Company and similar matters.  In September 2008, the Company and theSEC reached a settlement in which the Company, without admitting or denying theSEC’s findings, agreed to a cease and desist order that mandates compliance****with****federal securities laws and regulationsrelated to financial reporting, record keeping, and internal controls. The SECdid not impose any fines, civil penalties, or monetary sanctions on theCompany.

 

In December 2004,International Game Technology (“IGT”) filed a patent infringement lawsuitagainst the Company in the United States District Court for the District ofNevada. The complaint asserted that the Company’s wheel-based games, such asMonte CarloTM, Lucky WheelTM and Cash For LifeTM, its games with a reel in the topbox, such as Bonus FrenzyTM, and its iVIEWTM products infringed on patents heldby IGT, and sought injunctive relief and damages in unspecified amounts. Aspart of its defense, the Company asserted counterclaims seeking damages andother relief against IGT, including claims that IGT’s patents were invalid,unenforceable and not infringed, as well as several claims that IGT engaged inanti-competitive conduct in violation of state and federal antitrust laws. In October 2008,the court granted the Company’s motions for summary judgment, ruling that IGT’stwo “wheel” patents and a touch-screen player-tracking patent were invalid;that even if the patents were valid, the Company’s wheel-based games at issuewould not infringe; and that certain of the Company’s iVIEW products do notinfringe the two asserted player-tracking patents. The court also found issuesof material fact regarding IGT’s alleged inequitable conduct before the U.S.Patent and Trademark Office and denied IGT’s motions to dismiss those claims,leaving them for trial. The court said it will permit IGT to appeal the court’ssummary judgments before proceeding to trial on the Company’s antitrustallegations against IGT.

 

InMay 2006, IGT filed a patent infringement lawsuit against the Company inthe United States District Court for the District of Delaware. The complaintasserts that the Company’s Bally Power BonusingTM products infringe patents heldby IGT, and seeks injunctive relief and damages in unspecified amounts. Thecourt took IGT’s motion for a preliminary injunction off-calendar and has set aMay 2009 trial date. The Company believes IGT’s claims are without meritand is vigorously defending the lawsuit.

 

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 moved for summary judgment. In September 2008,the court granted IGT’s motions for summary judgment, declaring the wheelpatent obvious and therefore invalid.

 

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TheCompany is also a party to various lawsuits relating to routine mattersincidental to our business. Management does not believe that the outcome ofsuch litigation, including the matters above, in the aggregate, will have amaterial adverse effect on the Company’s consolidated financial position,results of operations or cash flows.

 

**9.****             SEGMENTAND GEOGRAPHICAL INFORMATION**

 

TheCompany operates in two business segments: (i) Bally Gaming Equipment andSystems which designs, manufactures, assembles, distributes and operates gamingdevices and licenses computerized monitoring and bonusing systems for gamingdevices, and (ii) Casino Operations which owns and operates a casino inVicksburg, Mississippi. The accounting policies of these segments areconsistent with the Company’s policies for the unaudited condensed consolidatedfinancial statements. The table below presents information as to the Company’srevenues and operating income (loss) by segment:

 

| ** **                   | ** ** | **Three Months Ended  September 30,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(in 000s)**                                   | ** ** |
| Revenues:                    |       |                                                 |       |   |   |
| Gaming Equipment and Systems |       | $                                                    | 227,350    |   | $ | 177,610 |   |
| Casino Operations            |       | 10,048                                               |       | 11,420 |   |
| Total revenues               |       | $                                                    | 237,398    |   | $ | 189,030 |   |
|                         |       |                                                 |       |   |   |
| Inter-segment revenues:      |       |                                                 |       |   |   |
| Gaming Equipment and Systems |       | $                                                    | 557        |   | $ | 285 |   |
| Casino Operations            |       | —                                               |       | — |   |
| Total inter-segment revenues |       | $                                                    | 557        |   | $ | 285 |   |
|                         |       |                                                 |       |   |   |
| Operating income (loss):     |       |                                                 |       |   |   |
| Gaming Equipment and Systems |       | $                                                    | 59,105     |   | $ | 46,702 |   |
| Casino Operations            |       | 2,887                                                |       | 3,842 |   |
| Corporate                    |       | (8,515                                               | )          | (9,382 | ) |
| Total operating income       |       | $                                                    | 53,477     |   | $ | 41,162 |   |

 

TheCompany has operations based primarily in the United States with a significantsales and distribution office based in Europe. The table below presents information as to the Company’s revenues andoperating income by geographic region:

 

| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **               | ** ** | **(in 000s)**                                   | ** ** |
| Revenues:                |       |                                                 |       |   |   |
| United States and Canada |       | $                                                    | 203,240    |   | $ | 162,368 |   |
| Europe                   |       | 8,128                                                |       | 10,292 |   |
| Other foreign            |       | 26,030                                               |       | 16,370 |   |
| Total revenues           |       | $                                                    | 237,398    |   | $ | 189,030 |   |
|                     |       |                                                 |       |   |   |
| Operating income:        |       |                                                 |       |   |   |
| United States and Canada |       | $                                                    | 45,850     |   | $ | 34,308 |   |
| Europe                   |       | 2,436                                                |       | 3,943 |   |
| Other foreign            |       | 5,191                                                |       | 2,911 |   |
| Total operating income   |       | $                                                    | 53,477     |   | $ | 41,162 |   |

 

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| **ITEM 2.** | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

We begin this Management’s Discussion and Analysis of FinancialCondition and Results of Operations with an overview of our key operatingbusiness divisions as of September 30, 2008. This overview is followed bya detailed analysis of our results of operations and our financial condition asof, and for, the three months ended September 30, 2008 and 2007.  References to “we,” “our,” “us,” or the “Company”refer to Bally Technologies, Inc. and its subsidiaries.

 

**Forward Looking Statements**

 

Certain statements made or incorporated by reference in this QuarterlyReport on Form 10-Q, in our other filings with the Securities and ExchangeCommission (“SEC”), in our press releases and in statements made by or with theapproval of authorized personnel constitute “forward looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”) and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”), and are subject to the safe harbor created thereby.Forward looking statements reflect intent, belief or current expectations withrespect to, among other things, future events and financial trends affectingus. Forward looking statements are typically identified by words such as “believes,”“estimates,” “expects,” “anticipates,” “plans,” “should,” “would” and similarexpressions.

