**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

ý    **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

** **

**For the quarterly period ended March 31, 2005**

 

**OR**

 

o    **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

** **

**For the transition period from              to              **

 

**Commission File Number 0-4281**

** **

**ALLIANCEGAMING CORPORATION**

(Exact name of registrant as specified in itscharter)

 
| **NEVADA**                               | ** ** | **88-0104066**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or organization)           |       | Identification No.) |
|                                     |       |                |
| **6601 S. Bermuda Road**                 |       |                |
| **Las Vegas, Nevada**                    | ** ** | **89119**           |
| (Address of principal executive offices) |       | (Zip Code)          |

 

**Registrant’s telephone number: (702) 270-7600**

#### **Registrant’sinternet:  www.alliancegaming.com**

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12B-2 of the Exchange Act). Yes  ý   No o

 

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

ý  Yes   o  No

 

The number of shares of Common Stock, $0.10 par value, outstanding asof May 6, 2005, according to the records of the registrant’s registrar andtransfer agent was 51,098,955.

 

 

----

 

**I N D E X**

 
| **  PART I.    FINANCIAL  INFORMATION** | ** **                                                                                                        |
|-----------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|
|                                                                  |                                                                                                              |   |
| Item 1.                                                               | Unaudited  Condensed Consolidated Financial Statements                                                            |   |
|                                                                  |                                                                                                              |   |
|                                                                  | Unaudited Condensed Consolidated Balance Sheets as  of March 31, 2005 and June 30, 2004                           |   |
|                                                                  |                                                                                                              |   |
|                                                                  | Unaudited Condensed Consolidated Statements of  Operations for the Three Months Ended March 31, 2005 and 2004     |   |
|                                                                  |                                                                                                              |   |
|                                                                  | Unaudited Condensed Consolidated Statements of  Operations for the Nine Months Ended March 31, 2005 and 2004      |   |
|                                                                  |                                                                                                              |   |
|                                                                  | Unaudited Condensed Consolidated Statement of  Stockholders’ Equity for the Nine Months Ended March 31, 2005 |   |
|                                                                  |                                                                                                              |   |
|                                                                  | Unaudited Condensed Consolidated Statements of Cash  Flows for the Nine Months Ended March 31, 2005 and 2004      |   |
|                                                                  |                                                                                                              |   |
|                                                                  | 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 6.                                                               | Exhibits                                                                                                          |   |
|                                                                  |                                                                                                              |   |
| **SIGNATURES**                                                        |                                                                                                              |

 

2

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**PART I**

**ALLIANCE GAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITED****CONDENSED CONSOLIDATEDBALANCE SHEETS**

 (In 000s)

 

 
| ** **                                                                                                            | ** ** | **As of**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                            | ** ** | **March 31****,** | ** ** | **June****30,** | ** ** |
| ** **                                                                                                            | ** ** | **2005**          | ** ** | **2004** | ** ** |
| ASSETS                                                                                                                | ** ** | ** **        | ** ** | ** ** | ** ** |
|                                                                                                                  | ** ** | ** **        | ** ** | ** ** | ** ** |
| Current assets:                                                                                                  |       |              |       |   |   |
| Cash and cash equivalents                                                                                             |       | $                 | 31,414     |   | $ | 172,726 |   |
| Accounts and notes receivable, net of  allowances for doubtful accounts of $13,381 and $9,722                         |       | 105,781           |       | 129,779 |   |
| Inventories, net                                                                                                      |       | 58,319            |       | 61,135 |   |
| Deferred tax assets, net                                                                                              |       | 19,982            |       | 20,054 |   |
| Other current assets                                                                                                  |       | 16,952            |       | 12,420 |   |
| Total current assets                                                                                                  |       | 232,448           |       | 396,114 |   |
| Long-term investments (restricted)                                                                                    |       | 9,622             |       | 2,528 |   |
| Long-term receivables, net                                                                                            |       | 5,120             |       | 12,518 |   |
| Net investment in leases                                                                                              |       | 10,917            |       | 5,614 |   |
| Leased gaming equipment, net of accumulated  depreciation of $46,138 and $31,105                                      |       | 46,205            |       | 46,634 |   |
| Property, plant and equipment, net of  accumulated depreciation of $31,616 and $23,127                                |       | 74,986            |       | 75,838 |   |
| Goodwill                                                                                                              |       | 175,077           |       | 136,989 |   |
| Intangible assets, net of accumulated  amortization of $17,152 and $12,489                                            |       | 57,185            |       | 63,623 |   |
| Deferred tax assets, net                                                                                              |       | 14,895            |       | — |   |
| Assets of discontinued operations held for  sale                                                                      |       | —            |       | 4,442 |   |
| Other assets, net                                                                                                     |       | 14,935            |       | 6,354 |   |
| Total assets                                                                                                          |       | $                 | 641,390    |   | $ | 750,654 |   |
|                                                                                                                  |       |              |       |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                             |       |              |       |   |   |
|                                                                                                                  |       |              |       |   |   |
| Current liabilities:                                                                                                  |       |              |       |   |   |
| Accounts payable                                                                                                      |       | $                 | 24,856     |   | $ | 37,515 |   |
| Accrued liabilities                                                                                                   |       | 61,301            |       | 51,469 |   |
| Jackpot liabilities                                                                                                   |       | 12,576            |       | 12,075 |   |
| Income taxes payable                                                                                                  |       | 6,353             |       | 7,233 |   |
| Current maturities of long-term debt                                                                                  |       | 4,768             |       | 5,866 |   |
| Liabilities of discontinued operations held  for sale                                                                 |       | —            |       | 4,337 |   |
| Total current liabilities                                                                                             |       | 109,854           |       | 118,495 |   |
| Long-term debt, net of current maturities                                                                             |       | 345,442           |       | 423,089 |   |
| Deferred tax liabilities                                                                                              |       | 799               |       | 849 |   |
| Other liabilities                                                                                                     |       | 7,019             |       | 6,092 |   |
| Minority interest                                                                                                     |       | 521               |       | 1,326 |   |
| Total liabilities                                                                                                     |       | 463,635           |       | 549,851 |   |
| 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; 51,590,000 and 51,426,000 shares issued and outstanding |       | 5,162             |       | 5,145 |   |
| Treasury stock at cost, 526,000 and 525,000  shares                                                                   |       | (665              | )          | (501 | ) |
| Deferred compensation (restricted stock  units)                                                                       |       | (7,271            | )          | (6,500 | ) |
| Additional paid-in capital                                                                                            |       | 197,217           |       | 194,040 |   |
| Accumulated other comprehensive income                                                                                |       | 1,382             |       | 1,524 |   |
| Accumulated (deficit) retained earnings                                                                               |       | (18,082           | )          | 7,083 |   |
| Total stockholders’ equity                                                                                       |       | 177,755           |       | 200,803 |   |
| Total liabilities and stockholders’ equity                                                                       |       | $                 | 641,390    |   | $ | 750,654 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

3

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**ALLIANCE GAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITED****CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(In 000s)

 
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **                                                        | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                         |       |                   |       |                  |       |   |   |   |   |
| Gaming equipment and systems                                      |       | $                      | 111,678    |                  | $          | 101,977 |   | $ | 316,688 |   | $ | 286,764 |   |
| Casino operations                                                 |       | 13,734                 |       | 14,262                |       | 39,339 |   | 39,329 |   |
|                                                              |       | 125,412                |       | 116,239               |       | 356,027 |   | 326,093 | ** ** |
| Cost and expenses:                                                |       |                   |       |                  |       |   |   |   |   |
| Cost of gaming equipment and systems                              |       | 57,453                 |       | 41,378                |       | 161,626 |   | 113,395 |   |
| Cost of casino operations                                         |       | 4,857                  |       | 5,324                 |       | 14,248 |   | 15,211 |   |
| Selling, general and administrative                               |       | 36,510                 |       | 30,198                |       | 121,216 |   | 80,812 |   |
| Research and development costs                                    |       | 10,589                 |       | 9,059                 |       | 32,719 |   | 24,462 |   |
| Restructuring charge                                              |       | 2,219                  |       | —                |       | 3,654 |   | — |   |
| Impairment charge                                                 |       | 3,599                  |       | —                |       | 3,599 |   | — |   |
| Depreciation and amortization                                     |       | 12,373                 |       | 8,128                 |       | 35,234 |   | 20,595 |   |
|                                                              |       | 127,600                |       | 94,087                |       | 372,296 |   | 254,475 | ** ** |
| Operating income (loss)                                           |       | (2,188                 | )          | 22,152                |       | (16,269 | ) | 71,618 |   |
| ** **                                                        | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other income (expense):                                           |       |                   |       |                  |       |   |   |   |   |
| Interest income                                                   |       | 215                    |       | 1,817                 |       | 1,013 |   | 1,943 |   |
| Interest expense                                                  |       | (5,073                 | )          | (4,590                | )          | (12,785 | ) | (14,188 | ) |
| Minority interest                                                 |       | (907                   | )          | (722                  | )          | (2,551 | ) | (1,749 | ) |
| Refinancing/ bank amendment charges                               |       | —                 |       | —                |       | (564 | ) | (12,293 | ) |
| Other, net                                                        |       | 24                     |       | (182                  | )          | 552 |   | (1,081 | ) |
| Income (loss) from continuing operations  before income taxes     |       | (7,929                 | )          | 18,475                |       | (30,604 | ) | 44,250 |   |
| Income tax expense (benefit)                                      |       | (1,480                 | )          | 6,234                 |       | (10,210 | ) | 15,944 |   |
| Income (loss) from continuing operations                          |       | (6,449                 | )          | 12,241                |       | (20,394 | ) | 28,306 |   |
| Income (loss) from discontinued operations                        |       | (395                   | )          | 1,593                 |       | (4,771 | ) | 10,299 |   |
| Net income (loss)                                                 |       | $                      | (6,844     | )                     | $          | 13,834 |   | $ | (25,165 | ) | $ | 38,605 |   |
|                                                              |       |                   |       |                  |       |   |   |   |   |
| Basic earnings (loss) per share:                                  | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing operations                                             |       | $                      | (0.13      | )                     | $          | 0.25 |   | $ | (0.41 | ) | $ | 0.57 |   |
| Discontinued operations                                           |       | (0.01                  | )          | 0.03                  |       | (0.09 | ) | 0.21 |   |
| Total                                                             |       | $                      | (0.14      | )                     | $          | 0.28 |   | $ | (0.50 | ) | $ | 0.78 |   |
|                                                              |       |                   |       |                  |       |   |   |   |   |
| Diluted earnings (loss) per share:                                | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing operations                                             |       | $                      | (0.13      | )                     | $          | 0.24 |   | $ | (0.41 | ) | $ | 0.56 |   |
| Discontinued operations                                           |       | (0.01                  | )          | 0.03                  |       | (0.09 | ) | 0.20 |   |
| Total                                                             |       | $                      | (0.14      | )                     | $          | 0.27 |   | $ | (0.50 | ) | $ | 0.76 |   |
| ** **                                                        | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares outstanding                        |       | 51,057                 |       | 50,221                |       | 50,485 |   | 49,334 |   |
|                                                              |       |                   |       |                  |       |   |   |   |   |
| Weighted average common and common share equivalents  outstanding |       | 51,057                 |       | 51,449                |       | 50,485 |   | 50,522 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

4

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**ALLIANCE GAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITED****CONDENSED CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 (In 000s)

 
| ** **                                     | ** ** | ** **        | ** ** | ** **  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | ** **        | ** ** | **Accumulated**    | ** ** | **Retained**           | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-------------------|------------|-------------|------------|--------------|------------|--------------|------------|------------------|------------|-------------------|------------|--------------------|------------|------------------------|------------|------------|------------|
| ** **                                     | ** ** | ** **        | ** ** | ** **  | ** ** | **Series E** | ** ** | ** **   | ** ** | ** **       | ** ** | **Additional**    | ** ** | **Other**          | ** ** | **Earnings**           | ** ** | **Total**  | ** ** |
| ** **                                     | ** ** | **Common  Stock** | ** ** | **Special** | ** ** | **Treasury** | ** ** | **Deferred** | ** ** | **Paid-in**      | ** ** | **Comprehensive** | ** ** | **(Accumulated**   | ** ** | **Stockholders’** | ** ** |
| ** **                                     | ** ** | **Shares**        | ** ** | **Dollars** | ** ** | **Stock**    | ** ** | **Stock**    | ** ** | **Compensation** | ** ** | **Capital**       | ** ** | **Income  (loss)** | ** ** | **Deficit)**           | ** ** | **Equity** | ** ** |
|                                           |       |              |       |        |       |         |       |         |       |             |       |              |       |               |       |                   |       |       |       |
| Balances at June  30, 2004                     |       | 51,426            |       | $           | 5,145      |         | $          | 12           |       | $                | (501       | )                 | $          | (6,500             | )          | $                      | 194,040    |       | $          | 1,524 |   | $ | 7,083 |   | $ | 200,803 |   |
|                                           |       |              |       |        |       |         |       |         |       |             |       |              |       |               |       |                   |       |       |       |
| Net loss                                       |       | —            |       | —      |       | —       |       | —       |       | —           |       | —            |       | —             |       | (25,165                | )          | (25,165    | )          |
| Foreign currency  translation adjustment       |       | —            |       | —      |       | —       |       | —       |       | —           |       | —            |       | (142               | )          | —                 |       | (142       | )          |
| Total  comprehensive income                    |       |              |       |        |       |         |       |         |       |             |       |              |       |               |       |                   |       | (25,307    | )          |
| Restricted stock  units issued                 |       | —            |       | —      |       | —       |       | —       |       | (2,127           | )          | 2,127             |       | —             |       | —                 |       | —     |       |
| Restricted stock  units amortization           |       | —            |       | —      |       | —       |       | —       |       | 1,356            |       | —            |       | —             |       | —                 |       | 1,356      |       |
| Repurchase of  common stock for treasury       |       | —            |       | —      |       | —       |       | (164         | )          | —           |       | —            |       | —             |       | —                 |       | (164       | )          |
| Shares issued  upon exercise of stock options  |       | 164               |       | 17          |       | —       |       | —       |       | —           |       | 814               |       | —             |       | —                 |       | 831        |       |
| Tax benefit of  employee stock option exercise |       | —            |       | —      |       | —       |       | —       |       | —           |       | 236               |       | —             |       | —                 |       | 236        |       |
| Balances at March  31, 2005                    |       | 51,590            |       | $           | 5,162      |         | $          | 12           |       | $                | (665       | )                 | $          | (7,271             | )          | $                      | 197,217    |       | $          | 1,382 |   | $ | (18,082 | ) | $ | 177,755 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

5

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**ALLIANCE GAMING CORPORATION AND SUBSIDIARIES**

**UNAUDITED****CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(In 000s)

 
| ** **                                                                                                         | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                         | ** ** | **March 31,**         | ** ** |
| ** **                                                                                                         | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Cash flows from operating activities of  continuing operations:                                                    |       |                  |       |   |   |
| Net income (loss)                                                                                                  |       | $                     | (25,165    | ) | $ | 38,605 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities of continuing operations: |       |                  |       |   |   |
| (Income) loss from discontinued operations                                                                         |       | 4,771                 |       | (10,299 | ) |
| Depreciation and amortization                                                                                      |       | 35,234                |       | 20,595 |   |
| Stock-based compensation                                                                                           |       | 1,356                 |       | — |   |
| Refinancing / bank amendment charges                                                                               |       | 564                   |       | 12,293 |   |
| Deferred income taxes                                                                                              |       | (3,996                | )          | (6,257 | ) |
| Provision for losses on receivables                                                                                |       | 5,700                 |       | 755 |   |
| Inventory and other discontinued asset  write-downs                                                                |       | 25,565                |       | — |   |
| Other                                                                                                              |       | (1,207                | )          | (1,354 | ) |
|                                                                                                               |       |                  |       |   |   |
| Change in operating assets and liabilities,  net of effects of business acquired:                                  |       |                  |       |   |   |
| Purchase of appeal bond                                                                                            |       | (7,600                | )          | — |   |
| Accounts and notes receivable                                                                                      |       | 18,458                |       | (8,725 | ) |
| Inventories                                                                                                        |       | (8,347                | )          | (3,080 | ) |
| Other current assets                                                                                               |       | (4,955                | )          | (627 | ) |
| Accounts payable                                                                                                   |       | (12,814               | )          | 9,893 |   |
| Accrued liabilities and jackpot liabilities                                                                        |       | (12,449               | )          | 16,255 |   |
| Net cash provided by operating activities  of continuing operations                                                |       | 15,115                |       | 68,054 |   |
|                                                                                                               |       |                  |       |   |   |
| Cash flows from investing activities of  continuing operations:                                                    |       |                  |       |   |   |
| Advances of notes receivable due from  Sierra Design Group                                                         |       | —                |       | (72,820 | ) |
| Additions to property, plant and equipment                                                                         |       | (9,124                | )          | (9,556 | ) |
| Additions to leased gaming equipment                                                                               |       | (30,076               | )          | (26,372 | ) |
| Additions to other long-term assets                                                                                |       | (2,177                | )          | (12,825 | ) |
| Acquisitions, net of cash acquired                                                                                 |       | (12,000               | )          | (50,675 | ) |
| Proceeds from sale of net assets of  discontinued operations                                                       |       | 1,911                 |       | 16,500 |   |
| Net cash used in investing activities of  continuing operations                                                    |       | (51,466               | )          | (155,748 | ) |
|                                                                                                               |       |                  |       |   |   |
| Cash flows from financing activities of  continuing operations:                                                    |       |                  |       |   |   |
| Capitalized debt issuance costs                                                                                    |       | (1,053                | )          | (6,954 | ) |
| Premium paid on early redemption of debt                                                                           |       | —                |       | (5,399 | ) |
| Proceeds from the issuance of long-term  debt                                                                      |       | —                |       | 350,000 |   |
| Net change in revolving credit facility                                                                            |       | —                |       | 70,000 |   |
| Payoff of debt due to sale of net assets of  discontinued operations                                               |       | (101,618              | )          | (337,625 | ) |
| Reduction of long-term debt                                                                                        |       | (5,283                | )          | (2,986 | ) |
| Re-purchase of treasury shares                                                                                     |       | (164                  | )          | — |   |
| Proceeds from exercise of stock options and  warrants                                                              |       | 1,068                 |       | 6,623 |   |
| Net cash (used in) provided by financing  activities of continuing operations                                      |       | (107,050              | )          | 73,659 |   |
|                                                                                                               |       |                  |       |   |   |
| Effect of exchange rate changes on cash                                                                            |       | 385                   |       | 100 |   |
|                                                                                                               |       |                  |       |   |   |
| Discontinued operations:                                                                                           |       |                  |       |   |   |
| Cash provided by discontinued operations                                                                           |       | 1,704                 |       | 7,557 |   |
|                                                                                                               |       |                  |       |   |   |
| Cash and cash equivalents:                                                                                         |       |                  |       |   |   |
| Decrease for the period                                                                                            |       | (141,312              | )          | (6,378 | ) |
| Balance, beginning of period                                                                                       |       | 172,726               |       | 38,884 |   |
| Balance, end of period                                                                                             |       | $                     | 31,414     |   | $ | 32,506 |   |

 

See accompanying notes to unauditedcondensed consolidated financial statements.

 

6

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**ALLIANCEGAMING CORPORATION AND SUBSIDIARIES**

**NOTES TO****UNAUDITED****CONDENSED****CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.   BASIS OF PRESENTATION**

 

*Principles of presentation and consolidation*

 

The accompanying unaudited interim condensedconsolidated financial statements reflect all adjustments, consisting of normalrecurring adjustments, which management believes are necessary to presentfairly the financial position, results of operations and cash flows of AllianceGaming Corporation and its subsidiaries (“Alliance” or the “Company”) for therespective periods presented.  Theresults of operations for an interim period are not necessarily indicative ofthe results that may be expected for any other interim period or the year as awhole. The accompanying unaudited interim condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes in the Company’s annual report onForm 10-K for the year ended June 30, 2004.

 

The accompanying consolidated financial statementsinclude the accounts of Alliance Gaming Corporation and its wholly owned andpartially owned, controlled subsidiaries. The Company consolidates RainbowCasino Vicksburg Partnership (“RCVP”) and recordsminority interest expense to reflect the portion of the earnings of RCVP attributable to the minority shareholders. The Companyis the general partner of RCVP, the partnership thatoperates the Rainbow Casino. Pursuant to transactions consummated in March1995, the Rainbow Corporation, which was the former general partner of RCVP, became a limited partner entitled to receive 10%(which amount increases to 20% of such amount when annual revenues exceed $35.0million but only on such incremental amount) of the net available cash flowsafter debt service and other items, as defined, payable quarterly throughDecember 31, 2010. The Company holds the remaining economic interest in thepartnership.

 

All significant intercompany accounts andtransactions have been eliminated in consolidation. Certain reclassificationshave been made to prior year financial statements to conform to the currentyear presentation, and to present Rail City Casino sold in May 2004, asdiscontinued operations for all periods presented.

 

*Recently Issued Accounting Pronouncements*

 

In December 2004, the FASBissued Statement 123(R) which revised FASB No.123.  Statement 123(R) requires allentities to recognize compensation expense in an amount equal to the fair valueof share-based payments granted to employees for fiscal years beginning afterJune 15, 2005. The first reporting period for the Company will be the quarterended September 30, 2005, and the Company is currently evaluating the impact ofthe adoption, however the pro forma impact is reflected in footnote 2.

 

In November 2004, the FASBissued Statement 151 revising ARB 43, Chapter 4,which clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, wasted material (spoilage). This Statement iseffective for inventory costs incurred during fiscal years beginning after June15, 2005.  The Company does not believethis accounting pronouncement will have a material impact on its financialcondition or results of operations.

 

**2.  STOCK-BASED COMPENSATION**

 

The Company accounts for its stock-based employee compensationawards in accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”). Under APB 25, because the exerciseprice of the Company’s employee stock options is not less than the market priceon the date of grant, no compensation expense is recognized.

 

As provided under Financial Accounting Standards Board No. 123 “Accountingfor Stock-Based Compensation” (“FASB No. 123”),companies may continue to account for employee stock-based compensation underAPB 25, but are required to disclose historical pro-forma net income andearnings per share that would have resulted from the use of the fair valuemethod described in FASB No. 123.

 

In December 2002, the FASB issued FASB No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure”. This Statement amended FASB No. 123 to provide alternative methods of transitionfor a voluntary change to the fair value based method of accounting forstock-based employee compensation. In addition, this

 

7

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Statement amended the disclosure requirements of FASBNo. 123 and APB Opinion No. 28 “Interim Financial Reporting” to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. Under the fair value method, compensationcosts are measured using an option pricing model and are amortized over theestimated life of the option, with option forfeitures accounted for at the timeof the forfeiture, and all amounts are reflected net of tax.

 

The historical and pro forma net income (assuming an after-tax chargefor stock-based compensation) and related per share data are as follows (in000s, except per share data):

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **                                              | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                       |       |                   |       |                  |       |   |   |   |   |
| As reported                                             |       | $                      | (6,844     | )                     | $          | 13,834 |   | $ | (25,165 | ) | $ | 38,605 |   |
| Stock-based compensation under FASB No. 123, net of tax |       | (2,081                 | )          | (1,490                | )          | (5,344 | ) | (3,390 | ) |
| Pro forma net income (loss)                             |       | $                      | (8,925     | )                     | $          | 12,344 |   | $ | (30,509 | ) | $ | 35,215 |   |
|                                                    |       |                   |       |                  |       |   |   |   |   |
| Earnings (loss) per share:                              |       |                   |       |                  |       |   |   |   |   |
| Basic – as reported                                |       | $                      | (0.14      | )                     | $          | 0.28 |   | $ | (0.50 | ) | $ | 0.78 |   |
| Basic – pro forma                                  |       | $                      | (0.18      | )                     | $          | 0.25 |   | $ | (0.60 | ) | $ | 0.71 |   |
| Diluted – as reported                              |       | $                      | (0.14      | )                     | $          | 0.27 |   | $ | (0.50 | ) | $ | 0.76 |   |
| Diluted – pro forma                                |       | $                      | (0.18      | )                     | $          | 0.24 |   | $ | (0.60 | ) | $ | 0.70 |   |

 

On the date of grant using the Black-Scholesoption-pricing model, the following assumptions were used to estimate the grantdate fair value of the options in the periods indicated:

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **                                | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                      |       |                   |       |                  |       |   |   |   |   |
| Risk-fee interest rate (weighted average) |       | 3.0                    | %          | 3.5                   | %          | 2.8 | % | 3.5 | % |
| Expected volatility                       |       | 0.35                   |       | 0.26                  |       | 0.35 |   | 0.26 |   |
| Expected dividend yield                   |       | 0                      | %          | 0                     | %          | 0 | % | 0 | % |
| Expected life                             |       | 5 years                |       | 3-10 years            |       | 5-10 years |   | 3-10 years |   |

 

Based on the assumptions shown in the tableabove, the resulting fair values applied to the options granted were $4.00 and$9.18 per share for the quarter ended March 31, 2005 and 2004, respectively,and were $4.39 and $9.26 for the nine months ended March 31, 2005 and 2004,respectively.

 

During the three months ended March 31, 2005, we issued 20,000restricted stock units with an aggregate fair value of $226,000. The totalvalue of each unit, based on the fair market value of the stock on the date ofgrant, is initially reported as deferred compensation under shareholders’equity. This deferred compensation is then amortized to compensation expenseover the related vesting period. Pre-tax income, as reported, reflects $0.8million and $1.4 million of amortization of restricted stock compensation forthe three and nine month periods ended March 31, 2005, respectively.

 

**3.  DISCONTINUED OPERATIONS**

 

The Company has completed several divestitures inaccordance with its plan to sell “non-core” businesses, which was a strategyannounced in July 2003. In July 2003, the Company completed the sale of itsBally Wulff subsidiary. On June 30, 2004, the Companycompleted the sale of United Coin Machine Co. (“UCMC”).On October 15, 2004, the Companycompleted the sale of its interest in Video Services Inc. (“VSI”)to Churchill Downs Incorporated and received proceeds of approximately $2.0million and realized a gain of $0.8 million, net of tax. During the quarterended December 31, 2004, the Company accrued $2.0 million for variouscontingencies related to the sale of its discontinued operations.

 

The results of these discontinued operationsare presented net of applicable income taxes in discontinued operations in theaccompanying consolidated statements of operations.

 

8

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Operating results for the discontinuedoperations for the nine month period ended March 31, 2005 consist primarily of VSI, as well as translation gains and losses on acertificate of deposit denominated in Euros which collateralizes certain taxclaims. The results for the three and nine month periods ended March 31, 2004 includeUCMC, VSI, and Rail City.

 

 Summary operating results are as follows (in000s):

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **                                 | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenues                               |       | $                      | —     |                  | $          | 68,797 |   | $ | 4,514 |   | $ | 192,330 |   |
| Operating income                           |       | $                      | —     |                  | $          | 8,716 |   | $ | 358 |   | $ | 23,462 |   |
| Income tax expense (benefit)               |       | $                      | 31         |                  | $          | 7,023 |   | $ | (2,485 | ) | $ | 11,747 |   |
| Income (loss) from discontinued operations |       | $                      | (395       | )                     | $          | 1,593 |   | $ | (4,771 | ) | $ | 10,299 |   |

 

**4.   OTHER CURRENT ASSETS**

 

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

 
| ** **                              | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|---------------|------------|--------------|------------|
| ** **                              | ** ** | **2005**      | ** ** | **2004**     | ** ** |
| Prepaid taxes                           |       | $             | 168        |         | $          | 814 |   |
| Prepaid royalty                         |       | 2,947         |       | 2,623        |       |
| Refundable deposits                     |       | 1,845         |       | 3,229        |       |
| Games on trial                          |       | 2,982         |       | 2,608        |       |
| Deferred cost of revenue                |       | 4,640         |       | 208          |       |
| Prepaid licensing and intellectual fees |       | 86            |       | 1,090        |       |
| Prepaid insurance                       |       | 1,370         |       | 592          |       |
| Prepaid other expense                   |       | 2,914         |       | 1,256        |       |
| Total current assets                    |       | $             | 16,952     |         | $          | 12,420 |   |

 

The decrease in refundable deposits of $1.4 million is a result ofproduct purchases for which the deposit has been applied to the accountspayable.  Deferred costs increased $4.4million, of which $2.2 million is due to games sold to a European market, whichwill not be recognized as revenue until the games are accepted by the customersand $2.0 million is due to Systems installations in various casinos that arenot fully installed.

 

During the quarter ended March 31, 2005, the Company performed a reviewof its intellectual property rights for various video games used on certainlegacy platforms. This review was triggered by the declining sales of theselegacy games during fiscal 2005. The Company evaluated the carrying value ofcertain intellectual property assets and determined that several were no longerrecoverable and were therefore deemed to be impaired.The impairment charge totaled $1.3 million, of which $0.4 million related toassets included in long-term intangible assets on the accompanying balancesheet.

 

**5.   INVENTORIES**

 

Inventories are stated at the lower of cost, determined on a first-in,first-out basis, or market.  Costelements included for work-in-process and finished goods includeraw materials, freight, direct labor and manufacturing overhead.  Inventories consist of the following (in000s):

 
| ** **      | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-----------------|------------|---------------|------------|--------------|------------|
| ** **      | ** ** | **2005**      | ** ** | **2004**     | ** ** |
| Raw materials   |       | $             | 25,972     |         | $          | 26,050 |   |
| Work-in-process |       | 3,084         |       | 3,324        |       |
| Finished goods  |       | 29,263        |       | 31,761       |       |
| Total           |       | $             | 58,319     |         | $          | 61,135 |   |

 

The Company performs detailed inventory valuationprocedures at least quarterly. This process includes examining the carryingvalues of new and used gaming devices, parts and ancillary equipment incomparison to the current fair market values for such equipment (less costs tosell or dispose).  Some of the factorsinvolved in this analysis include the overall levels of inventories, thecurrent and projected sales levels for such products, the projected markets forsuch products both domestically and internationally, the costs required to sell the products including

 

9

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refurbishment costs andimportation costs for international shipments, and the overall projected demandfor products once the next generation of products are scheduled for release.

 

The Company has faced decliningdemand for its video products during fiscal year 2005, and therefore hasperformed ongoing assessments of the net realizable value of this portion ofits inventories. In October 2004, the Company made the strategic decision tomove to its new Alpha video platform, which has resulted in higher than normal obsolescencein the legacy products.

 

The decision to move to the newvideo platform, the targeting of used equipment for non-domestic markets, andthe previously disclosed consolidation of certain warehouses, all led toaccelerated disposals of legacy products. This process has required continualupdating of estimates for the net realizable value of inventories due to thesubjectivity involved in projecting sales volumes, used game sales values,refurbishment costs, and customer demand in non-domestic jurisdictions. As aresult of its ongoing analysis of inventory valuations, the Company has taken aseries of inventory write downs totaling $7.9 million and $22.0 million, duringthe three and nine month periods ended March 31, 2005, respectively. While theCompany believes that its visibility on used game sales has improved, there canbe no assurances that further write downs will not be necessary in subsequentperiods.

 

###### **6.  PROPERTY, PLANT AND EQUIPMENT AND LEASEDGAMING EQUIPMENT**

 

Property, plant and equipment is stated at cost anddepreciated over the estimated useful lives or lease term, if less, using thestraight line method as follows: buildings and improvements, 28-40 years;gaming equipment, 4-7 years; furniture, fixtures and equipment, 3-7 years; andleasehold improvements, 5-10 years. Leased gaming equipment is stated at cost and depreciated over itsestimated useful life ranging from 2-4 years.

 

During the quarter ended March 31, 2005, the Companyevaluated the useful lives and salvage values for its leased gaming equipment.Based on recent historical data indicating a shortening of the average lengthsuch games were deployed, the Company decided to reduce the depreciable lifefor certain video products to 2 years, and increase the salvage value from $1,000to $2,000 based on current used game sales estimates. The change in the usefullife resulted in an impairment charge of $0.8 million to write off the undepreciated portion of the game values (down to thesalvage value) for games at the end of their 2-year life, and will increasedeprecation expense by approximately $0.5 million per quarter.