 

Although we believe the expectations reflected in any forward lookingstatements are reasonable, readers are cautioned that forward lookingstatements involve known and unknown risks and uncertainties, are notguarantees of future performance and that actual results, performance orachievements may differ materially from any future results, performance orachievements expressed or implied by such forward looking statements. Thesedifferences can arise as a result of the risks described in Item 1A, RiskFactors included in on our Annual Report on Form 10-K for the fiscal yearended June 30, 2008 (the “2008 10-K”), as well as other factors such asthe impact of competition, the impact of any prolonged downturn in the economyor the financial markets, our ability to service debt, product development,foreign operations, dependence on key personnel, the ability to integratefuture acquisitions, regulation by gaming authorities, the outcome of pendinglitigation matters, gaming taxes, market risks and the potential adverseeffects to our financial condition, results of operations or prospects.

 

Forward looking statements in this Quarterly Report on Form 10-Qspeak only as of the date hereof, and forward looking statements in documentsincorporated by reference speak only as of the date of those documents. Unlessotherwise required by law, we undertake no obligation to publicly update orrevise these forward looking statements, whether as a result of newinformation, future events or otherwise. In light of these risks anduncertainties, we cannot assure you that the forward looking statementscontained in this Quarterly Report on Form 10-Q will, in fact, transpire.

 

**Our Business**

 

Weare a diversified, worldwide gaming company that designs, manufactures,distributes and operates gaming devices and computerized monitoring andaccounting systems for gaming devices. In addition to selling our gamingdevices, we also offer our customers a wide range of rental options. Ourprimary technologies include gaming devices for land-based, riverboat andNative American casinos, video lottery and central determination markets andspecialized system-based hardware and software products. Our specializedsystem-based hardware and software products provide casinos with a wide rangeof marketing, data management, accounting, security and other softwareapplications and tools to more effectively manage their operations. We also ownand operate the Rainbow Casino, a dockside riverboat casino in Vicksburg,Mississippi.

 

Wederive our revenue from the following four 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; |
| · | * * | *Systems*           | — | Sale  of computerized monitoring systems and related recurring hardware and  software maintenance revenue; and                          |
| · | * * | *Casino Operations* | — | Operation  of the Rainbow Casino.                                                                                                       |

 

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***Bally Gaming Equipment and Systems—GamingEquipment***

 

Wedesign, manufacture, assemble, sell, maintain and operate a full range oftechnology-based gaming devices and related equipment, parts and conversionkits. These devices are normally configured to specific requirements based on acustomer’s particular order. Gaming devices are differentiated by a number offactors including, but not limited to, game theme, cabinet style, pay table,game layout, betting denomination and minimum/maximum betting amount.

 

Ourgaming devices include a variety of innovative features and layouts in bothvideo and mechanical-reel formats. Our gaming devices come in several differentcabinet styles with some devices featuring high-profile top boxes with variousgame features and varying sizes geared towards specific market niches. Thegaming products we create are the result of comprehensive product developmentefforts that include extensive internal and third party testing. We alsoperform market tests of our products with the cooperation of casino operatorsto assess reliability and player appeal. We offer a number of different cabinetdesigns, from a standard upright to dramatic tower units to our new bar-top cabinet.

 

OurALPHA EliteTM cabinet series features interchangeable video and mechanical-reelconfigurations and is recognized for its modularity, meaning that gamingoperators can easily convert one game into another without having to invest ina whole new device. In addition to easily changing the cabinet from one game toanother, the modularity of our cabinets allows gaming operators to convertcabinets from video to mechanical-reel games and easily replace top boxes,button decks, and other key parts, protecting gaming operators’ previouslyinvested capital. The modularity of our cabinets, combined with the use ofcommon parts, also makes maintenance easier for our customers, providinglabor-saving benefits to gaming operators, while enabling a quickermanufacturing turn-around.

 

OurCineVisionTM cabinet series features a wide-screen display that enables unique,on-screen progressive features and bonus events. Enhancing this immersiveinteraction for players is a dynamic new surround-sound audio system and anadvanced ergonomic design including padded armrests that creates a unique zoneof comfort and privacy for players.

 

OurCineReelsTM CineVision cabinet design enables us to offer the industry’s firstseven-reel mechanical gaming device and another industry first, “micro-stepping”technology, that provides “all-stop” player control. This technology allows theplayer to immediately stop all of the reels at once by tapping the “spin”button, thus enabling the player to establish their own rhythm of game playrather than have the game dictate the pace of play.

 

Eachgaming device contains an operating system referred to as a game platform. Thegame platform manages the software needed to run the device. Game platforms andthe related computer systems are constantly updated and revised to keep pacewith the ever-increasing complexity of modern game play requirements. Thechange in game play requirements is driven by, among other things, changes inconsumer demand, capacity, security and regulation. The Linux-based ALPHA OSTM   is the platform for our entire video andmechanical reel gaming device product offerings.

 

TheALPHA OS platform is designed to separate the gaming operating system from thegame layer, which reduces the time required for game development. ALPHA OS isalso designed to incorporate bonusing, free spin, scatter and other advancedgame features, while providing internal and third-party developers with asecure, easy-to-use programming environment that incorporates an advanced setof development tools. Moreover, ALPHA OS is designed to support networked andserver-based gaming initiatives, including download of game results and gamecontent and configuration management. Additionally, our layered architectureand modular design allows for adaptability and simplified requirement changes.ALPHA OS is designed to support Gaming Standard Association (“GSA”) standardsand is compatible with most common accounting, ticketing and bonusing systems.ALPHA OS also supports various game bonusing, multi- denomination, multi-gameand multi-pay table game configurations and can operate with stand alone, localand wide-area progressive products.

 

Oursales are not limited to our gaming devices. Customers that purchase or rentour gaming devices typically purchase replacement parts, upgrades, gameconversion kits and other products from us to keep the devices in good workingorder and to enhance the underlying performance of the devices. Certainequipment within gaming devices such as video monitors, bill validators, logicboards and printers are typically replaced, whether as a result of partfailures or new technology offerings by our suppliers. These sales may alsoinclude game conversion kits that provide our customers the opportunity tooffer a new theme or variant on the existing product without the necessity ofpurchasing an entirely new gaming device.