 

Significant replacements and improvements are capitalized; othermaintenance and repairs are expensed. The cost and accumulated depreciation of assets retired or otherwisedisposed of are eliminated from the accounts and any resulting gain or loss iscredited or charged to income as appropriate.

 

Property, plant and equipment consist of the following (in000s):

 
| ** **                               | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------|------------|---------------|------------|--------------|------------|
| ** **                               | ** ** | **2005**      | ** ** | **2004**     | ** ** |
| Land and land improvements               |       | $             | 12,827     |         | $          | 19,086 |   |
| Buildings and leasehold improvements     |       | 39,626        |       | 29,937       |       |
| Casino and central site equipment        |       | 30,424        |       | 29,121       |       |
| Furniture, fixtures and equipment        |       | 23,725        |       | 20,821       |       |
| Less accumulated depreciation            |       | (31,616       | )          | (23,127      | )          |
| Total property, plant and equipment, net |       | $             | 74,986     |         | $          | 75,838 |   |
|                                     |       |          |       |         |       |
| Leased gaming equipment                  |       | $             | 92,343     |         | $          | 77,739 |   |
| Less accumulated depreciation            |       | (46,138       | )          | (31,105      | )          |
| Total leased gaming equipment, net       |       | $             | 46,205     |         | $          | 46,634 |   |

 

10

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**7. INTANGIBLE ASSETS AND GOODWILL**

 

The Company evaluates the carrying value of goodwill forimpairment annually during the fourth quarter or whenever events or changes incircumstances indicate that the carrying value of goodwill may not berecoverable.  Indicators that couldtrigger an impairment review include changes in legal, regulatory, or economicfactors, market conditions or operational performance. There were no impairmentcharges to goodwill in the nine months ended March 31, 2005 or during fiscal2004.

 

*Intangibles*

 

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

 
| ** **                            | ** ** | ** **      | ** ** | **March 31, 2005** | ** ** | **June 30, 2004** | ** ** |
|---------------------------------------|------------|-----------------|------------|--------------------|------------|-------------------|------------|
| ** **                            | ** ** | **Wt. Avg.**    | ** ** | **Gross**          | ** ** | ** **        | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                            | ** ** | **Useful Life** | ** ** | **Carrying**       | ** ** | **Accumulated**   | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                            | ** ** | **(Years)**     | ** ** | **Amount**         | ** ** | **Amortization**  | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Computer software                     |       | 3               |       | $                  | 9,006      |              | $          | (2,909 | ) | $ | 6,097 |   | $ | 8,963 |   | $ | (1,498 | ) | $ | 7,465 |   |
| Computer software from acquisitions   |       | 9               |       | 11,700             |       | (4,355            | )          | 7,345 |   | 11,700 |   | (3,380 | ) | 8,320 |   |
| License rights                        |       | 3-5             |       | 1,262              |       | (524              | )          | 738 |   | 2,745 |   | (1,979 | ) | 766 |   |
| Capitalized regulatory approval costs |       | 3               |       | 4,062              |       | (1,358            | )          | 2,704 |   | 4,767 |   | (833 | ) | 3,934 |   |
| CRM software systems                  |       | 5               |       | 3,290              |       | (1,511            | )          | 1,779 |   | 3,039 |   | (1,046 | ) | 1,993 |   |
| PLM software  systems                 |       | 5               |       | 1,843              |       | (256              | )          | 1,587 |   | 1,585 |   | — |   | 1,585 |   |
| Trademarks                            |       | 5               |       | 6,688              |       | (503              | )          | 6,185 |   | 6,688 |   | (288 | ) | 6,400 |   |
| Patents                               |       | 13              |       | 9,470              |       | (789              | )          | 8,681 |   | 9,470 |   | (243 | ) | 9,227 |   |
| Non-compete agreements                |       | 6               |       | 275                |       | (50               | )          | 225 |   | 275 |   | (15 | ) | 260 |   |
| Customer relationships                |       | 5               |       | 740                |       | (160              | )          | 580 |   | 740 |   | (49 | ) | 691 |   |
| Core technology                       |       | 8               |       | 5,445              |       | (737              | )          | 4,708 |   | 5,445 |   | (227 | ) | 5,218 |   |
| Deferred financing costs              |       | 6               |       | 7,400              |       | (1,994            | )          | 5,406 |   | 6,910 |   | (1,017 | ) | 5,893 |   |
| Contracts                             |       | 10              |       | 12,100             |       | (1,318            | )          | 10,782 |   | 12,100 |   | (411 | ) | 11,689 |   |
| Other intangibles                     |       | 7               |       | 1,056              |       | (688              | )          | 368 |   | 1,685 |   | (1,503 | ) | 182 |   |
| Total                                 |       |            |       | $                  | 74,337     |              | $          | (17,152 | ) | $ | 57,185 |   | $ | 76,112 |   | $ | (12,489 | ) | $ | 63,623 |   |

 

Amortization expense totaled $2.5 million and $1.6 million for thethree months ended March 31, 2005 and 2004, respectively.  Amortization expense totaled $7.1 million and$4.2 million for the nine months ended March 31, 2005 and 2004, respectively.  Computer software amortization expensetotaled $1.1 million and $0.9 million for the three months ended March 31, 2005and 2004, respectively.  Computersoftware amortization totaled $2.7 million and $2.3 million for the nine monthsended March 31, 2005 and 2004, respectively.

 

Future amortization of intangible assets is scheduled as follows (in000s):

 
| **Period Ending**     | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| **June 30,**          | ** ** | **Amount** | ** ** |
|  2005 (3 months) |       | $          | 2,611      |   |
|  2006            |       | 10,667     |       |
|  2007            |       | 9,215      |       |
|  2008            |       | 6,890      |       |
|  2009            |       | 5,995      |       |
| Thereafter            |       | 21,807     |       |
| Total                 |       | $          | 57,185     |   |

 

*Goodwill*

 

The changes in the carrying amount of goodwill are as follows (in000s):

 
| Balance as of June 30, 2004               |   | $      | 136,989 |   |
|-------------------------------------------|--------|--------|---------|--------|
| Acquired goodwill                         |   | 40,879 |    |
| Goodwill adjustments                      |   | (3,143 | )       |
| Foreign currency translation  adjustments |   | 352    |    |
| Balance as of March 31, 2005              |   | $      | 175,077 |   |

 

11

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On December 30, 2004, the Company amended the Sierra Design Group (“SDG”) stock purchase agreement originally dated March 3,2004.  The amendment terminates thecontingent consideration payable over the next three years (the SDG  earnout) which could havetotaled $95.0 million (payable in cash and stock) depending on the achievementof certain SDG financial performance targets.  The consideration for the termination of the SDG  earnout consisted of aone-time cash payment of $12.0 million paid to the group of former SDG stakeholders (most of whom are now employed by theCompany) and the delivery of a $28.0 million unsecured promissory note to thatsame group of individuals, payable over five years with interest at LIBOR +2%.  The $40.0 million of totalconsideration paid to terminate the SDG  earnout, and related expenses has been treated asadditional consideration paid for the stock of SDG,and therefore has been recorded as goodwill.

 

The purchase agreement for MindPlay LLC callsfor future contingent consideration (“the MindPlay  earnouts”) to be paid to its former principals, as morefully described in footnote 16. The MindPlay  earnout is payable based on future revenues and grossmargins from the sale of MindPlay products.  No amounts have yet been paid pursuant to theMindPlay  earnout.

 

During the quarter ended March 31, 2005 the Company determined thatcertain valuation allowances against deferred tax assets recorded as part ofthe SDG acquisition were no longer required as thedeferred tax assets were now deemed to be recoverable through the use ofqualified tax planning strategies. The deferred tax valuation allowance of $2.5million was therefore reclassified as a reduction of the goodwill created inthe SDG acquisition. In addition, certain othercarrying values for purchased assets and liabilities were adjusted to goodwilltotaling $0.6 million.

 

**8.   ACCRUED LIABILITIES AND JACKPOT LIABILITIES**

 

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

 
| ** **                              | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|---------------|------------|--------------|------------|
| ** **                              | ** ** | **2005**      | ** ** | **2004**     | ** ** |
| Payroll and related costs               |       | $             | 11,406     |         | $          | 11,905 |   |
| Interest                                |       | 1,601         |       | 1,265        |       |
| Professional and consulting fees        |       | 2,572         |       | 3,102        |       |
| Deferred revenues, sales and use taxes  |       | 12,199        |       | 5,113        |       |
| Regulatory approval cost accruals       |       | 819           |       | 652          |       |
| Royalties, rebates, direct mail coupons |       | 7,281         |       | 7,390        |       |
| Customer deposits                       |       | 6,511         |       | 9,896        |       |
| Acquisition related accruals            |       | 2,257         |       | 3,806        |       |
| Divestiture related accruals            |       | 498           |       | 4,377        |       |
| Litigation accruals                     |       | 9,360         |       | —       |       |
| Severance accruals (See Note 14)        |       | 1,784         |       | —       |       |
| Other                                   |       | 5,013         |       | 3,963        |       |
| Subtotal                                |       | 61,301        |       | 51,469       |       |
| Jackpots accrued not yet awarded        |       | 12,576        |       | 12,075       |       |
| Total accrued liabilities               |       | $             | 73,877     |         | $          | 63,544 |   |

 

The Company recognizes liability for jackpot expense for the cost tofund these jackpots in the future. Generally winners may elect to receive a single lump sum payment or mayopt to receive payments in equal installments over a specified period oftime.  The most recent history patternindicates that approximately 85% of winners will elect the single paymentoption.

 

The Company funds jackpot installment payments through qualifying U.S.government or agency securities.  Thepresent value of the outstanding progressive jackpot liabilities is computedbased upon the payment stream discounted at the applicable discount rate.

 

The increase in litigation accruals of $9.4 million is primarily aresult of the patent litigation discussed in Note 16 and the Commitments andContingencies section of this report.

 

12

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**9.   LONG-TERM INVESTMENTS(RESTRICTED)**

 

Pursuant to various state gaming regulations, certain cash accounts aremaintained to ensure availability of funds to pay wide-area progressive jackpotawards, which totaled approximately $13.3 million at March 31, 2005 and whichare included in cash and cash equivalents in the accompanying balancesheets.  In addition, the Companypurchases U.S. Treasury Strip securities for the benefit of jackpot winners whoelect to receive annual or weekly installment payments. These securities arepresented as restricted investments in the accompanying unauditedcondensed consolidated balance sheets, and totaled $9.6 million and $2.5million as of March 31, 2005 and June 30, 2004, respectively.

 

**10.  LONG-TERM DEBT**

 

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

 
| ** **                              | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|---------------|------------|--------------|------------|
| ** **                              | ** ** | **2005**      | ** ** | **2004**     | ** ** |
| Term loan facility                      |       | $             | 315,757    |         | $          | 350,000 |   |
| Revolving credit facility               |       | —        |       | 70,000       |       |
| SDG  earnout                       |       | 28,000        |       | —       |       |
| Other, generally unsecured              |       | 6,453         |       | 8,955        |       |
|                                    |       | 350,210       |       | 428,955      |       |
| Less current maturities                 |       | 4,768         |       | 5,866        |       |
| Long-term debt, less current maturities |       | $             | 345,442    |         | $          | 423,089 |   |

 

During December 2004, the Company amended its senior loanagreement (the “Loan Agreement”).  Theamendment provides for an increase in the maximum allowable leverage ratio, areduction in the revolver from $125.0 million to $75.0 million, and an increasein the term loan interest rate to LIBOR + 3.00%. The fee incurred for theamendment totaled approximately $1.0 million. The Company is currently incompliance with its covenants consisting of leverage ratio, fixed chargescoverage ratio, and minimum EBITDA (as that term isdefined in the Loan Agreement).  Theleverage ratio is computed as total average debt outstanding during the quarterdivided by the trailing 12 months EBITDA excludingcertain cash and non-cash charges, and is further adjusted to remove EBITDA from discontinued operations at the time thoseoperations are sold. As of March 31, 2005, the computed leverage ratio was 4.1times versus an amended covenant maximum of 4.5 times.  The maximum leverage ratio increase to 4.75times for the trailing 12 month period ended June 30, 2005.

 

The other debt totaling approximately $34.5 million as of March 31,2005 consists primarily of the debt owed to the former principals of SDG, Micro Clever Consulting, and MindPlay,totaling $28.0 million, $1.3 million and $4.0 million, respectively.  The loans are due at various dates between2005 and 2009 and bear rates of interest between LIBOR + 2% (5.7% as of March31, 2005) and 6%, and are generally unsecured. Interest expense for these debts totaled $0.3 million, $0.1 million, and$0.2 million, respectively for the nine month ended March 31, 2005.

 

13

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**11.  EARNINGS PER SHARE**

 

The following computation of basic and diluted earnings (loss) pershare from continuing operations, and income (loss) applicable to common sharesare as follows (in 000s except per share amounts):

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **                                               | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss) from continuing  operations            |       | $                      | (6,449     | )                     | $          | 12,241 |   | $ | (20,394 | ) | $ | 28,306 |   |
| Net income (loss) from discontinued  operations          |       | (395                   | )          | 1,593                 |       | (4,771 | ) | 10,299 |   |
| Net income (loss)                                        |       | $                      | (6,844     | )                     | $          | 13,834 |   | $ | (25,165 | ) | $ | 38,605 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Weighted average common shares outstanding               |       | 51,057                 |       | 50,221                |       | 50,485 |   | 49,334 |   |
| Effect of dilutive securities                            |       | —                 |       | 1,228                 |       | — |   | 1,188 |   |
| Weighted average common and dilutive shares  outstanding |       | 51,057                 |       | 51,449                |       | 50,485 |   | 50,522 |   |
|                                                     |       |                   |       |                  |       |   |   |   |   |
| Earnings (loss) per basic share:                         |       |                   |       |                  |       |   |   |   |   |
| Income (loss) from continued operations                  |       | $                      | (0.13      | )                     | $          | 0.25 |   | $ | (0.41 | ) | $ | 0.57 |   |
| Income (loss) from discontinued operations               |       | (0.01                  | )          | 0.03                  |       | (0.09 | ) | 0.21 |   |
|                                                     |       | $                      | (0.14      | )                     | $          | 0.28 |   | $ | (0.50 | ) | $ | 0.78 |   |
| Earnings (loss) per diluted share:                       |       |                   |       |                  |       |   |   |   |   |
| Income (loss) from continued operations                  |       | $                      | (0.13      | )                     | $          | 0.24 |   | $ | (0.41 | ) | $ | 0.56 |   |
| Income (loss) from discontinued operations               |       | (0.01                  | )          | 0.03                  |       | (0.09 | ) | 0.20 |   |
|                                                     |       | $                      | (0.14      | )                     | $          | 0.27 |   | $ | (0.50 | ) | $ | 0.76 |   |

 

Diluted earnings per share represent the potential dilutionthat could occur if all dilutive securities outstanding were exercised. Certainsecurities do not have a dilutive effect because their exercise price exceedsthe fair market value of the underlying stock. Such securities are excludedfrom the diluted earnings per share calculation and consist of the following(in 000s):

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------|------------|------------------------|------------|-----------------------|------------|
| ** **    | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **    | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Stock options |       | 5,588                  |       | 2                     |       | 5,588 |   | 1,435 |   |
| Warrants      |       | 100                    |       | —                |       | 100 |   | — |   |
|          |       | 5,688                  |       | 2                     |       | 5,688 |   | 1,435 |   |

 

For the three and nine monthperiods ended March 31, 2005, a total of 1.2 million in-the-money options and0.6 million restricted stock units were also excluded from the dilutiveearnings per share calculation as they are antidilutivegiven the reported net loss for these periods.

 

14

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**12.  SEGMENTS AND GEOGRAPHICALINFORMATION**

 

The Company currently operatesin two business segments (exclusive of the business segments included indiscontinued operations): (i) Gaming Equipment andSystems which designs, manufactures and distributes gaming machines andcomputerized monitoring systems for gaming machines, and (ii) Casino Operationswhich currently owns and operates a casino in Vicksburg, Mississippi. Theaccounting policies of these segments are consistent with the Company’spolicies for the Consolidated Financial Statements.