 

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Wegenerally offer a 90-day parts and labor warranty for new gaming devices. Weprovide several after-sale services to our customers including customereducation programs, a 24-hour customer service telephone hot-line, a web sitefor technical support, field service support programs and spare parts programs.Our historical warranty expense as a percentage of revenues has been less than1%. From time to time, we also sell used gaming devices, including productsmade by us as well as those produced by our competitors. Generally, we acquireused devices as trade-ins toward the purchase of new gaming devices. While asmall secondary market exists in the United States, used devices are typicallyresold in international markets where new device purchases often prove to betoo costly. Where appropriate, we incur costs to recondition used devices forresale or we may elect to destroy the devices. We also occasionally sell usedequipment in lots on an “as is” basis to used device brokers and customers.

 

***Bally Gaming Equipment and Systems—GamingOperations***

*** ***

Weoffer our customers a wide range of rental options through our GamingOperations division. Specifically, these arrangements are available under fourbusiness models: linked progressive systems, rental and daily fee games, videolottery systems and centrally determined systems. In most cases, operatinggaming devices under a rental arrangement requires us to invest capital inmanufacturing the gaming device and related equipment, purchasing signs andseating and, in certain cases, acquiring certain intellectual property rights.

 

*Linked Progressive Systems:*  Weoffer our customers gaming devices featuring a common jackpot or prize awardthat can be linked within a casino, in a local-area network, or among multiplecasinos within a market or jurisdiction in a wide-area network. Progressivegaming devices are typically offered to customers under a daily fee arrangementthat is based on a percentage of the money wagered on the participating gamingdevices. In many cases, we use a portion of these revenues to fund the ultimatepayment of the jackpot awards.

 

*Rental and Daily-Fee Games:*  Weoffer a variety of non-linked games and content on a rental basis for either afixed daily fee or a fee based on the percentage of the net win generated bythe gaming device. This category includes both gaming devices in which weretain ownership and depreciate over their estimated useful lives and gamingdevices the casino purchases which are classified as game sales revenues inwhich we provide the game content on a daily-fee basis, that results in a lowerdaily-fee than if we were to lease the entire gaming device. We market ourrental and daily-fee games under such titles as Hot Shot ProgressiveTM, QuickHit PlatinumTM, Golden MonkeyTM, Reel WinnersTM, Hee Haw® and MonteCarloTM.

 

*Video Lottery Systems:*  Weoffer both video and mechanical reel devices that can operate as stand-alonedevices or can interact with, or be monitored by, central computers maintainedby governmental agencies. The financial model for this market requires us tobuild, deploy and maintain the devices as well as provide the related equipmentin return for a share of the net win generated by the device.

 

*Centrally Determined Systems:*  Weoffer video and mechanical reel devices that connect to a central server whichdetermines the outcome of the game. These systems primarily operate in NativeAmerican casinos in Washington, Florida and Oklahoma as well as in Mexico. Incertain of these jurisdictions, our customers purchase our gaming devices, inwhich case the purchases are classified as game sales revenues. In otherjurisdictions, our customers rent the gaming device, in which case the rentalpayments are classified as gaming operations revenues. In each case, for theuse of our central determination software we receive either a fixed daily feeor a percentage of the net win generated by the devices connected to thesystem.

 

***Bally Gaming Equipment and Systems—Systems***

*** ***

Wedesign, program, license and support casino enterprise systems for a wide rangeof customers of varying size and complexity under our Systems division. Webelieve we are the only provider in the industry that offers a selection oftechnology platform options to our customers. Our products, which support GSAprotocols, operate on platforms such as Windows®, AS/400 (iSeries),Linux and UNIX which allows our customers to choose a technology solution thatmeets their existing or future infrastructure requirements.

 

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Oursystems typically provide casino operators features such as active, real-timemonitoring tools for gaming devices, tools to collect and manage customer data,security to protect against theft and data loss, and marketing programs toenhance the gaming experience. Our casino enterprise product functionality hasevolved from basic automation of manual activities to highly integrated missioncritical applications as a result of the convergence of gaming content andsystem applications into a single gaming-floor network. We market a number oftechnology solutions as Bally’s Networked Floor of the Future*TM*. Our Networked Floor of the Futureproduct suite features products and technologies that are designed for and takeadvantage of high-speed Ethernet gaming-floor network environments.

 

Thefollowing are the primary systems we license to our customers:

 

·**     ***Slot Floor Management:*  Ourgame monitoring products are comprised of system-based hardware consisting ofmicro controller-based printed circuit boards installed within the gamingdevice as well as card readers, displays and keypads. We also develop proprietaryfirmware that controls and manages the hardware components of our systems. Thisequipment provides casinos the ability to track player gaming activity throughour casino management systems and monitor employee access to gaming devices.

 

·**     ***Casino Management:*  Ourcasino management systems are composed of various system-based hardware andsoftware products that provide casino operators player loyalty solutionscomparable to frequent guest programs offered in other leisure and retailindustries; database marketing and table game accounting solutions includingthe calculation of all revenue and expense related items; and cage and creditaccountability for all extensions of credit and cage cash balancing functions.Our solutions are designed and deployed in both domestic and internationalmarkets and adaptable to foreign languages and currencies. Our TableViewproduct brings management of table game activities directly to the table with ahigh-tech touch screen.

 

·**     ***iVIEWTM Player-CommunicationNetwork:*  Our iVIEW network leverages a small,horizontal liquid-crystal display screen and accompanying hardware and softwarethat resides in the gaming devices and serves as a communication tool to endplayers. Our iVIEW network is also designed to work with our Bally PowerBonusingTM suite of products and other new technologies under development.

 

·**     ***Bally Power Bonusing:*  TheBally Power Bonusing products represent an integrated set of cashless andbonusing features to enhance the gaming experience of casino patrons. Theseproducts allow the transfer of funds using bar-coded coupons and/or encryptedPIN numbers to download either restricted or unrestricted credits to the gamingdevice. These products, combined with innovative and exciting promotions, allowcasino operators to reduce cash and coin-handling expenses, minimize overalloperating expenditures and provide creative marketing incentives to theircasino patrons.

 

·**     ***Business Intelligence andData Analysis:*  The Bally Business Intelligence applications,which span across all our products, bring state-of-the-art data analytics tothe casino’s key executive and marketing management teams. The executivedashboards, slot floor data and transaction visualization empowers casinooperators to analyze customer activity and take proactive actions that enhancerevenue and profits.

 

·**     ***Download and ConfigurationManager (DCM):*  Our DCM product enables casinos to downloadmarketing content on iVIEWs, configure gaming device paytables and game playoptions, and deliver new game content and game libraries from a central server.

 

Wemarket our system product solutions under the broad categories of Bally CMS®(Casino Management Systems), Bally SMS® (Slot Management Systems)and Bally TMSTM (Table Management Systems).

 

***Casino Operations***

*** ***

TheRainbow Casino, located in Vicksburg, Mississippi, began operations in July 1994.It was one of four casinos operating in the Vicksburg, Mississippi marketduring the period. The facility includes a 33,000 square-foot casino with 832gaming devices and 10 table games, a 224-seat buffet-style restaurant, and a20,000 square-foot conference center. The Casino also includes the 89-roomRainbow Hotel, which is owned and operated by a third party. Rainbow ismarketed as a “locals” casino and draws mid-level gaming customers principallyfrom within a 75-mile radius of Vicksburg. Our promotions are focused primarilyon direct mail and special promotional events.

 

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Weare the general partner of Rainbow Casino Vicksburg Partnership, L.P. (“RCVP”),the limited partnership that operates Rainbow. The limited partner of RCVP isentitled to receive 10% of the net available cash flows of RCVP after debtservice and other items, as defined in the limited partnership agreement, whichincreases to 20% of the net available cash flows based on the incrementalamount of revenues in excess of $35.0 million, payable quarterly through December 31,2010. We consolidate RCVP and record an adjustment to reflect the portion ofearnings of RCVP attributable to minority shareholders.

 

Theoperation of casinos is a highly competitive business. Gaming of all types isavailable throughout Mississippi in numerous locations as well as insurrounding markets. The principal competitive factors in the industry includethe structure, age and location of the facility, the nature, variety andquality of the amenities and customer services offered, and the continuousdevelopment, implementation and success of a variety of marketing programs. OurRainbow Casino faces intense direct competition from other gaming facilitiesservicing the Vicksburg market, and, to a lesser degree, indirect competitionfrom those servicing the Gulf Coast region. A new casino project adjacent tothe Rainbow Casino opened in late October 2008 and a nearby competitorproperty recently expanded its casino and added 500 slot machines and themarket’s largest live poker room.

 

**Resultsof Operations**

 

Our results of operations include the accounts of Bally Technologies, Inc.,and its subsidiaries. We report our revenue and income in two reportable segments:the Bally Gaming Equipment and Systems segment, which includes our GamingEquipment, Gaming Operations and Systems divisions, and our Casino Operationssegment. Revenue from our Bally Gaming and Systems segment representedapproximately 96% and 94% of our total revenues for the three months ended September 30,2008 and 2007, respectively.

 

***Bally GamingEquipment and Systems***

*** ***

The summaryfinancial results and operating statistics for our Bally Gaming Equipment andSystems segment for the three months ended September 30, 2008 and 2007were as follows:

 

| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                                 | ** ** | **% Rev** | ** ** | **2007** | ** ** | **% Rev** | ** ** |
| ** **                          | ** ** | **(dollars in millions)**                      | ** ** |
| Revenues:                           |       |                                                     |       |   |   |   |   |   |   |
| Gaming Equipment                    |       | $                                                        | 107.3      |   | 47 | % | $ | 84.3 |   | 48 | % |
| Gaming Operations                   |       | 67.8                                                     |       | 30 | % | 54.1 |   | 30 | % |
| Systems                             |       | 52.3                                                     |       | 23 | % | 39.2 |   | 22 | % |
| Total revenues                      |       | $                                                        | 227.4      |   | 100 | % | $ | 177.6 |   | 100 | % |
|                                |       |                                                     |       |   |   |   |   |   |   |
| Gross Margin:                       |       |                                                     |       |   |   |   |   |   |   |
| Gaming Equipment(1)                 |       | $                                                        | 47.4       |   | 44 | % | $ | 38.9 |   | 46 | % |
| Gaming Operations                   |       | 47.2                                                     |       | 70 | % | 36.0 |   | 67 | % |
| Systems(1)                          |       | 36.6                                                     |       | 70 | % | 30.0 |   | 77 | % |
| Total gross margin                  |       | $                                                        | 131.2      |   | 58 | % | $ | 104.9 |   | 59 | % |
|                                |       |                                                     |       |   |   |   |   |   |   |
| Selling, general and administrative |       | $                                                        | 48.1       |   | 21 | % | $ | 41.0 |   | 23 | % |
| Research and development costs      |       | 19.9                                                     |       | 9 | % | 13.3 |   | 8 | % |
| Depreciation and amortization       |       | 4.1                                                      |       | 2 | % | 3.9 |   | 2 | % |
| Operating income                    |       | $                                                        | 59.1       |   | 26 | % | $ | 46.7 |   | 26 | % |

 

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(1)**  **GrossMargin from Gaming Equipment and Systems excludes amortization related tocertain intangibles including core technology and license rights, which areincluded in depreciation and amortization.

 

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| ** **                                               | ** ** | **Three Months Ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Operating Statistics                                     |       |                                                 |       |   |   |
| New gaming devices                                       |       | 6,598                                                |       | 5,151 |   |
| Original Equipment Manufacturer (“OEM”)  units |       | 465                                                  |       | — |   |
| New unit Average Selling Price (“ASP”)         |       | $                                                    | 14,062     |   | $ | 13,275 |   |
|                                                     |       |                                                 |       |   |   |
| End of period installed base:                            |       |                                                 |       |   |   |
| Gaming monitoring units installed base                   |       | 314,000                                              |       | 291,000 |   |
| Casino management systems installed base                 |       | 608                                                  |       | 558 |   |
| Systems managed cashless games                           |       | 282,000                                              |       | 233,000 |   |
|                                                     |       |                                                 |       |   |   |
| Wide-area progressive                                    |       | 1,001                                                |       | 936 |   |
| Local-area progressive                                   |       | 248                                                  |       | 423 |   |
| Total linked progressive systems                         |       | 1,249                                                |       | 1,359 |   |
|                                                     |       |                                                 |       |   |   |
| Rental and daily-fee games (1)                           |       | 13,089                                               |       | 8,774 |   |
| Lottery systems                                          |       | 8,122                                                |       | 8,004 |   |
| Centrally determined systems (1) (2)                     |       | 43,523                                               |       | 40,284 |   |
|                                                          |            |                                                      |            |  |  |  |  |

 

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(1)**          **Certain devices previously included incentrally determined systems that were converted to standalone devices havebeen reclassified to rental and daily-fee games.