 

The table below presentsinformation as to the Company’s revenues and operating income by segment (in000s):

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **                    | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                     |       |                   |       |                  |       |   |   |   |   |
| Gaming Equipment and Systems  |       | $                      | 111,678    |                  | $          | 101,977 |   | $ | 316,688 |   | $ | 286,764 |   |
| Casino Operations             |       | 13,734                 |       | 14,262                |       | 39,339 |   | 39,329 |   |
| Total revenues                |       | $                      | 125,412    |                  | $          | 116,239 |   | $ | 356,027 |   | $ | 326,093 |   |
|                          |       |                   |       |                  |       |   |   |   |   |
| Inter-segment revenues:       |       |                   |       |                  |       |   |   |   |   |
| Gaming Equipment and Systems  |       | $                      | 84         |                  | $          | 106 |   | $ | 396 |   | $ | 447 |   |
|                          |       |                   |       |                  |       |   |   |   |   |
| Operating income (loss):      |       |                   |       |                  |       |   |   |   |   |
| Gaming Equipment and Systems  |       | $                      | (2,575     | )                     | $          | 20,096 |   | $ | (13,902 | ) | $ | 68,670 |   |
| Casino Operations             |       | 4,812                  |       | 5,157                 |       | 12,690 |   | 12,985 |   |
| Corporate/other               |       | (4,425                 | )          | (3,101                | )          | (15,057 | ) | (10,037 | ) |
| Total operating income (loss) |       | $                      | (2,188     | )                     | $          | 22,152 |   | $ | (16,269 | ) | $ | 71,618 |   |

 

Total assets of the operatingsegments was consistent with amount disclosed within the Company’s AnnualReport on Form 10-K for the fiscal year ended June 30, 2004, with exception ofgoodwill which increased approximately $38.0 million as a result of the SDG earnout buyout.  Themajority of the Company’s goodwill is recorded in the Gaming Equipment andSystems segment.

 

The Company has operations based primarily in the United Stateswith sales and distribution offices in Europe and South America.

 

The table below presents information as tothe Company’s revenues and operating income (loss) by geographic region (in000s):

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **                    | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                     |       |                   |       |                  |       |   |   |   |   |
| United States                 |       | $                      | 116,595    |                  | $          | 109,809 |   | $ | 334,866 |   | $ | 300,149 |   |
| Germany                       |       | 1,595                  |       | 2,901                 |       | 4,253 |   | 14,695 |   |
| Other foreign                 |       | 7,222                  |       | 3,529                 |       | 16,908 |   | 11,249 |   |
| Total revenues                |       | $                      | 125,412    |                  | $          | 116,239 |   | $ | 356,027 |   | $ | 326,093 |   |
|                          |       |                   |       |                  |       |   |   |   |   |
| Operating income (loss):      |       |                   |       |                  |       |   |   |   |   |
| United States                 |       | $                      | (770       | )                     | $          | 22,032 |   | $ | (12,836 | ) | $ | 69,004 |   |
| Germany                       |       | (1,045                 | )          | 695                   |       | (2,370 | ) | 2,645 |   |
| Other foreign                 |       | (373                   | )          | (575                  | )          | (1,063 | ) | (31 | ) |
| Total operating income (loss) |       | $                      | (2,188     | )                     | $          | 22,152 |   | $ | (16,269 | ) | $ | 71,618 |   |

 

15

----

 

**13.  SUPPLEMENTAL CASH FLOW INFORMATION**

 

The following supplemental information is related to the consolidatedstatements of cash flows (in 000s).

 
| ** **                                             | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **March 31,**         | ** ** |
| ** **                                             | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Cash paid for interest                                 |       | $                     | 12,448     |   | $ | 19,779 |   |
| Cash paid for income taxes                             |       | $                     | 3,077      |   | $ | 3,425 |   |
|                                                   |       |                  |       |   |   |
| Non-cash investing and financing  transactions:        |       |                  |       |   |   |
| Reclassify property, plant and equipment to  inventory |       | $                     | 5,728      |   | $ | 3,793 |   |
| Unfavorable translation rate adjustment                |       | $                     | 527        |   | $ | 697 |   |
| Note payable issued in acquisition                     |       | $                     | 28,000     |   | $ | 4,000 |   |

 

**14.  RESTRUCTURING CHARGES**

 

During fiscal year 2005, the Company has undertaken anextensive review of its operations and reduced its workforce during theSeptember 2004 quarter and the March 2005 quarter. As a result of thesereductions in force, the Company incurred charges totaling $2.2 million and$3.7 million for the three and nine month periods ended March 31, 2005,respectively which is primarily related to the Gaming and Systems segment. Thebalance of the accrued liability for unpaid severance costs is as follows:

 
| Beginning balance at June 30, 2004 |   | $      | — |   |
|------------------------------------|--------|--------|--------|--------|
| Additions to the accrual           |   | 3,657  |   |
| Amounts paid                       |   | (1,873 | )      |
| Ending balance at March 31, 2005   |   | $      | 1,784  |   |

 

Therestructuring completed in the March 2005 quarter included the relocation ofthe Company’s European distribution operations. The Company has accrued a tax liability of $1.4 million (included in taxexpense in the accompanying statement of operations) for the estimated taxobligation resulting from this restructuring.

 

**15.  IMPAIRMENT CHARGE FOR DEVELOPMENT LOAN**

 

During fiscal year 2004, theCompany entered into an agreement to provide a development loan to a NativeAmerican tribe to further their pursuit of developing a gaming facility. Theamounts advanced under the terms of the loan totaled $1.5 million, and theCompany is not obligated for any additional advances. During the quarter endedMarch 31, 2005, the tribe received an adverse court ruling which the Companybelieves materially impairs the tribe’s ability to pay the loan and thereforethe Company recorded an impairment charge for the full amount of the loan.

 

**16.  COMMITMENTS AND CONTINGENCIES**

 

On February 19, 2004, the Company completed the acquisition of MindPlay LLC. Additional consideration may become payable in cash over the next 13years upon the MindPlay business unit achievingcertain significant revenue and gross margin targets.  The additional consideration that may becomepayable will be recorded as an additional cost of the acquired entity.

 

In June and July 2004, purported class actions were filed againstAlliance Gaming Corporation and its officers, Robert Miodunski(the Company’s former Chief Executive Officer), Robert Saxton, Mark Lerner, andSteven Des Champs, in the Federal District Court for the District ofNevada.  The nearly identical complaintsallege violations of the Securities Exchange Act of 1934 stemming from therevision of earnings guidance and declines in the stock price.  The plaintiffs’ motions to consolidate thecases and appoint lead plaintiff counsel customary in such cases, were grantedin February 2005. The next step will be for the plaintiffs to file aconsolidated complaint.  The Companybelieves the lawsuits are without merit and intends to vigorously defend theaction.  In addition, in July 2004 twoderivative lawsuits were filed in Nevada state court against the members of theboard of directors and the officers listed above.  The Company is named as a nominal defendantin the derivative lawsuits as the claims are purportedly asserted for thebenefit of the Company. These lawsuits assert claims for breach of fiduciaryduty and waste of corporate assets arising out of the same events as thosegiving rise to the class actions described above.  These two cases have also been consolidated,and a consolidated

 

16

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complainthas been filed.  The defendants’ motionsto dismiss or to stay were heard in January 2005, and the court granted themotions to dismiss in February 2005. The plaintiff’s motion to alter or amendthe judgment is pending.

 

In February 2005, the Securities and Exchange Commission (the “SEC”)requested documents and information regarding matters related to theallegations in the class actions and similar matters.  Management is cooperating fully with the SECin this matter.

 

A lawsuit filed against the Company in August 2004 by Shuffle Master,Inc. in the U.S. District Court, District of Nevada, alleging infringement ofvarious patents is in the discovery phase. A patent infringement lawsuit filed against the Company in December 2004by IGT in the U.S. District Court, District ofNevada, is in the discovery phase.  TheCompany is vigorously defending both lawsuits.

 

In September 2004, a federal district court jury entered a $7.4 millionverdict against the Company in a suit filed by Action Gaming, Inc. and IGT.  The suitalleged that the multi-hand video poker game deployed by the Company’s formersubsidiary, United Coin Machine Co., infringed the plaintiffs’ patents.  The district court ruled on summary judgmentthat the game does not infringe the patents. However, the court left to the jury the question whether the use of “autohold,” a specific, optional feature of the game, causedit to infringe under the “doctrine of equivalents,” a doctrine of patent law.After a two-week trial, the jury determined that the game with the autohold option enabled did infringe under the doctrine ofequivalents and awarded damages accordingly. The feature has been disabled onall affected games in the field, and the decision permits continued deploymentof the game as long as the autohold feature is notincluded.  The Company is pursuingvarious remedies and has posted a cash bond totaling $7.6 million to staypayment of the judgment (and accrued interest) pending post-trial motions andappeal.  The cash bond is included inother non-current assets and the accrued liability is included in accrued liabilitiesin the accompanying balance sheet. The expense for this charge is included indiscontinued operations in the accompanying statement of operations.

 

The Company is also a party to various lawsuits relating to routinematters incidental to its business. Management does not believe that the outcome of such litigation, in theaggregate, will have a material adverse effect on the Company’s financialposition or results of operations.

 

Management believes that cash flows from current operating activitiesand the availability under the revolving credit facility will provide theCompany with sufficient capital resources and liquidity.  At March 31, 2005, the Company had nosignificant material purchase commitments for capital expenditures.

 

**17.  UNAUDITEDCONDENSED CONSOLIDATING FINANCIAL STATEMENTS**

 

The following unaudited condensed consolidating financial statements arepresented to provide certain financial information regarding guaranteeing andnon-guaranteeing subsidiaries in relation to the Company’s Loan Agreement. Thefinancial information presented includes Alliance Gaming Corporation (the “Parent”),its wholly-owned guaranteeing subsidiaries (“Guaranteeing Subsidiaries”), andthe Rainbow Casino Vicksburg Partnership, L.P. (dbaRainbow Casino) and the Company’s non-domestic subsidiaries (together the “Non-GuaranteeingSubsidiaries”). The notes to the unauditedconsolidating financial statements should be read in conjunction with these unaudited condensed consolidating financial statements.

 

17

----

 

**UNAUDITED****CONDENSED CONSOLIDATING BALANCE SHEETS**

March31, 2005

(In000s)

 
| ** **                                     | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **            | ** ** | **Alliance**     | ** ** |
|------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **Reclassifications** | ** ** | **Gaming**       | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **and**               | ** ** | **Corp. and**    | ** ** |
| ** **                                     | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations**      | ** ** | **Subsidiaries** | ** ** |
| ASSETS                                         | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **            | ** ** | ** **       | ** ** |
| Current assets:                                |       |       |       |             |       |             |       |                  |       |             |       |
| Cash and cash equivalents                      |       | $          | 10,374     |             | $          | 12,719           |       | $                     | 8,321      |             | $          | — |   | $ | 31,414 |   |
| Accounts and notes receivable, net             |       | 1,736      |       | 86,998           |       | 17,900           |       | (853                  | )          | 105,781          |       |
| Inventories, net                               |       | —     |       | 50,154           |       | 8,339            |       | (174                  | )          | 58,319           |       |
| Deferred tax assets, net                       |       | 1,461      |       | 18,521           |       | —           |       | —                |       | 19,982           |       |
| Other current assets                           |       | 1,574      |       | 13,870           |       | 1,508            |       | —                |       | 16,952           |       |
| Total current assets                           |       | 15,145     |       | 182,262          |       | 36,068           |       | (1,027                | )          | 232,448          |       |
|                                           |       |       |       |             |       |             |       |                  |       |             |       |
| Long-term investment (restricted)              |       | —     |       | 9,622            |       | —           |       | —                |       | 9,622            |       |
| Long-term receivables, net                     |       | 267,344    |       | 3,782            |       | 22               |       | (266,028              | )          | 5,120            |       |
| Net investment in leases                       |       | —     |       | 10,917           |       | —           |       | —                |       | 10,917           |       |
| Leased gaming equipment, net                   |       | —     |       | 50,390           |       | (4,185           | )          | —                |       | 46,205           |       |
| Property, plant and equipment, net             |       | 68         |       | 31,024           |       | 43,894           |       | —                |       | 74,986           |       |
| Goodwill, net                                  |       | (900       | )          | 157,731          |       | 18,246           |       | —                |       | 175,077          |       |
| Intangible assets, net                         |       | 5,408      |       | 47,322           |       | 4,455            |       | —                |       | 57,185           |       |
| Investments in subsidiaries                    |       | 354,467    |       | 68,040           |       | —           |       | (422,507              | )          | —           |       |
| Deferred tax assets, net                       |       | 19,549     |       | —           |       | —           |       | (4,654                | )          | 14,895           |       |
| Other assets, net                              |       | (112,366   | )          | 149,162          |       | (21,988          | )          | 127                   |       | 14,935           |       |
|                                           |       | $          | 548,715    |             | $          | 710,252          |       | $                     | 76,512     |             | $          | (694,089 | ) | $ | 641,390 |   |
|                                           |       |       |       |             |       |             |       |                  |       |             |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY      |       |       |       |             |       |             |       |                  |       |             |       |
| Current liabilities:                           |       |       |       |             |       |             |       |                  |       |             |       |
| Accounts payable                               |       | $          | 807        |             | $          | 22,665           |       | $                     | 1,384      |             | $          | — |   | $ | 24,856 |   |
| Accrued liabilities                            |       | 14,779     |       | 42,422           |       | 4,837            |       | (737                  | )          | 61,301           |       |
| Jackpot liabilities                            |       | —     |       | 12,446           |       | 130              |       | —                |       | 12,576           |       |
| Income taxes payable                           |       | 4,522      |       | 504              |       | 1,327            |       | —                |       | 6,353            |       |
| Current maturities of long-term debt           |       | 3,158      |       | 1,610            |       | —           |       | —                |       | 4,768            |       |
| Total current liabilities                      |       | 23,266     |       | 79,647           |       | 7,678            |       | (737                  | )          | 109,854          |       |
|                                           |       |       |       |             |       |             |       |                  |       |             |       |
| Long term debt, net                            |       | 344,599    |       | 266,871          |       | —           |       | (266,028              | )          | 345,442          |       |
| Deferred tax liabilities                       |       | —     |       | 4,654            |       | 799              |       | (4,654                | )          | 799              |       |
| Other liabilities                              |       | 2,574      |       | 4,445            |       | —           |       | —                |       | 7,019            |       |
| Minority interest                              |       | 521        |       | —           |       | —           |       | —                |       | 521              |       |
| Total liabilities                              |       | 370,960    |       | 355,617          |       | 8,477            |       | (271,419              | )          | 463,635          |       |
|                                           |       |       |       |             |       |             |       |                  |       |             |       |
| Stockholders’ equity:                     |       |       |       |             |       |             |       |                  |       |             |       |
| Special stock Series E                         |       | 12         |       | —           |       | —           |       | —                |       | 12               |       |
| Common stock                                   |       | 5,162      |       | 109              |       | 1,027            |       | (1,136                | )          | 5,162            |       |
| Treasury stock                                 |       | (665       | )          | —           |       | —           |       | —                |       | (665             | )          |
| Deferred compensation                          |       | (7,271     | )          | —           |       | —           |       | —                |       | (7,271           | )          |
| Additional paid-in capital                     |       | 197,217    |       | 299,667          |       | 31,959           |       | (331,626              | )          | 197,217          |       |
| Accumulated other comprehensive income  (loss) |       | 1,382      |       | 1,385            |       | 2,972            |       | (4,357                | )          | 1,382            |       |
| Retained earnings (accumulated deficit)        |       | (18,082    | )          | 53,474           |       | 32,077           |       | (85,551               | )          | (18,082          | )          |
| Total stockholders’ equity                |       | 177,755    |       | 354,635          |       | 68,035           |       | (422,670              | )          | 177,755          |       |
|                                           |       | $          | 548,715    |             | $          | 710,252          |       | $                     | 76,512     |             | $          | (694,089 | ) | $ | 641,390 |   |

 

See accompanying unaudited note.

 

18

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**UNAUDITED****CONDENSED CONSOLIDATING BALANCE SHEETS**

June 30, 2004

(In 000s)

 
| ** **                                       | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **            | ** ** | **Alliance**     | ** ** |
|--------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **Reclassifications** | ** ** | **Gaming Corp.** | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **and**               | ** ** | **and**          | ** ** |
| ** **                                       | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations**      | ** ** | **Subsidiaries** | ** ** |
| ASSETS                                           |       |       |       |             |       |             |       |                  |       |             |       |
| Current assets:                                  |       |       |       |             |       |             |       |                  |       |             |       |
| Cash and cash equivalents                        |       | $          | 155,347    |             | $          | 7,742            |       | $                     | 9,637      |             | $          | — |   | $ | 172,726 |   |
| Accounts and notes receivable, net               |       | 1,806      |       | 110,693          |       | 17,984           |       | (704                  | )          | 129,779          |       |
| Inventories, net                                 |       | —     |       | 55,125           |       | 6,161            |       | (151                  | )          | 61,135           |       |
| Deferred tax assets, net                         |       | 1,461      |       | 18,593           |       | —           |       | —                |       | 20,054           |       |
| Other current assets                             |       | 744        |       | 10,531           |       | 1,145            |       | —                |       | 12,420           |       |
| Total current assets                             |       | 159,358    |       | 202,684          |       | 34,927           |       | (855                  | )          | 396,114          |       |
|                                             |       |       |       |             |       |             |       |                  |       |             |       |
| Long-term investment (restricted)                |       | —     |       | 2,528            |       | —           |       | —                |       | 2,528            |       |
| Long-term receivables, net                       |       | 254,862    |       | 9,789            |       | 22               |       | (252,155              | )          | 12,518           |       |
| Net investment in leases                         |       | —     |       | 5,614            |       | —           |       | —                |       | 5,614            |       |
| Leased gaming equipment, net                     |       | —     |       | 50,664           |       | (4,030           | )          | —                |       | 46,634           |       |
| Property, plant and equipment, net               |       | 70         |       | 33,299           |       | 42,469           |       | —                |       | 75,838           |       |
| Goodwill, net                                    |       | (900       | )          | 119,715          |       | 18,174           |       | —                |       | 136,989          |       |
| Intangible assets, net                           |       | 5,899      |       | 52,958           |       | 4,766            |       | —                |       | 63,623           |       |
| Investments in subsidiaries                      |       | 345,560    |       | 74,234           |       | —           |       | (419,794              | )          | —           |       |
| Deferred tax assets, net                         |       | 5,342      |       | —           |       | —           |       | (5,342                | )          | —           |       |
| Assets of discontinued operations held for  sale |       | 39         |       | —           |       | 4,403            |       | —                |       | 4,442            |       |
| Other assets, net                                |       | (122,036   | )          | 143,833          |       | (15,443          | )          | —                |       | 6,354            |       |
|                                             |       | $          | 648,194    |             | $          | 695,318          |       | $                     | 85,288     |             | $          | (678,146 | ) | $ | 750,654 |   |
|                                             |       |       |       |             |       |             |       |                  |       |             |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY        |       |       |       |             |       |             |       |                  |       |             |       |
| Current liabilities:                             |       |       |       |             |       |             |       |                  |       |             |       |
| Accounts payable                                 |       | $          | 974        |             | $          | 34,017           |       | $                     | 2,524      |             | $          | — |   | $ | 37,515 |   |
| Accrued liabilities                              |       | 9,744      |       | 37,391           |       | 5,052            |       | (718                  | )          | 51,469           |       |
| Jackpot liabilities                              |       | —     |       | 11,934           |       | 141              |       | —                |       | 12,075           |       |
| Income taxes payable                             |       | 5,538      |       | 1,140            |       | 555              |       | —                |       | 7,233            |       |
| Current maturities of long-term debt             |       | 3,313      |       | 2,553            |       | —           |       | —                |       | 5,866            |       |
| Liabilities of disc operations held for  sale    |       | 3,185      |       | —           |       | 1,152            |       | —                |       | 4,337            |       |
| Total current liabilities                        |       | 22,754     |       | 87,035           |       | 9,424            |       | (718                  | )          | 118,495          |       |
|                                             |       |       |       |             |       |             |       |                  |       |             |       |
| Long term debt, net                              |       | 420,687    |       | 254,391          |       | —           |       | (251,989              | )          | 423,089          |       |
| Deferred tax liabilities                         |       | —     |       | 4,556            |       | 1,635            |       | (5,342                | )          | 849              |       |
| Other liabilities                                |       | 2,624      |       | 3,468            |       | —           |       | —                |       | 6,092            |       |
| Minority interest                                |       | 1,326      |       | —           |       | —           |       | —                |       | 1,326            |       |
| Total liabilities                                |       | 447,391    |       | 349,450          |       | 11,059           |       | (258,049              | )          | 549,851          |       |
|                                             |       |       |       |             |       |             |       |                  |       |             |       |
| Stockholders’ equity:                       |       |       |       |             |       |             |       |                  |       |             |       |
| Special stock Series E                           |       | 12         |       | —           |       | —           |       | —                |       | 12               |       |
| Common stock                                     |       | 5,145      |       | 109              |       | 1,027            |       | (1,136                | )          | 5,145            |       |
| Treasury stock                                   |       | (501       | )          | —           |       | —           |       | —                |       | (501             | )          |
| Deferred compensation                            |       | (6,500     | )          | —           |       | —           |       | —                |       | (6,500           | )          |
| Additional paid-in capital                       |       | 194,040    |       | 260,813          |       | 33,415           |       | (294,228              | )          | 194,040          |       |
| Accumulated other comprehensive income  (loss)   |       | 1,524      |       | 1,527            |       | 2,713            |       | (4,240                | )          | 1,524            |       |
| Retained earnings (accumulated deficit)          |       | 7,083      |       | 83,419           |       | 37,074           |       | (120,493              | )          | 7,083            |       |
| Total stockholders’ equity                  |       | 200,803    |       | 345,868          |       | 74,229           |       | (420,097              | )          | 200,803          |       |
|                                             |       | $          | 648,194    |             | $          | 695,318          |       | $                     | 85,288     |             | $          | (678,146 | ) | $ | 750,654 |   |

 

See accompanying unaudited note.

 

19

----

 

**UNAUDITED****CONDENSED CONSOLIDATING STATEMENTS OFOPERATIONS**

ThreeMonths Ended March 31, 2005

(In000s)

 
| ** **                                                    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **            | ** ** | **Alliance**     | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **Reclassifications** | ** ** | **Gaming**       | ** ** |
| ** **                                                    | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **and**               | ** ** | **Corp. and**    | ** ** |
| ** **                                                    | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations**      | ** ** | **Subsidiaries** | ** ** |
| Revenues:                                                     |       |       |       |             |       |             |       |                  |       |             |       |
| Gaming equipment and systems                                  |       | $          | —     |             | $          | 107,689          |       | $                     | 8,817      |             | $          | (4,828 | ) | $ | 111,678 |   |
| Casino operations                                             |       | —     |       | —           |       | 15,267           |       | (1,533                | )          | 13,734           |       |
|                                                          |       | —     |       | 107,689          |       | 24,084           |       | (6,361                | )          | 125,412          |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Costs and expenses:                                           |       |       |       |             |       |             |       |                  |       |             |       |
| Cost of gaming equipment and systems                          |       | —     |       | 56,604           |       | 5,617            |       | (4,768                | )          | 57,453           |       |
| Cost of casino operations                                     |       | —     |       | —           |       | 4,857            |       | —                |       | 4,857            |       |
| Selling, general and administrative                           |       | 4,046      |       | 26,733           |       | 7,263            |       | (1,532                | )          | 36,510           |       |
| Research and development                                      |       | —     |       | 9,864            |       | 725              |       | —                |       | 10,589           |       |
| Restructuring charge                                          |       | 33         |       | 1,174            |       | 1,012            |       | —                |       | 2,219            |       |
| Impairment charge                                             |       | —     |       | 3,599            |       | —           |       | —                |       | 3,599            |       |
| Depreciation and amortization                                 |       | 345        |       | 10,813           |       | 1,215            |       | —                |       | 12,373           |       |
|                                                          |       | 4,424      |       | 108,787          |       | 20,689           |       | (6,300                | )          | 127,600          |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Operating income (loss)                                       |       | (4,424     | )          | (1,098           | )          | 3,395            |       | (61                   | )          | (2,188           | )          |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Earnings in consolidated subsidiaries                         |       | (7,426     | )          | 107              |       | —           |       | 7,319                 |       | —           |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Other income (expense):                                       |       |       |       |             |       |             |       |                  |       |             |       |
| Interest income                                               |       | 4,814      |       | 80               |       | 9                |       | (4,688                | )          | 215              |       |
| Interest expense                                              |       | (4,964     | )          | (4,776           | )          | (21              | )          | 4,688                 |       | (5,073           | )          |
| Rainbow royalty                                               |       | 1,724      |       | —           |       | (1,724           | )          | —                |       | —           |       |
| Minority interest                                             |       | (521       | )          | (386             | )          | —           |       | —                |       | (907             | )          |
| Other, net                                                    |       | 225        |       | (359             | )          | 158              |       | —                |       | 24               |       |
| Income (loss) from continuing operations  before income taxes |       | (10,572    | )          | (6,432           | )          | 1,817            |       | 7,258                 |       | (7,929           | )          |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Income tax expense (benefit)                                  |       | (4,123     | )          | 934              |       | 1,709            |       | —                |       | (1,480           | )          |
| Income (loss) from continuing operations                      |       | (6,449     | )          | (7,366           | )          | 108              |       | 7,258                 |       | (6,449           | )          |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Income (loss) from discontinued operations                    |       | (395       | )          | —           |       | —           |       | —                |       | (395             | )          |
| Net income (loss)                                             |       | $          | (6,844     | )                | $          | (7,366           | )          | $                     | 108        |             | $          | 7,258 |   | $ | (6,844 | ) |

 

See accompanying unaudited note.

 

20

----

** **

**UNAUDITED CONDENSEDCONSOLIDATING STATEMENTS OF OPERA****TIONS**

Three Months Ended March 31, 2004

(In 000s)

 
| ** **                                                    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **            | ** ** | **Alliance**     | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **Reclassifications** | ** ** | **Gaming**       | ** ** |
| ** **                                                    | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **and**               | ** ** | **Corp. and**    | ** ** |
| ** **                                                    | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations**      | ** ** | **Subsidiaries** | ** ** |
| Revenues:                                                     |       |       |       |             |       |             |       |                  |       |             |       |
| Gaming equipment  and systems                                 |       | $          | —     |             | $          | 97,822           |       | $                     | 6,430      |             | $          | (2,275 | ) | $ | 101,977 |   |
| Casino  operations                                            |       | —     |       | —           |       | 15,876           |       | (1,614                | )          | 14,262           |       |
|                                                          |       | —     |       | 97,822           |       | 22,306           |       | (3,889                | )          | 116,239          |       |
| Costs and  expenses:                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Cost of gaming  equipment and systems                         |       | —     |       | 40,394           |       | 3,447            |       | (2,463                | )          | 41,378           |       |
| Cost of casino  operations                                    |       | —     |       | —           |       | 5,324            |       | —                |       | 5,324            |       |
| Selling, general  and administrative                          |       | 2,778      |       | 21,739           |       | 7,294            |       | (1,613                | )          | 30,198           |       |
| Research and  development                                     |       | —     |       | 8,865            |       | 194              |       | —                |       | 9,059            |       |
| Depreciation and  amortization                                |       | 323        |       | 7,038            |       | 767              |       | —                |       | 8,128            |       |
|                                                          |       | 3,101      |       | 78,036           |       | 17,026           |       | (4,076                | )          | 94,087           |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Operating income  (loss)                                      |       | (3,101     | )          | 19,786           |       | 5,280            |       | 187                   |       | 22,152           |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Earnings in  consolidated subsidiaries                        |       | 17,002     |       | 2,712            |       | —           |       | (19,714               | )          | —           |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Other income  (expense):                                      |       |       |       |             |       |             |       |                  |       |             |       |
| Interest income                                               |       | 5,203      |       | 98               |       | 4                |       | (3,488                | )          | 1,817            |       |
| Interest expense                                              |       | (4,471     | )          | (3,600           | )          | (7               | )          | 3,488                 |       | (4,590           | )          |
| Rainbow royalty                                               |       | 1,777      |       | —           |       | (1,777           | )          | —                |       | —           |       |
| Minority  interest                                            |       | (722       | )          | —           |       | —           |       | —                |       | (722             | )          |
| Other, net                                                    |       | (422       | )          | 329              |       | (183             | )          | 94                    |       | (182             | )          |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Income (loss)  from continuing operations before income taxes |       | 15,266     |       | 19,325           |       | 3,317            |       | (19,433               | )          | 18,475           |       |
| Income tax  expense                                           |       | 3,025      |       | 2,605            |       | 604              |       | —                |       | 6,234            |       |
| Income (loss)  from continuing operations                     |       | 12,241     |       | 16,720           |       | 2,713            |       | (19,433               | )          | 12,241           |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Income (loss)  from discontinued operations                   |       | 1,593      |       | 1,593            |       | 586              |       | (2,179                | )          | 1,593            |       |
| Net income  (loss)                                            |       | $          | 13,834     |             | $          | 18,313           |       | $                     | 3,299      |             | $          | (21,612 | ) | $ | 13,834 |   |

 

See accompanying unauditednote.

 

21

----

 

**UNAUDITEDCONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS**

Nine Months Ended March 31, 2005

(In 000s)

 
| ** **                                                    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **            | ** ** | **Alliance**     | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **Reclassifications** | ** ** | **Gaming**       | ** ** |
| ** **                                                    | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **and**               | ** ** | **Corp. and**    | ** ** |
| ** **                                                    | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations**      | ** ** | **Subsidiaries** | ** ** |
| Revenues:                                                     |       |       |       |             |       |             |       |                  |       |             |       |
| Gaming equipment  and systems                                 |       | $          | —     |             | $          | 309,107          |       | $                     | 21,161     |             | $          | (13,580 | ) | $ | 316,688 |   |
| Casino  operations                                            |       | —     |       | —           |       | 43,480           |       | (4,141                | )          | 39,339           |       |
|                                                          |       | —     |       | 309,107          |       | 64,641           |       | (17,721               | )          | 356,027          |       |
| Costs and  expenses:                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Cost of gaming  equipment and systems                         |       | —     |       | 161,702          |       | 13,479           |       | (13,555               | )          | 161,626          |       |
| Cost of casino  operations                                    |       | —     |       | —           |       | 14,248           |       | —                |       | 14,248           |       |
| Selling, general  and administrative                          |       | 13,480     |       | 88,721           |       | 23,156           |       | (4,141                | )          | 121,216          |       |
| Research and  development                                     |       | —     |       | 31,802           |       | 917              |       | —                |       | 32,719           |       |
| Restructuring  charge                                         |       | 579        |       | 2,063            |       | 1,012            |       | —                |       | 3,654            |       |
| Impairment  charge                                            |       | —     |       | 3,599            |       | —           |       | —                |       | 3,599            |       |
| Depreciation and  amortization                                |       | 998        |       | 30,885           |       | 3,351            |       | —                |       | 35,234           |       |
|                                                          |       | 15,057     |       | 318,772          |       | 56,163           |       | (17,696               | )          | 372,296          |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Operating income  (loss)                                      |       | (15,057    | )          | (9,665           | )          | 8,478            |       | (25                   | )          | (16,269          | )          |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Earnings in  consolidated subsidiaries                        |       | (22,538    | )          | 2,435            |       | —           |       | 20,103                |       | —           |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Other income  (expense):                                      |       |       |       |             |       |             |       |                  |       |             |       |
| Interest income                                               |       | 14,696     |       | 154              |       | 202              |       | (14,039               | )          | 1,013            |       |
| Interest expense                                              |       | (12,521    | )          | (14,276          | )          | (27              | )          | 14,039                |       | (12,785          | )          |
| Rainbow royalty                                               |       | 4,929      |       | —           |       | (4,929           | )          | —                |       | —           |       |
| Minority  interest                                            |       | (1,450     | )          | (1,101           | )          | —           |       | —                |       | (2,551           | )          |
| Refinancing /  bank amendment charges                         |       | (564       | )          | —           |       | —           |       | —                |       | (564             | )          |
| Other, net                                                    |       | 898        |       | (383             | )          | 37               |       | —                |       | 552              |       |
| Income (loss)  from continuing operations before income taxes |       | (31,607    | )          | (22,836          | )          | 3,761            |       | 20,078                |       | (30,604          | )          |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Income tax  expense (benefit)                                 |       | (11,213    | )          | (323             | )          | 1,326            |       | —                |       | (10,210          | )          |
| Income (loss)  from continuing operations                     |       | (20,394    | )          | (22,513          | )          | 2,435            |       | 20,078                |       | (20,394          | )          |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Income (loss)  from discontinued operations                   |       | (4,771     | )          | 261              |       | 261              |       | (522                  | )          | (4,771           | )          |
| Net income  (loss)                                            |       | $          | (25,165    | )                | $          | (22,252          | )          | $                     | 2,696      |             | $          | 19,556 |   | $ | (25,165 | ) |

 

See accompanying unauditednote.