 

(2)**          **Daily fee revenue from approximately 7,844and 7,859 units included in the centrally determined systems end of periodinstalled base total as of September 30, 2008 and 2007, respectively, arecurrently being deferred based upon the completion of certain contractualcommitments necessary to recognize the revenue under our revenue recognitionpolicy.

 

**Three Months Ended September 30, 2008Compared to Three Months Ended September 30, 2007**

 

Total revenues for our Bally Gaming Equipment and Systems segmentincreased $49.8 million, or 28%, in the three months ended September 30,2008, when compared to the same period last year, as a result of the following:

 

*Gaming Equipment Revenue.*Gaming Equipment revenue increased by $23.0 million, or 27%, toapproximately $107.3 million primarily as a result of a 28% increase in newgaming device sales to 6,598 units in the three months ended September 30,2008, when compared to 5,151 units in the same period last year and a 6%increase in the ASP, excluding OEM units, of new gaming devices as the resultof product mix and an increase in international sales with a higher ASP duringthe same period.

 

*GamingEquipment Gross Margin*. Gaming Equipment gross margindecreased to 44% in the three months ended September 30, 2008 from 46%, inthe same period last year, primarily as a result of an increase in inventorywrite-downs of $0.8 million and thesale of an additional 465 lower margin OEM units during the period.

 

*Gaming Operations Revenue.*Gaming Operations revenue increased $13.7 million, or 25%, to approximately$67.8 million in the three months ended September 30, 2008, when comparedto the same period last year, primarily as a result of an increase inparticipation, rental and license revenue primarily from the following:

 

·**     **Ourinstalled base of devices connected to our centrally determined systems (Class II,Video Lottery and iVIEW network) increased 8% from 40,284 units as of September 30,2007 to 43,523 units as of September 30, 2008 primarily due to units addedin Mexico; and

 

·**     **Ourinstalled base of rental and daily fee games increased 49% from 8,774 units asof September 30, 2007 to 13,089 units as of September 30, 2008primarily due to the popularity of our premium products and conversion of olderClass II devices (classified as centrally determined systems) to Class IIIrental and daily-fee games.

 

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*Gaming Operations Gross Margin*.Gross margin increased to 70% in the three months ended September 30, 2008from 67%, in the same period last year, primarily as a result of thesignificant increases in both rental and participation revenue which had littleassociated variable costs.  Cost ofgaming operations increased $2.5 million, or 14%, in the three months ended September 30,2008 primarily due to depreciation expense included in cost of gamingoperations which was $3.4 million higher due to the increase in Bally-ownedgaming operations units and infrastructure installed in customer locationsunder rental and participation arrangements.

 

*Systems Revenue.*Systemsrevenue increased $13.1 million, or 33%, to approximately $52.3 million in thethree months ended September 30, 2008 when compared to the same periodlast year primarily as a result of continued acceptance of our products,including our iVIEW player-communication devices and Bally Power Bonusingsoftware, and an increase in the number of go-lives with new customers andincremental sales to existing customers during the period.  Systems maintenance revenue was $12.2 millionrepresenting an increase of $2.5 million, or 26%, in the three months ended September 30,2008 when compared to $9.7 million in the same period last year.

 

*Systems Gross Margin.*Systemsgross margin decreased to 70% in the three months ended September 30, 2008from 77%, in the same period last year, primarily as a result of the largenumber of hardware sales recognized in the current quarter, when compared tothe same period last year, which have a higher cost than software and otherhardware sold by the Company.

 

*Selling, General and AdministrativeExpenses. *Selling, general and administrative expensesincreased $7.1 million, or 17%, in the three months ended September 30,2008, when compared to the same period last year. Salaries and related expensesincreased $8.6 million, or 26%, in the three months ended September 30,2008, when compared to the same period last year, due primarily to increases instaffing to meet growing demands of the business brought about by the 28%increase in Gaming and Systems revenue.

 

Theincrease in salaries and related expenses was offset by a $1.2 million decreasein temporary labor and related outside services during the same period.  In addition, bad debt expense decreased$0.5 million during the three months ended September 30, 2008, whencompared to the same period last year, due to improvements in the collectionsof accounts receivable.

 

*Research and Development Costs*.Research and development costsincreased $6.6 million, or 50%, in the three months ended September 30,2008, when compared to the same period last year, as a result of the increasein projects coupled with an increase in staffing.  The Company remains focused on its technologyassets due to the competitive landscape that requires a continual investment infuture generations of gaming products and systems.

 

*Depreciation and Amortization Expense*.Depreciation and amortization expense increased $0.2 million, or 5%, in thethree months ended September 30, 2008, when compared to same period lastyear, primarily as a result of certain intangible assets added in June 2008which began amortizing during the period.

 

***Casino Operations***

 

Thesummary of our financial results and operating statistics for our CasinoOperations is as follows:

 

| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                                 | ** ** | **% Rev** | ** ** | **2007** | ** ** | **% Rev** | ** ** |
| ** **                          | ** ** | **(dollars in millions)**                      | ** ** |
| Revenue                             |       | $                                                        | 10.0       |   | 100 | % | $ | 11.4 |   | 100 | % |
|                                |       |                                                     |       |   |   |   |   |   |   |
| Selling, general and administrative |       | $                                                        | 2.1        |   | 21 | % | $ | 2.2 |   | 19 | % |
| Depreciation and amortization       |       | $                                                        | 0.7        |   | 7 | % | $ | 0.7 |   | 6 | % |
| Operating income                    |       | $                                                        | 2.9        |   | 29 | % | $ | 3.8 |   | 33 | % |
|                                |       |                                                     |       |   |   |   |   |   |   |
| Operating statistics:               |       |                                                     |       |   |   |   |   |   |   |
| Average number of gaming devices    |       | 832                                                      |       |   |   | 817 |   |   |   |
| Average number of table games       |       | 10                                                       |       |   |   | 10 |   |   |   |

 

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**Three Months Ended September 30, 2008Compared to Three Months Ended September 30, 2007**

 

*Casino Operations. *Revenue decreased by12% for the three months ended September 30, 2008 when compared to thesame period last year due primarily toincreased competition from the opening of a competitor’s expansion project inthe fourth quarter of fiscal 2008. In addition, rising fuel prices and adownturn in the economy reduced patronage during the quarter.

 

*Selling, General and Administrative Expenses*.Selling, general and administrative expenses decreased by $0.1 million, or 5%,for the three months ended September 30, 2008 when compared to the sameperiod last year due primarily to a decrease in advertising and promotionalexpenditures during the period.

 

*Depreciation and Amortization Expense*.Depreciation and amortization expense increased slightly for the three monthsended September 30, 2008, when compared to the same period last year, as aresult of the increase in the number of slot machines deployed during theperiod.

 

***Parent Company***

 

The summaryfinancial results of Bally Technologies, Inc., our parent entity, are setforth below. These results also include certain other income and expenses thatare otherwise not allocated to a specific business segment.

 

| ** **                    | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------|------------|----------------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| ** **                    | ** ** | **(dollars in millions)**                      | ** ** |
| General and administrative    |       | $                                                        | 8.2        |   | $ | 9.1 |   |
| Depreciation and amortization |       | 0.3                                                      |       | 0.3 |   |
| Operating loss                |       | $                                                        | 8.5        |   | $ | 9.4 |   |
|                          |       |                                                     |       |   |   |
| Other income (expense)        |       |                                                     |       |   |   |
| Interest income               |       | $                                                        | 1.2        |   | $ | 1.0 |   |
| Interest expense              |       | (5.1                                                     | )          | (7.2 | ) |
| Other, net                    |       | (2.6                                                     | )          | 0.9 |   |
| Total other expense           |       | $                                                        | (6.5       | ) | $ | (5.3 | ) |
|                          |       |                                                     |       |   |   |
| Income tax expense            |       | $                                                        | (17.1      | ) | $ | (13.1 | ) |
| Minority interest             |       | $                                                        | 0.5        |   | $ | (1.4 | ) |

 

**Three Months Ended September 30, 2008Compared to Three Months Ended September 30, 2007**

 

*General and Administrative Expenses.*Generaland administrative expenses decreased $0.9 million, or 10%, in the three monthsended September 30, 2008, when compared to the same period last year,primarily as a result of a decrease in payroll and related expenses of $0.7million and a decrease in legal fees of $0.6 million which was offset by an increase in accounting and professionalfees of $0.4 million during the same period.

 

*Other Income (Expense).*Other expense increased $1.2 million, or23%, in the three months ended September 30, 2008, when compared to thesame period last year.  Other expenseincreased primarily due to the write-off of previously capitalized debtissuance costs of $0.8 million upon the financing of the Company’s new termloan and revolving credit facility in the current quarter and an increase inlosses incurred on foreign currency transactions as a result of thestrengthening U.S. dollar.  Interestexpense decreased $2.1 million primarily due to a reduction in both theprincipal balance and the interest rate on the term loan which decreased from8.60% in three months ended September 30, 2007 to 5.80% in the same periodthis year.

 

*Income Tax Expense.*  Theeffective income tax rate for the three months ended September 30, 2008was 36% compared to 37% for the same period last year. At the end of eachinterim period, we make our best estimate of the effective tax rate expected tobe applicable for the full fiscal year and the impact of discrete items, ifany, and adjust the quarterly rate, as necessary.

 

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*Minority Interest.*Minority interest expense decreased in thethree months ended September 30, 2008, when compared to the same periodlast year, due primarily to a reduction in earnings from certain variableinterest entities due to a higher than average jackpot liability expenserecognized during the quarter.

 

**FinancialCondition and Liquidity**

 

Selected balance sheet accounts are as follows:

 
| ** **                              | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **Increase (decrease)** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **2008**               | ** ** | **2008**          | ** ** | **Amount**                   | ** ** | **%** | ** ** |
| ** **                              | ** ** | **(in 000s)**     | ** ** |
| Cash and cash equivalents               |       | $                      | 57,316     |              | $          | 66,570                       |       | $ | (9,254 | ) | (14 | )% |
|                                    |       |                   |       |              |       |                         |       |   |   |
| Total long-term debt and capital leases |       | $                      | 288,763    |              | $          | 304,504                      |       | $ | (15,741 | ) | (5 | )% |
|                                    |       |                   |       |              |       |                         |       |   |   |
| Total current assets                    |       | $                      | 514,137    |              | $          | 547,687                      |       | $ | (33,550 | ) | (6 | )% |
| Total current liabilities               |       | 270,476                |       | 294,398           |       | (23,922                      | )          | (8 | )% |
| Net working capital                     |       | $                      | 243,661    |              | $          | 253,289                      |       | $ | (9,628 | ) | (4 | )% |

 

As of September 30, 2008 and June 30,2008, we had $57.3 million and $66.6 million, respectively, in consolidatedcash and cash equivalents which included approximately $3.8 million and $3.5million, respectively, of cash utilized in our Casino Operations segment thatis held in vaults, cages or change banks. Pursuant to various state gamingregulations, certain cash accounts are maintained to ensure availability offunds to pay wide-area progressive jackpot awards in installments rather thanin one lump-sum. At September 30, 2008 and June 30, 2008, theseaccounts had an aggregate value of approximately $12.5 million and $13.1million, respectively, which are classified as restricted cash in our unauditedcondensed consolidated balance sheets. In addition, we purchase U.S. Treasury Strip Securities for the benefitof 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 $14.6 million and $13.6 million as of September 30,2008 and June 30, 2008, respectively.

 

Ournet working capital decreased $9.6 million for the three months ended September 30,2008. Cash and cash equivalents decreased by $9.3 million during theperiod.  Working capital was increased bya $13.3 million decrease in inventory, an $8.7 million decrease in net accountsand notes receivable and an increase in current maturities of long-term debt of$22.1 million and was offset by a $10.2 million decrease in deferred revenue, a$10.1 million decrease in customer deposits and a $26.7 million decrease inaccounts payable and accrued liabilities.