 

22

----

 

**UNAUDITED****CONDENSED****CONSOLIDATING STATEMENTS OF OPERATIONS**

Nine Months Ended March 31, 2004

(In 000s)

 
| ** **                                                    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **            | ** ** | **Alliance**     | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **Reclassifications** | ** ** | **Gaming**       | ** ** |
| ** **                                                    | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **and**               | ** ** | **Corp. and**    | ** ** |
| ** **                                                    | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations**      | ** ** | **Subsidiaries** | ** ** |
| Revenues:                                                     |       |       |       |             |       |             |       |                  |       |             |       |
| Gaming equipment  and systems                                 |       | $          | —     |             | $          | 275,192          |       | $                     | 25,944     |             | $          | (14,372 | ) | $ | 286,764 |   |
| Casino  operations                                            |       | —     |       | —           |       | 43,873           |       | (4,544                | )          | 39,329           |       |
|                                                          |       | —     |       | 275,192          |       | 69,817           |       | (18,916               | )          | 326,093          |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Costs and  expenses:                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Cost of gaming  equipment and systems                         |       | —     |       | 112,375          |       | 15,403           |       | (14,383               | )          | 113,395          |       |
| Cost of casino  operations                                    |       | —     |       | —           |       | 15,211           |       | —                |       | 15,211           |       |
| Selling, general  and administrative                          |       | 8,836      |       | 55,975           |       | 20,545           |       | (4,544                | )          | 80,812           |       |
| Research and  development                                     |       | —     |       | 23,893           |       | 569              |       | —                |       | 24,462           |       |
| Depreciation and  amortization                                |       | 1,202      |       | 16,903           |       | 2,490            |       | —                |       | 20,595           |       |
|                                                          |       | 10,038     |       | 209,146          |       | 54,218           |       | (18,927               | )          | 254,475          |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Operating income  (loss)                                      |       | (10,038    | )          | 66,046           |       | 15,599           |       | 11                    |       | 71,618           |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Earnings in  consolidated subsidiaries                        |       | 61,759     |       | 8,437            |       | —           |       | (70,196               | )          | —           |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Other income  (expense):                                      |       |       |       |             |       |             |       |                  |       |             |       |
| Interest income                                               |       | 11,380     |       | 103              |       | 12               |       | (9,552                | )          | 1,943            |       |
| Interest expense                                              |       | (13,937    | )          | (9,765           | )          | (38              | )          | 9,552                 |       | (14,188          | )          |
| Rainbow royalty                                               |       | 4,911      |       | —           |       | (4,911           | )          | —                |       | —           |       |
| Minority  interest                                            |       | (1,749     | )          | —           |       | —           |       | —                |       | (1,749           | )          |
| Refinancing /  bank amendment charges                         |       | (12,293    | )          | —           |       | —           |       | —                |       | (12,293          | )          |
| Other, net                                                    |       | (188       | )          | (58              | )          | (929             | )          | 94                    |       | (1,081           | )          |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Income (loss)  from continuing operations before income taxes |       | 39,845     |       | 64,763           |       | 9,733            |       | (70,091               | )          | 44,250           |       |
| Income tax  expense                                           |       | 11,539     |       | 3,110            |       | 1,295            |       | —                |       | 15,944           |       |
| Income (loss)  from continuing operations                     |       | 28,306     |       | 61,653           |       | 8,438            |       | (70,091               | )          | 28,306           |       |
|                                                          |       |       |       |             |       |             |       |                  |       |             |       |
| Income (loss)  from discontinued operations                   |       | 10,299     |       | 10,299           |       | 1,316            |       | (11,615               | )          | 10,299           |       |
| Net income  (loss)                                            |       | $          | 38,605     |             | $          | 71,952           |       | $                     | 9,754      |             | $          | (81,706 | ) | $ | 38,605 |   |

 

See accompanying unauditednote.

 

23

----

 

**UNAUDITED****CONDENSED****CONSOLIDATING STATEMENTS OF CASH FLOWS**

Nine Months Ended March 31, 2005

(In 000s)

 
| ** **                                                                        | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **            | ** ** | **Alliance**     | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                                                        | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **Reclassifications** | ** ** | **Gaming**       | ** ** |
| ** **                                                                        | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **and**               | ** ** | **Corp. and**    | ** ** |
| ** **                                                                        | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations**      | ** ** | **Subsidiaries** | ** ** |
| Cash flows from  operating activities of continuing operations:                   |       |       |       |             |       |             |       |                  |       |             |       |
| Net income  (loss)                                                                |       | $          | (25,165    | )                | $          | (22,252          | )          | $                     | 2,696      |             | $          | 19,556 |   | $ | (25,165 | ) |
| (Income) loss  from discontinued operations                                       |       | 4,771      |       | (261             | )          | (261             | )          | 522                   |       | 4,771            |       |
| Depreciation and  amortization                                                    |       | 998        |       | 30,885           |       | 3,351            |       | —                |       | 35,234           |       |
| Stock-based  compensation                                                         |       | 1,356      |       | —           |       | —           |       | —                |       | 1,356            |       |
| Refinancing/bank  amendment charges                                               |       | 564        |       | —           |       | —           |       | —                |       | 564              |       |
| Deferred income  taxes                                                            |       | (3,258     | )          | 94               |       | (832             | )          | —                |       | (3,996           | )          |
| Provision for  losses on receivables                                              |       | —     |       | 5,520            |       | 180              |       | —                |       | 5,700            |       |
| Inventory and  other assets write-downs                                           |       | —     |       | 25,565           |       | —           |       | —                |       | 25,565           |       |
| Other                                                                             |       | (1,690     | )          | 698              |       | (215             | )          | —                |       | (1,207           | )          |
| Change in  operating assets and liabilities, net of effects of business acquired: |       |       |       |             |       |             |       |                  |       |             |       |
| Purchase of  appeal bond                                                          |       | (7,600     | )          | —           |       | —           |       | —                |       | (7,600           | )          |
| Accounts and  notes receivable                                                    |       | 1,629      |       | 16,944           |       | (98              | )          | (17                   | )          | 18,458           |       |
| Intercompany  accounts                                                            |       | (5,017     | )          | 18,537           |       | 6,545            |       | (20,065               | )          | —           |       |
| Inventories                                                                       |       | —     |       | (6,193           | )          | (2,177           | )          | 23                    |       | (8,347           | )          |
| Other current  assets                                                             |       | (830       | )          | (3,762           | )          | (363             | )          | —                |       | (4,955           | )          |
| Accounts payable                                                                  |       | (169       | )          | (11,505          | )          | (1,140           | )          | —                |       | (12,814          | )          |
| Accrued  liabilities and jackpot liabilities                                      |       | (8,065     | )          | (4,907           | )          | 542              |       | (19                   | )          | (12,449          | )          |
| Net cash  provided by (used in) operating activities of continuing operations     |       | (42,476    | )          | 49,363           |       | 8,228            |       | —                |       | 15,115           |       |
| Cash flows from  investing activities of continuing operations:                   |       |       |       |             |       |             |       |                  |       |             |       |
| Additions to  property, plant and equipment                                       |       | (16        | )          | (4,811           | )          | (4,297           | )          | —                |       | (9,124           | )          |
| Additions to  leased gaming equipment                                             |       | —     |       | (30,076          | )          | —           |       | —                |       | (30,076          | )          |
| Acquisitions,  net of cash acquired                                               |       | —     |       | (12,000          | )          | —           |       | —                |       | (12,000          | )          |
| Additions to  other long-term assets                                              |       | —     |       | (2,182           | )          | 5                |       | —                |       | (2,177           | )          |
| Proceeds from  sale of net assets of discontinued operations                      |       | 1,911      |       | —           |       | —           |       | —                |       | 1,911            |       |
| Net cash  provided by (used in) investing activities of continuing operations     |       | 1,895      |       | (49,069          | )          | (4,292           | )          | —                |       | (51,466          | )          |
| Cash flows from  financing activities of continuing operations:                   |       |       |       |             |       |             |       |                  |       |             |       |
| Capitalized debt  issuance costs                                                  |       | (1,053     | )          | —           |       | —           |       | —                |       | (1,053           | )          |
| Payoff of debt  due to sale of net assets of discontinued operations              |       | (101,618   | )          | —           |       | —           |       | —                |       | (101,618         | )          |
| Reduction of  long-term debt                                                      |       | (2,625     | )          | (2,658           | )          | —           |       | —                |       | (5,283           | )          |
| Re-purchase of  treasury shares                                                   |       | (164       | )          | —           |       | —           |       | —                |       | (164             | )          |
| Proceeds from  exercise of stock options and warrants                             |       | 1,068      |       | —           |       | —           |       | —                |       | 1,068            |       |
| Dividends (paid)  received                                                        |       | —     |       | 5,791            |       | (5,791           | )          | —                |       | —           |       |
| Net cash (used  in) provided by financing activities of continuing operations     |       | (104,392   | )          | 3,133            |       | (5,791           | )          | —                |       | (107,050         | )          |
| Effect of  exchange rate changes on cash                                          |       | —     |       | —           |       | 385              |       | —                |       | 385              |       |
| Cash provided by  discontinued operations                                         |       | —     |       | 1,550            |       | 154              |       | —                |       | 1,704            |       |
| Cash and cash  equivalents:                                                       |       |       |       |             |       |             |       |                  |       |             |       |
| Increase  (decrease) for period                                                   |       | (144,973   | )          | 4,977            |       | (1,316           | )          | —                |       | (141,312         | )          |
| Balance,  beginning of period                                                     |       | 155,347    |       | 7,742            |       | 9,637            |       | —                |       | 172,726          |       |
| Balance, end of  period                                                           |       | $          | 10,374     |             | $          | 12,719           |       | $                     | 8,321      |             | $          | — |   | $ | 31,414 |   |

 

See accompanying unauditednote.

 

24

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**UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS**

Nine Months Ended March 31, 2004

 (In 000s)

 
| ** **                                                                        | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **            | ** ** | **Alliance**     | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                                                        | ** ** | ** ** | ** ** | ** **       | ** ** | **Non-**         | ** ** | **Reclassifications** | ** ** | **Gaming Corp**  | ** ** |
| ** **                                                                        | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **Guaranteeing** | ** ** | **and**               | ** ** | **and**          | ** ** |
| ** **                                                                        | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations**      | ** ** | **Subsidiaries** | ** ** |
|                                                                              |       |       |       |             |       |             |       |                  |       |             |       |
| Cash flows from  operating activities of continuing operations:                   |       |       |       |             |       |             |       |                  |       |             |       |
| Net income  (loss)                                                                |       | $          | 38,605     |             | $          | 71,952           |       | $                     | 9,754      |             | $          | (81,706 | ) | $ | 38,605 |   |
| (Income) loss  from discontinued operations                                       |       | (10,299    | )          | (10,299          | )          | (1,316           | )          | 11,615                |       | (10,299          | )          |
| Depreciation and  amortization                                                    |       | 1,202      |       | 16,903           |       | 2,490            |       | —                |       | 20,595           |       |
| Refinancing  charge                                                               |       | 12,293     |       | —           |       | —           |       | —                |       | 12,293           |       |
| Deferred income  taxes                                                            |       | 4,398      |       | (10,655          | )          | —           |       | —                |       | (6,257           | )          |
| Provision for  losses on receivables                                              |       | —     |       | 721              |       | 34               |       | —                |       | 755              |       |
| Other                                                                             |       | 131        |       | (1,475           | )          | (10              | )          | —                |       | (1,354           | )          |
| Change in  operating assets and liabilities, net of effects of business acquired: |       |       |       |             |       |             |       |                  |       |             |       |
| Accounts and  notes receivable                                                    |       | (187       | )          | (15,497          | )          | 6,872            |       | 87                    |       | (8,725           | )          |
| Intercompany  accounts                                                            |       | (12,546    | )          | (54,018          | )          | (3,636           | )          | 70,200                |       | —           |       |
| Inventories                                                                       |       | —     |       | (3,632           | )          | 564              |       | (12                   | )          | (3,080           | )          |
| Other current  assets                                                             |       | (645       | )          | (1,029           | )          | 1,047            |       | —                |       | (627             | )          |
| Accounts payable                                                                  |       | 757        |       | 9,915            |       | (779             | )          | —                |       | 9,893            |       |
| Accrued  liabilities and jackpot liabilities                                      |       | (2,355     | )          | 19,999           |       | (1,205           | )          | (184                  | )          | 16,255           |       |
| Net cash  provided by operating activities of continuing operations               |       | 31,354     |       | 22,885           |       | 13,815           |       | —                |       | 68,054           |       |
| Cash flows from  investing activities of continuing operations:                   |       |       |       |             |       |             |       |                  |       |             |       |
| Advances of  notes receivable due from Sierra Design Group                        |       | (72,820    | )          | —           |       | —           |       | —                |       | (72,820          | )          |
| Additions to  property, plant and equipment                                       |       | (28        | )          | (6,999           | )          | (2,529           | )          | —                |       | (9,556           | )          |
| Additions to  leased gaming equipment                                             |       | —     |       | (24,496          | )          | (1,876           | )          | —                |       | (26,372          | )          |
| Additions to  other long-term assets                                              |       | (5,580     | )          | (7,746           | )          | 501              |       | —                |       | (12,825          | )          |
| Acquisitions,  net of cash acquired                                               |       | (46,796    | )          | (3,879           | )          | —           |       | —                |       | (50,675          | )          |
| Proceeds from  sale of net assets of discontinued operations                      |       | 16,500     |       | —           |       | —           |       | —                |       | 16,500           |       |
| Net cash used in  investing activities of continuing operations                   |       | (108,724   | )          | (43,120          | )          | (3,904           | )          | —                |       | (155,748         | )          |
| Cash flows from  financing activities of continuing operations:                   |       |       |       |             |       |             |       |                  |       |             |       |
| Capitalized debt  issuance costs                                                  |       | (6,954     | )          | —           |       | —           |       | —                |       | (6,954           | )          |
| Premium paid on  early redemption of debt                                         |       | (5,399     | )          | —           |       | —           |       | —                |       | (5,399           | )          |
| Proceeds from  issuance of long-term debt                                         |       | 350,000    |       | —           |       | —           |       | —                |       | 350,000          |       |
| Net change in  revolving credit facility                                          |       | 70,000     |       | —           |       | —           |       | —                |       | 70,000           |       |
| Payoff of debt  from refinancing                                                  |       | (337,625   | )          | —           |       | —           |       | —                |       | (337,625         | )          |
| Reduction of  long-term debt                                                      |       | (495       | )          | (2,476           | )          | (15              | )          | —                |       | (2,986           | )          |
| Proceeds from  exercise of stock options and warrants                             |       | 6,624      |       | (1               | )          | —           |       | —                |       | 6,623            |       |
| Dividends (paid)  received                                                        |       | —     |       | 11,595           |       | (11,595          | )          | —                |       | —           |       |
| Net cash (used  in) provided by financing activities of continuing operations     |       | 76,151     |       | 9,118            |       | (11,610          | )          | —                |       | 73,659           |       |
| Effect of  exchange rate changes on cash                                          |       | —     |       | —           |       | 100              |       | —                |       | 100              |       |
| Cash provided by  discontinued operations                                         |       | —     |       | 6,205            |       | 1,352            |       | —                |       | 7,557            |       |
| Cash and cash  equivalents:                                                       |       |       |       |             |       |             |       |                  |       |             |       |
| Decrease for the  period                                                          |       | (1,219     | )          | (4,912           | )          | (247             | )          | —                |       | (6,378           | )          |
| Balance,  beginning of period                                                     |       | 12,730     |       | 18,036           |       | 8,118            |       | —                |       | 38,884           |       |
| Balance, end of  period                                                           |       | $          | 11,511     |             | $          | 13,124           |       | $                     | 7,871      |             | $          | — |   | $ | 32,506 |   |

 

See accompanying unaudited note.