 

OnSeptember 29, 2008, the Company entered into a new $225.0 million termloan and a new $75.0 million revolving credit facility (collectively, the “CreditFacility”).  The Company also has theoption to request an increase in the size of the term loan and/or creditfacility by up to $50.0 million in the aggregate provided that certainconditions are met.  The proceeds from the Credit Facility were used torepay existing bank term loans totaling $290.0 million and to pay fortransaction fees and expenses totaling $10.7 million which are being amortizedover the term of the Credit Facility.

 

Asof September 30, 2008 there was $25.0 million of undrawn availabilityunder the revolving credit facility. Availability under the revolving credit facility is reduced to theextent of outstanding letters of credit. As of September 30, 2008, there were no outstanding letters ofcredit.

 

Theinterest rate on the Credit Facility is set at LIBOR plus 3.25% through March 2009(or 7.30% at September 30, 2008) and thereafter is subject to a leveragebased pricing grid. If the Company’s leverage ratio, as defined under theCredit Facility, is greater than 1.5, the interest rate will be LIBOR plus3.25%; if the leverage ratio is between 1.0 and 1.5, the interest rate will beLIBOR plus 3.00%; and if the leverage ratio is below 1.0, the interest ratewill be LIBOR plus 2.75%.

 

Theterm loan requires quarterly principal reductions of $6.25 million during thefirst year, $8.75 million during the second year and $11.25 million during eachof the third and fourth years, with a balloon payment due in September 2012.The Credit Facility matures in September 2012.  The Credit Facility is collateralized bysubstantially all of the Company’s domestic property and is guaranteed by eachof the Company’s domestic subsidiaries, other than the entity that holds theCompany’s interest in its Rainbow Casino, and is secured by a pledge agreement.

 

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The Credit Facilitycontains a number of maintenance and other 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. The Company was in compliance with thesecovenants as of September 30, 2008.

 

The financial covenantsunder the Credit Facility consist of a leverage ratio and a fixed chargescoverage ratio. The leverage ratio is computed as total debt outstanding at theend of the quarter divided by the trailing twelve months Earnings BeforeInterest, Taxes, Depreciation and Amortization (“EBITDA”), excluding certaincash and non-cash charges. The Company’s leverage ratio as of September 30,2008 was 1.00 versus a maximum allowable of 2.50 through March 31,2009.  From April 1, 2009 to March 31,2010, the Company’s maximum leverage ratio is 2.25; from April 1, 2010 andthereafter, the maximum leverage ratio is 2.00 until maturity of the CreditFacility. The fixed charges coverage ratio is computed as EBITDA, adjusted forboth the trailing twelve months capital expenditures and cash taxes paid,divided by the trailing twelve months interest charges plus all payments ofprincipal made during the previous twelve months. The fixed charges coverageratio as of September 30, 2008 was 3.34 versus the covenant minimum of2.00.

 

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 September 30,2008, we had no material commitments for capital expenditures.

 

***Cash Flow Summary***

 

Cash flows from operating activities are derivedprimarily from the sale of gaming equipment and systems, the operation ofwide-area progressive systems, daily fee and rental payments, and monthly cashreceipts from maintenance agreements from our casino systems customers. Inaddition, we generate cash through our casino operations. We utilize our cashto acquire materials for the manufacture of goods for resale or lease, to paypayroll and selling, general and administrative expenses, to fund research anddevelopment activities, as well as to service our debt.

 

Cash flows provided by operating activities was$25.2 million in the three months ended September 30, 2008 as compared to$25.8 million in the same period last year.

 

Cashflows used in investing activities totaled $3.5 million in the three monthsended September 30, 2008 as compared to $4.9 million in the same periodlast year primarily as a result of:

 

·                  Capitalexpenditures of $4.0 million in the three months ended September 30, 2008as compared to $3.9 million in the same period last year; and

 

·                  Reductions inrestricted cash and investments of $0.7 million in the three months ended September 30,2008 as compared to increases in restricted cash and investments of $0.3million in same period last year.

 

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Cashused by financing activities totaled $30.1 million in the three months ended September 30,2008, as compared to $10.5 million in the same period last year, as a resultof:

 

·                  Payoff of debt fromrefinancing of $14.6 million primarily from the proceeds from borrowings underthe Credit Facility.  See Note 4 tounaudited condensed consolidated financial statements, Long-Term Debt andCapital Leases;

 

·                  Payment of capitalized debtissuance costs of $10.7 million under the Credit Facility;

 

·                  Principalpayments on capital leases and other long term debt of $1.2 million in thethree months ended September 30, 2008 as compared to $17.1 million in thesame period last year.  During the threemonths ended September 30 2007, we made an unscheduled $15.0 millionpayment under the then existing term loan facility;

 

·                  Purchase of 326,098 sharesof common stock for treasury for $11.0 million during the three months ended September 30,2008;

 

·                  Cash providedfrom exercise of stock options and warrants of $7.5 million in the three monthsended September 30, 2008 as compared to $4.8 million in the same periodlast year; and

 

·                  Excess net taxbenefit from the exercise of stock options of $0.6 million and $1.8 million inthe three months ended September 30, 2008 and 2007, respectively.

 

**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 2008 10-K. There were no material changes to those policiesduring the three months ended September 30, 2008.

 

**Recently Issued Accounting Pronouncements**

 

For a description ofrecently 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 DISCLOSURESABOUT MARKET RISK**

 

*Interest Rate Risk*

 

As of September 30, 2008, we had total debtoutstanding of approximately $288.8 million, consisting primarily of $225.0million outstanding under our term loan, $50.0 million borrowed under ourrevolving credit facility, $5.6 million in related party debt, (see Note 5 tounaudited condensed consolidated financial statements, Related PartyTransactions) and $8.2 million in capital lease obligations and other debt. Theinterest rate for the term loan and the revolving credit facility is variable,based on LIBOR for six months after closing of the transaction and thereafteris subject to a leveraged based pricing grid. See Note 4 to unaudited condensed consolidated financial statements,Long-Term Debt and Capital Leases. The related party debt is variable and isbased on LIBOR. If the LIBOR rates were to increase or decrease by 100 basispoints, with all other factors remaining constant, earnings would decrease orincrease by approximately $2.8 million annually, on a pre-tax basis.

 

*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 $0.4 million.

 

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# **ITEM4.             CONTROLSAND PROCEDURES**

# ** **

**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 Chief FinancialOfficer, evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e),as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

Basedon this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that, as of September 30, 2008, our disclosure controls andprocedures were not effective due to the existing material weaknesses in ourinternal control over financial reporting previously identified and discussedin the 2008 10-K and below under “Management’s Report on Internal ControlOver Financial Reporting —Material Weakness in Internal Control Over FinancialReporting Previously Reported.”