 

25

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**ALLIANCE GAMINGCORPORATION AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATINGSTATEMENTS**

 

**Debt andRevolving Credit Facility**

 

Long-term debts and lines of credit at March 31, 2005 consist ofthe following (in 000s):

 
| ** **                               | ** ** | ** ** | ** ** | ** **       | ** ** | ** **            | ** ** | **Alliance**     | ** ** |
|------------------------------------------|------------|------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** **       | ** ** | **Reclassifications** | ** ** | **Gaming Corp.** | ** ** |
| ** **                               | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **and**               | ** ** | **and**          | ** ** |
| ** **                               | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Eliminations**      | ** ** | **Subsidiaries** | ** ** |
|                                     |       |       |       |             |       |                  |       |             |       |
| Term Loan  Facility                      |       | $          | 315,757    |             | $          | —                |       | $                | —     |   | $ | 315,757 |   |
| Revolving credit  lines                  |       | —     |       | —           |       | —                |       | —           |       |
| Intercompany  notes payable              |       | —     |       | 266,028          |       | (266,028              | )          | —           |       |
| Other, generally  unsecured              |       | 32,000     |       | 2,453            |       | —                |       | 34,453           |       |
|                                     |       | 347,757    |       | 268,481          |       | (266,028              | )          | 350,210          |       |
| Less current  maturities                 |       | 3,158      |       | 1,610            |       | —                |       | 4,768            |       |
| Long-term debt,  less current maturities |       | $          | 344,599    |             | $          | 266,871               |       | $                | (266,028   | ) | $ | 345,442 |   |

 

Long-term debt andlines of credit at June 30, 2004 consist of the following (in 000’s):

 
| ** **                               | ** ** | ** ** | ** ** | ** **       | ** ** | ** **            | ** ** | **Alliance**     | ** ** |
|------------------------------------------|------------|------------|------------|------------------|------------|-----------------------|------------|------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** **       | ** ** | **Reclassifications** | ** ** | **Gaming Corp.** | ** ** |
| ** **                               | ** ** | ** ** | ** ** | **Guaranteeing** | ** ** | **and**               | ** ** | **and**          | ** ** |
| ** **                               | ** ** | **Parent** | ** ** | **Subsidiaries** | ** ** | **Eliminations**      | ** ** | **Subsidiaries** | ** ** |
| Term Loan Facility                       |       | $          | 350,000    |             | $          | —                |       | $                | —     |   | $ | 350,000 |   |
| Revolving credit  facility               |       | 70,000     |       | —           |       | —                |       | 70,000           |       |
| Intercompany  notes payable              |       | —     |       | 251,989          |       | (251,989              | )          | —           |       |
| Other, generally  unsecured              |       | 4,000      |       | 4,955            |       | —                |       | 8,955            |       |
|                                     |       | 424,000    |       | 256,944          |       | (251,989              | )          | 428,955          |       |
|                                     |       |       |       |             |       |                  |       |             |       |
| Less current  maturities                 |       | 3,313      |       | 2,553            |       | —                |       | 5,866            |       |
| Long-term debt,  less current maturities |       | $          | 420,687    |             | $          | 254,391               |       | $                | (251,989   | ) | $ | 423,089 |   |

 

26

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**ALLIANCE GAMING CORPORATION**

**FORM 10-Q**

**March 31, 2005**

 

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

 

**Forward-Looking Statements**

 

Certain matters in this Form 10-Q and our otherfilings with the Securities and Exchange Commission, including, without limitation,certain matters discussed in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and in Quantitative andQualitative Disclosures about Market Risk, constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended,and are subject to the safe harbor created thereby.  Those statementsreflect the intent, belief or current expectations of the Company, itsdirectors or its officers with respect to, among other things, future eventsand financial trends affecting the Company.

 

Forward-lookingstatements are typically identified by the words “believes,” “expects,” “anticipates,”and similar expressions.  In addition, any statements that refer toexpectations or other characterizations of future events or circumstances areforward-looking statements.  Readers are cautioned that any suchforward-looking statements are not guarantees of future performance and thatmatters referred to in such forward-looking statements involve known andunknown risks, uncertainties and other factors which may cause actual results,performance or achievements of the Company to be materially different from anyfuture results, performance or achievements expressed or implied by suchforward-looking statements.  Such factors include, among other things, theimpact of competition and uncertainties concerning such matters as the Company’sability to service debt, product development, customer financing, sales tonon-traditional gaming markets, foreign operations, dependence on keypersonnel, the ability to integrate future acquisitions, strict regulation bygaming authorities, the outcome of pending litigation matters including thepending securities class actions, gaming taxes, currency fluctuations andmarket risk.  The Company undertakes no obligation to publicly update orrevise these forward-looking statements because of new information, futureevents or otherwise.

 

**Introduction**

 

Operating under the name *BallyGaming and Systems*, the Company is a worldwide leader of designing,manufacturing and distributing traditional and nontraditional gaming machines,having marketed over 100,000 gaming machines during the past five years, andcomputerized monitoring systems for gaming facilities.  The Bally Gamingand Systems business unit consists of three divisions: Game sales, System salesand Gaming operations. The Company also owns and operates a dockside casino inVicksburg, Mississippi, which has approximately 12 table games andapproximately 916 gaming devices (“Casino Operations”). Further informationabout our business units is contained in the notes to the Unaudited Condensed ConsolidatedFinancial Statements (“Segments and Geographical Information”) and in ourannual report filed on Form 10-K.

 

The Company recognizes revenue from the following sources:  sales of gaming machines, operation ofwide-area progressive systems and leasing of gaming machines, sales ofcomputerized monitoring systems and related recurring hardware and softwaremaintenance revenue, and from casino operations.  The Company often accepts used machines astrade-ins toward the purchase of new gaming equipment. These trade-insare negotiated at the time of sale for that transaction only, and there are noprovisions for rights to future trade-ins contained in the purchase agreementfor the new gaming equipment.   Thetraded-in gaming machine is accounted for as a discount to the contractedselling price of a new gaming machine.

 

Our most significant expenses are (1) cost of sales, (2) research anddevelopment expenses, (3) advertising and promotional expenses and (4)administrative expenses.  The Companystrives to control these expenses by working closely with division unit leadersand by centralizing functions such as finance, accounting, legal, humanresources and management information systems. The Company also uses its market presence and purchasing power tonegotiate favorable rates with vendors and suppliers.

 

Our research and development costs are driven by the development cyclefor hardware which varies between a few months for minor revisions to more thana year for major design changes or for changes made by various slotmanufacturers with which our product must communicate and be physicallyintegrated. Software development results in (i) periodic product releasesthat include new features that extend and enhance casino enterprise systems;

 

27

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(ii) periodic maintenance releases that enable casino operators tocorrect problems or improve the usability of the system; and(iii) documentation needed to install and use the system.

 

Depreciation and amortization expense for tangible and intangible assetshave historically been significant factors in determining our overallprofitability.  Based on intangibleassets currently held by us and the allocation of the aggregate purchase priceof acquisitions completed during the year ended June 30, 2004, the Company expectsthe total amortization expense incurred will increase in fiscal year 2005compared to fiscal year 2004.

 

**CriticalAccounting Policies**

 

A description ofour critical accounting policies can be found in Item 7 of our Annual Report onForm 10-K for the fiscal year ended June 30, 2004.  There were no material changes to thosepolicies during the quarter and nine months ended March 31, 2005.

 

**Basis of Presentation**

 

Our results include the accounts of Alliance Gaming Corporation, and itswholly-owned and partially-owned, controlled subsidiaries.

 

**Results of Operations**

 

***Bally Gaming and Systems***

Summary financial results and operating statistics (dollars inmillions):

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **March 31,**          | ** ** | **Increase/**         | ** ** | **%** | ** ** | **March 31,** | ** ** | **Increase/** | ** ** | **%** | ** ** |
| ** **                                            | ** ** | **2005**               | ** ** | **2004**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Revenues                                              |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Game sales                                            |       | $                      | 53.1       |                  | $          | 49.1 |   | $ | 4.0 |   | 8 | % | $ | 150.6 |   | $ | 141.5 |   | $ | 9.1 |   | 6 | % |
| System sales                                          |       | 27.0                   |       | 31.1                  |       | (4.1 | ) | (13 | )% | 70.6 |   | 91.8 |   | (21.2 | ) | (23 | )% |
| Gaming operations                                     |       | 31.6                   |       | 21.8                  |       | 9.8 |   | 45 | % | 95.5 |   | 53.5 |   | 42.0 |   | 79 | % |
| Total revenues                                        |       | $                      | 111.7      |                  | $          | 102.0 |   | $ | 9.7 |   | 10 | % | $ | 316.7 |   | $ | 286.8 |   | $ | 29.9 |   | 10 | % |
|                                                  |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross Margin                                          |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Game sales                                            |       | $                      | 10.6       |                  | $          | 22.1 |   | $ | (11.5 | ) | (52 | )% | $ | 27.7 |   | $ | 64.9 |   | $ | (37.2 | ) | (57 | )% |
| System sales                                          |       | 21.0                   |       | 22.7                  |       | (1.7 | ) | (7 | )% | 55.7 |   | 69.4 |   | (13.7 | ) | (20 | )% |
| Gaming operations                                     |       | 22.6                   |       | 15.8                  |       | 6.8 |   | 43 | % | 71.7 |   | 39.1 |   | 32.6 |   | 83 | % |
| Total gross  margin                                   |       | $                      | 54.2       |                  | $          | 60.6 |   | $ | (6.4 | ) | (11 | )% | $ | 155.1 |   | $ | 173.4 |   | $ | (18.3 | ) | (11 | )% |
|                                                  |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative                  |       | $                      | 29.2       |                  | $          | 24.3 |   | $ | 4.9 |   | 20 | % | $ | 97.8 |   | $ | 62.9 |   | $ | 34.9 |   | 55 | % |
| Impairment  charges                                   |       | 3.6                    |       | —                |       | 3.6 |   | — |   | 3.6 |   | — |   | 3.6 |   | — |   |
| Restructuring  charges                                |       | 2.2                    |       | —                |       | 2.2 |   | — |   | 3.1 |   | — |   | 3.1 |   | — |   |
| Research and  development costs                       |       | 10.6                   |       | 9.1                   |       | 1.5 |   | 16 | % | 32.7 |   | 24.5 |   | 8.2 |   | 34 | % |
| Depreciation and  amortization                        |       | 11.2                   |       | 7.1                   |       | 4.1 |   | 58 | % | 31.8 |   | 17.3 |   | 14.5 |   | 84 | % |
| Operating income  (loss)                              |       | $                      | (2.6       | )                     | $          | 20.1 |   | $ | (22.7 | ) | (113 | )% | $ | (13.9 | ) | $ | 68.7 |   | $ | (82.6 | ) | (120 | )% |
|                                                  |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  statistics:                                |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| New gaming  devices sold                              |       | 3,966                  |       | 3,894                 |       | 72 |   | 2 | % | 9,829 |   | 10,990 |   | (1,161 | ) | (11 | )% |
| Original  equipment mfg. (“OEM”) units sold |       | —                 |       | 256                   |       | (256 | ) | (100 | )% | 1,954 |   | 2,950 |   | (996 | ) | (34 | )% |
| New unit average  selling price (excluding OEM)       |       | $                      | 10,136     |                  | $          | 9,816 |   | $ | 320 |   | 3 | % | $ | 10,381 |   | $ | 8,724 |   | $ | 1,657 |   | 19 | % |
| Game monitoring  units installed base                 |       | 282,000                |       | 265,000               |       | 17,000 |   | 6 | % |   |   |   |   |   |   |   |   |
| Casino management  systems- installed base            |       | 225                    |       | 213                   |       | 12 |   | 6 | % |   |   |   |   |   |   |   |   |
| System managed  cashless games                        |       | 136,000                |       | 64,000                |       | 72,000 |   | 113 | % |   |   |   |   |   |   |   |   |
| End of period  installed base:                        |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wide-area  progressive                                |       | 1,660                  |       | 1,670                 |       | (10 | ) | (1 | )% |   |   |   |   |   |   |   |   |
| Daily-fee games                                       |       | 8,620                  |       | 5,780                 |       | 2,840 |   | 49 | % |   |   |   |   |   |   |   |   |
| Centrally  determined games                           |       | 18,720                 |       | 15,170                |       | 3,550 |   | 23 | % |   |   |   |   |   |   |   |   |

 

28

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Segment revenues increased and gross margindecreased, in the three and nine month periods ended March 31, 2005 as a resultof the following:

 

•                  Bally Game Sales revenue increased as aresult of the following:

•                  An increase in the sale of games tonon-traditional markets due to the acquisition of SDG in March 2004, offset bya decline in sales to traditional markets for both the three and nine monthperiods ended March 31, 2005.

•                  An increase in the average selling price to$10,136.

•                  Anincrease in the sale of used games, parts, and game kits for both the three and nine month periods ended March 31, 2005.

 

•                  Bally Systems revenue decreased primarily asa result of:

•                   Decreased hardware and software salesdue to the lack of new property openings.

•                  Increasedrecurring hardware and software maintenance revenues for both the three and nine month periods ended March 31, 2005, asa result of the larger base of installed units, which now stands atapproximately 282,000 in 225 casinos world-wide.  Service revenue also increased due to demandfor system implementation and promotions services.

 

•                  GamingOperations revenues increased as a result of:

•                  Thecasino-owned central determination link increased during the three and ninemonth periods ended March 31, 2005, due to unit placements in Oklahoma andWashington.

•                  Thebase of wide-area progressive and daily fee games increased primarily due tothe increased placement of branded daily fee games over the prior year period.

 

•                   Grossmargin decreased as a result of thefollowing:

•                  Gamesales gross margin declined primarily due to inventory and related assetwrite-downs of $7.9 million and $22.0 million for the three and nine monthperiods ended March 31, 2005. See discussion labeled “Inventory write-down”which follows later in this section. Without these charges the gross margin was 35% and 34%, for the threeand nine month periods ended March 31, 2005, respectively, which reflects thelower margin received on certain Class II and central determination games.  The Company believes that if unit sales and placementsincrease, the gross margin will be positively impacted and could return to the40% level or above in the future, but there can be no assurances that thislevel will be achieved.

•                  Systemsgross margin improvement during the three and nine month periods ended March31, 2005, is reflective of the higher proportion of high margin softwaremaintenance and service revenues.

•                  Gamingoperations gross margin percentage slightly decreased due to the higher thanexpected jackpot frequency during the three and nine month periods ended March31, 2005.

 

•                  Selling, general and administrative expensesincreased in the three and ninemonth periods ended March 31, 2005, as compared to the prior year comparativeperiods as a result of the following:

 

•                  The addition of the Class II and centraldetermination operations which were acquired on March 3, 2004.

•                  For the nine month period ended March 31, 2005, wehave incurred higher legal expenses as compared to the prior year period as aresult of higher patent and litigation costs. See below for recent quarterlyimprovements in such legal expenses.

•                  Higher field service related costs for both thethree and nine month periods ended March 31, 2005, due to our increase in thebase of installed games under gaming operations.