 

While management hasconcluded that we have a material weakness related to internal control overfinancial reporting, we have devoted a significant amount of time and resourcesto the analysis of the financial statements presented in this Quarterly Reporton Form 10-Q for the fiscal quarter ended September 30, 2008.  Accordingly, management believes that thefinancial statements included in this report fairly present in all materialrespects, our financial condition, results of operations and cash flows.

 

It should be noted thatany system of controls, however well designed and operated, can provide onlyreasonable and not absolute assurance that the objectives of the system will bemet. In addition, the design of any control system is based in part uponcertain assumptions about the likelihood of future events. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, have been detected or that judgments in decision-making are not based onfaulty input.

 

**Management’s Report on Internal Control Over FinancialReporting**

 

Ourmanagement acknowledges its responsibility for establishing and maintainingadequate internal control over financial reporting that includes effectiveaccounting policies and procedures. Our continuing progress in establishingadequate internal control over financial reporting is described below.

 

**Material Weakness in Internal Control OverFinancial Reporting Previously Reported**

 

The specific materialweakness identified by management as of June 30, 2008 and described in the2008 10-K is described as follows:

 

***Ineffective controls related to the operating effectivenessof revenue recognition.***

 

As of June 30, 2008,we had a material weakness related to the operating effectiveness of revenuerecognition controls as the newly implemented controls had not been operatingfor a sufficient period of time to be considered effective. Specific controlsthat we believe were not effective as of June 30, 2008, include: (i) theeffectiveness of our policies and guidelines pertaining to the identificationand communication by our sales organization of all terms of customerarrangements relevant to revenue recognition, (ii) the effectiveness ofcontrols over reviews of changes to standardized contract language and timelycommunication of non-standard contract terms as it relates to revenuerecognition, (iii) the effectiveness of controls over the accumulation ofvendor specific objective evidence of fair value for undelivered software elementsand identification of elements for which such analysis is required, and (iv) theeffectiveness of our review of customer parts orders associated with systemssales prior to shipment for terms or conditions that may impact revenuerecognition.

 

***Changes in Internal Control Over FinancialReporting during the Fiscal Quarter Ended September 30, 2008***

 

Whilemanagement has continued to implement certain remediation activities describedin the 2008 10-K, there were no changes in our internal control over financialreporting that occurred in the first quarter of fiscal 2009 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.  The material weakness previously disclosed inthe 2008 Form 10-K continues to exist as of September 30, 2008.

 

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**PART II**

 

# **ITEM1.**          LEGAL PROCEEDINGS

# ** **

For a description of our legalproceedings, see Note 8 to the unaudited condensed consolidated financialstatements, Commitments and Contingencies, which is incorporated by referencein response to this 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 2008 10-K, to which, except for the deletion of the riskfactor entitled “The ongoing SEC investigation could adversely affect us” inconnection with the Company’s settlement with the SEC in September 2008,there were no material changes during the period covered by this QuarterlyReport on Form 10-Q.

 

**ITEM 2.          UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

Our Board of Directorsapproved a share repurchase plan under which, subject to price and marketconditions, purchases of shares can be made from time to time in the openmarket or in privately negotiated transactions using available cash. On August 12,2008, the Company’s Board of Directors reset the existing share repurchase planto purchase up to $100 million of common stock.  Our quarterly share repurchases under thisplan, excluding treasury shares acquired in non-cash transactions related toforfeited stock awards and shares exchanged for options exercised, were asfollows:

 
| **Period**                                           | ** ** | **Total  Number  of Shares  (or Units)  Purchased** | ** ** | **Average Price  Paid Per  Share  (Per Unit)** | ** ** | **Total Number of  Shares  (or Units) Purchased  as Part of Publicly  Announced  Plans or Programs** | ** ** | **Maximum Number  (or Approximate Dollar  Value)  of Shares (or Units)  That May Be Purchased  Under the Plans or Programs** | ** **  |
|------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
| July 1 - July 31, 2008           |       | —                                                        |       | —                                                        |       | —                                                                                                                                            |       | $                                                                                                                                                                                             | 57,902,256  | (1) |
| August 1 – August 31, 2008  |       | —                                                        |       | —                                                        |       | —                                                                                                                                            |       | $                                                                                                                                                                                             | 100,000,000 |   |
| September 1 - September 30, 2008 |       | 326,098                                                       |       | $                                                             | 33.68      |                                                                                                                                              | 326,098    |                                                                                                                                                                                          | $           | 89,017,373 |   |
| Total                                                |       | 326,098                                                       |       | $                                                             | 33.68      |                                                                                                                                              | 326,098    |                                                                                                                                                                                          |        |   |

 

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(1)          Maximum number of shares before the Company’sBoard of Directors reset the existing share repurchase plan limit to $100million on August 12, 2008.

 

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**ITEM 6.                  EXHIBITS**

 
| **Exhibits** | ** ** | **Description**                                                                                                                                                 |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                            |
| 31.1         |       | Certification  of Chief Executive Officer, pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, as amended.                            |
|         |       |                                                                                                                                                            |
| 31.2         |       | Certification  of Chief Financial Officer, pursuant to Rule 13a-14(a) of the  Securities Exchange Act of 1934, as amended.                            |
|         |       |                                                                                                                                                            |
| 32.1         |       | Certification  of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|         |       |                                                                                                                                                            |
| 32.2         |       | Certification  of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

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

 
| BALLY TECHNOLOGIES, INC. | Date: November 7, 2008                                     |
|-------------------------------|-----------------------------------------------------------------|
|                          |                                                            |   |
|                          |                                                            |   |
| By                            | /s/Richard Haddrill                                             |   |
|                          | Richard Haddrill                                                |   |
|                          | President and Chief Executive Officer                           |   |
|                          | (Principal Executive Officer)                                   |   |
|                          |                                                            |   |
|                          |                                                            |   |
| By                            | /s/Robert C. Caller                                             |   |
|                          | Robert C. Caller                                                |   |
|                          | Executive Vice President, Chief Financial Officer and Treasurer |   |
|                          | (Principal Financial Officer)                                   |   |

 

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