•                  Increase in the provision for doubtful accountsreceivable of $0.3 million and $4.7 million for the three and nine monthperiods ended March 31, 2005, respectively. This increase for the nine monthperiod includes a charge for a large customer who declared bankruptcy in theDecember quarter, as well as an increase in the accounts receivable reserve asthe receivable base has aged slightly compared to a year ago.

 

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•                  The Company has made progress on reducing selling,general and administrative costs during the three month period ended March 31,2005, compared to the sequential most recent two quarters. Such costs declinedby $4.0 million in the March 31, 2005 quarter versus the December 31, 2004quarter, following on a decrease of almost $3.4 million from the September 30,2004 quarter. The Company has been able to reduce costs during this period inthe areas of consulting, legal and payroll.

 

•                  Research and development costs increased as aresult of the increased investment in the development of the Alpha videoplatform and related game content, and sustaining development of multipleexisting game platforms and systems during the three and nine month periods endedMarch 31, 2005.

 

•                  Depreciation and amortization increased for the threeand nine month periods ended March 31, 2005, as a result of the following:

•                  Increasein acquisition-related intangible assets.

•                  Increase in the base of installed recurringrevenue games from 8,444 units in the prior year to 10,277 units.

•                  Increase in operating capital expendituresrelative to new technology initiatives.

 

## ***Rainbow Casino Operations***

 

Summary financialresults and operating statistics (dollars in millions):

 
| ** **                           | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **March  31,**          | ** ** | **Increase/**          | ** ** | **%** | ** ** | **March  31,** | ** ** | **Increase/** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **2005**                | ** ** | **2004**               | ** ** | **(Decrease)** | ** ** | **Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
|                                 |       |                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                              |       | $                       | 13.7       |                   | $          | 14.2 |   | $ | (0.5 | ) | (4 | )% | $ | 39.3 |   | $ | 39.3 |   | $ | 0.0 |   | 0 | % |
|                                 |       |                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross Margin                         |       | $                       | 8.9        |                   | $          | 8.9 |   | $ | 0.0 |   | 0 | % | $ | 25.1 |   | $ | 24.1 |   | $ | 1.0 |   | 4 | % |
|                                 |       |                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative |       | 3.3                     |       | 3.1                    |       | 0.2 |   | 6 | % | 10.0 |   | 9.1 |   | 0.9 |   | 10 | % |
| Depreciation and  amortization       |       | 0.8                     |       | 0.6                    |       | 0.2 |   | 33 | % | 2.4 |   | 2.0 |   | 0.4 |   | 20 | % |
| Operating income                     |       | $                       | 4.8        |                   | $          | 5.2 |   | $ | (0.4 | ) | (8 | )% | $ | 12.7 |   | $ | 13.0 |   | $ | (0.3 | ) | (2 | )% |
|                                 |       |                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  Statistics:               |       |                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Average no. –  gaming devices   |       | 916                     |       | 930                    |       | (14 | ) | (2 | )% |   |   |   |   |   |   |   |   |
| Average no. –  table games      |       | 12                      |       | 12                     |       | — |   | — | % |   |   |   |   |   |   |   |   |

 

•                  RainbowCasino revenues have decreased 4% due to lower win per day on table gamescompared to the prior year quarter.

•                  Gross margin remained flat for the quarter andincreased for the nine months ended March 31, 2005, as a result of decreases incertain operating costs.  Cost of casinorevenue includes gaming taxes, rental costs and direct labor including payrolltaxes and benefits.

•                  The overall selling, general and administrativeexpenses increased for the three and nine month periods ended March 31, 2005,as a result of increases in casino promotional expenses.

 

30

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***Parent Company and other unallocated income(expense)***

Summary financialresults (dollars in millions):

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **March  31,**         | ** ** | **Increase/**         | ** ** | **%** | ** ** | **March  31,** | ** ** | **Increase/** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **2005**               | ** ** | **2004**              | ** ** | **(Decrease)** | ** ** | **Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
|                                  |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| General and  administrative           |       | $                      | 4.1        |                  | $          | 2.8 |   | $ | 1.3 |   | 46 | % | $ | 14.1 |   | $ | 8.8 |   | $ | 5.3 |   | 60 | % |
| Depreciation and  amortization        |       | 0.3                    |       | 0.3                   |       | — |   | 0 | % | 1.0 |   | 1.2 |   | $ | (0.2 | ) | (17 | )% |
| Total Parent  company expense         |       | $                      | 4.4        |                  | $          | 3.1 |   | $ | 1.3 |   | 42 | % | $ | 15.1 |   | $ | 10.0 |   | $ | 5.1 |   | 51 | % |
|                                  |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income  (expense):              |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                       |       | $                      | 0.2        |                  | $          | 1.8 |   | $ | (1.6 | ) | (89 | )% | $ | 1.0 |   | $ | 1.9 |   | $ | (0.9 | ) | (47 | )% |
| Interest expense                      |       | (5.0                   | )          | (4.6                  | )          | 0.4 |   | 9 | % | (12.8 | ) | (14.2 | ) | (1.4 | ) | (10 | )% |
| Minority  interest                    |       | (0.9                   | )          | (0.7                  | )          | 0.2 |   | 29 | % | (2.5 | ) | (1.7 | ) | 0.8 |   | 47 | % |
| Refinancing /  bank amendment charges |       | —                 |       | —                |       | — |   | — |   | (0.6 | ) | (12.3 | ) | (11.7 | ) | (95 | )% |
| Other, net                            |       | —                 |       | (0.2                  | )          | 0.2 |   | 100 | % | 0.6 |   | (1.1 | ) | 1.7 |   | 155 | % |
| Total other  income (expense)         |       | $                      | (5.7       | )                     | $          | (3.7 | ) | $ | 2.0 |   | 54 | % | $ | (14.3 | ) | $ | (27.4 | ) | $ | (13.1 | ) | (48 | )% |
|                                  |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total tax  expense (benefit)          |       | $                      | (1.5       | )                     | $          | 6.2 |   | $ | (7.7 | ) | (124 | )% | $ | (10.2 | ) | $ | 15.9 |   | $ | 26.1 |   | 164 | % |

 

•                  Parent Company general and administrative expenses increasedprimarily as a result of:

•                  Increase in payroll and related expense during thethree and nine month periods ended March 31, 2005, primarily due to restrictedstock units amortized and severance benefits offset by reallocation of certain corporateemployees to Bally Gaming and Systems business segment.

•                  Increase in litigation costs during the three andnine month periods ended March 31, 2005, relative to protection of our patentsand the class action law suits.

•                  Increase in professional fees relative toSarbanes-Oxley implementations. The Company expects these additional costs tocontinue through fiscal 2005 and 2006.

•                  Increase in general liability and director andofficer insurance costs for the three and nine month periods ended March 31,2005.  Such increases in insurance costsare expected to continue in fiscal 2005.

•                  As a result of a refinancing completed duringfiscal year 2004, the Company recorded a pre-tax charge in the quarter endedSeptember 30, 2003 of $12.3 million, which includes a $5.0 million charge forthe early extinguishment of subordinated notes, $7.0 million for the non-cashwrite off of deferred financing costs, and $0.3 million in fees and expenses.

 

•                  Interest expense for the current quarter totaled$5.0 million compared to $4.6 million in the prior year period due to higherinterest rates on lower borrowings.

 

•                  Oureffective income tax rate for the nine month period ended March 31, 2005 was38% excluding the tax charge of $1.4 million, or ($0.03) EPS for the estimatedpotential tax liability for the reorganization of the Company’s European distributionoperations compared to 36% in the prior year period.

 

***DiscontinuedOperations***

 

On October15, 2004, the Company completed the sale of our interest in VSI to ChurchillDowns Incorporated. The net proceeds received totaled approximately $2.0million, resulting in a gain of $0.8 million, net of tax, and is included indiscontinued operations on the statement of operations. During the quarterended December 31, 2004, the Company accrued $2.0 million for variouscontingencies related to the sale of its discontinued operations.

 

***Restructuringcharges***

 

During fiscal year2005, the Company has undertaken an extensive review of its operations andreduced its workforce during the September 2004 quarter and the March 2005quarter. As a result of these reductions in force, the Company incurred chargestotaling $2.2 million and $3.7 million for the three and nine month periodsended March 31, 2005, respectively. Therestructuring completed in the March 2005 quarter included the relocation ofthe Company’s European distribution operations. The Company has accrued a tax liability of $1.4 million (included in taxexpense in the accompanying statement of operations) for the estimated taxobligation resulting from this restructuring.

 

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***Impairment charges***

 

Duringfiscal year 2004, the Company entered into an agreement to provide adevelopment loan to a Native American tribe to further their pursuit ofdeveloping a gaming facility. The amounts advanced under the terms of the loantotaled $1.5 million, and the Company is not obligated for any additionaladvances. During the quarter ended March 31, 2005, the tribe received anadverse court ruling which the Company believes materially impairs the tribe’sability to pay the loan and therefore the Company recorded an impairment chargefor the full amount of the loan.

 

***Refinancingcharge***

 

During December 2004, the Company amended its senior loan agreement(the “Loan Agreement”).  The amendmentprovides for an increase in the maximum allowable leverage ratio, a reductionin the revolver from $125.0 million to $75.0 million, and an increase in theterm loan interest rate to LIBOR + 3.00%. The fee incurred for the amendmenttotaled approximately $1.0 million.

 

***Inventorywrite-down***

 

The Company performs detailed inventory valuation procedures at leastquarterly. This process includes examining the carrying values of new and usedgaming devices, parts and ancillary equipment in comparison to the current fairmarket values for such equipment (less costs to sell or dispose). Some of thefactors involved in this analysis include the overall levels of ourinventories, the current and projected sales levels for such products, theprojected markets for such products both domestically and internationally, thecosts required to sell the products including refurbishment costs and importationcosts for international shipments, and the overall projected demand forproducts once the next generation of products are scheduled for release.

 

The Company has faced declining demand for its legacy video productsduring fiscal year 2005, and therefore continually assessed this particularportion of its inventories. In October 2004 the Company made the strategicdecision to move to its new Alpha video platform, which was made commerciallyavailable in April 2005 in most markets.

 

The decision to move to the new video platform, the targeting of usedequipment for non-domestic markets, and the consolidation of certainwarehouses, all led to accelerated disposals of legacy products. This processhas required continual updating of estimates for the net realizable value ofinventories due to the subjectivity involved in projecting sales volumes, usedgame sales values, refurbishment costs, and customer demand in non-domesticjurisdictions. As a result of its ongoing analysis of inventory valuations, theCompany has taken a series of inventory write-downs totaling $7.9 million and$22.0 million during the three and nine month periods ended March 31, 2005,respectively. While the Company believes that its visibility on used game saleshas improved, and therefore believes that further write-downs are unlikely,there can be no assurances that further write-downs will not occur insubsequent periods.

 

**Liquidity and Capital Resources**

 

As of March 31, 2005, cash and cash equivalentstotaled $31.4 million.  In addition, networking capital was approximately $123.0 million as of March 31, 2005.  The decrease in working capital ofapproximately $159.0 million from June 30, 2004 is explained in the workingcapital section below.  Consolidated cashand cash equivalents at March 31, 2005 includes approximately $2.0 million ofcash utilized in our Casino Operations that is held in vaults, cages or changebanks. Additionally, pursuant to various state gaming regulations, certain cashaccounts are maintained to ensure availability of funds to pay wide-areaprogressive jackpot awards, which totaled approximately $13.3 million at March31, 2005.  In addition, the Companypurchases U.S. Treasury Strip securities for the benefit of jackpot winners whoelect to receive annual or weekly installment payments. These securities arepresented as restricted investments in the accompanying consolidated balancesheets, and totaled $9.6 million and $2.5 million as of March 31, 2005 and June30, 2004, respectively.

 

The sale of Rail City wascompleted in May 2004 and the sale of UCMC was completed in June 2004. As aresult of the sale of these assets, the terms of our bank loan agreement (the “LoanAgreement”) required the use of 

 

32

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approximately 50% of thenet proceeds (as defined in the Loan Agreement) to reduce the term loan andrevolver principal balances on a pro rata basis. Accordingly, in August 2004the Company made an initial reduction in our term loan of $31.6 million, andthe revolver was paid down from $70.0 million to zero.

 

During December 2004, theCompany amended its Loan Agreement.  Theamendment provides for an increase in the maximum allowable leverage ratio, areduction in the revolver from $125.0 million to $75.0 million, and an increasein the term loan interest rate to LIBOR + 3.00%. The fee incurred for theamendment totaled approximately $1.0 million. The Company is currently incompliance with its covenants consisting of leverage ratio, fixed chargescoverage ratio, and minimum EBITDA (as that term is defined in the LoanAgreement).  The leverage ratio iscomputed as total average debt outstanding during the quarter divided by thetrailing 12 months EBITDA excluding certain cash and non-cash charges, and isfurther adjusted to remove EBITDA from discontinued operations at the timethose operations are sold. The Company’s leverage ratio as of March 31, 2005was 4.1 times versus an amended covenant maximum of 4.5 times. The leverageratio maximum will increase to 4.75 at June 30, 2005, and the Company’s currentprojections lead management to continue to believe that the Company will remainin compliance with the leverage ratio at that measurement date.  However, if the Company does not meet thiscovenant, the Company believes that we have a variety of financing optionsavailable to us.

 

Management believes thatcash flows from current operating activities and the availability under therevolving credit facility will provide the Company with sufficient capitalresources and liquidity.  Given thecurrent leverage ratio, the Company had approximately $40.0 million ofavailability on its revolving credit facility as of March 31, 2005. Continuedaccess to the revolving credit facility will be dependent on the Company’sability to generate adequate levels of EBITDA as described above. At March 31, 2005,there were no material commitments for capital expenditures.

 

***Working Capital***

 

The following table presents the components ofconsolidated working capital at March 31, 2005 and June 30, 2004, excludingassets and liabilities of discontinued operations (in 000s):

 
| ** **                            | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| ** **                            | ** ** | **2005**      | ** ** | **2004**     | ** ** | **Change** | ** ** |
| Current assets:                       |       |          |       |         |       |       |       |
| Cash and cash  equivalents            |       | $             | 31,414     |         | $          | 172,726    |       | $ | (141,312 | ) |
| Accounts and  notes receivable        |       | 105,781       |       | 129,779      |       | (23,998    | )          |
| Inventories                           |       | 58,319        |       | 61,135       |       | (2,816     | )          |
| Deferred tax  assets                  |       | 19,982        |       | 20,054       |       | (72        | )          |
| Other current  assets                 |       | 16,952        |       | 12,420       |       | 4,532      |       |
| Total current  assets                 |       | $             | 232,448    |         | $          | 396,114    |       | $ | (163,666 | ) |
|                                  |       |          |       |         |       |       |       |
| Current  liabilities:                 |       |          |       |         |       |       |       |
| Accounts payable                      |       | $             | 24,856     |         | $          | 37,515     |       | $ | (12,659 | ) |
| Jackpot  liabilities                  |       | 12,576        |       | 12,075       |       | 501        |       |
| Accrued  liabilities                  |       | 61,301        |       | 51,469       |       | 9,832      |       |
| Taxes payable                         |       | 6,353         |       | 7,233        |       | (880       | )          |
| Current  maturities of long-term debt |       | 4,768         |       | 5,866        |       | (1,098     | )          |
| Total current  liabilities            |       | 109,854       |       | 114,158      |       | (4,304     | )          |
| Net working  capital                  |       | $             | 122,594    |         | $          | 281,956    |       | $ | (159,362 | ) |

 

For the nine month period ended March 31, 2005, working capital,excluding cash, declined $18.0 million on a net basis.  The decrease in cash of $141.3 million wasdriven by the $101.6 million of sale proceeds used to pay down our term loansin accordance with the Loan Agreement, as well as cash used to deploy wide-areaand daily-fee gaming devices.

 

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The other fluctuations contributing to changes in working capital were:

 

•                  Anet decrease in accounts and notes receivable due to increased collectionsefforts and timing of cash receipts for customers.

 

•                  Anet decrease in inventory, which resulted from the inventory obsolescence(non-cash) charges. Excluding such charges, inventory increased during fiscalyear 2005 due to the build up of inventory related to the Company’s newproducts currently being introduced.

 

•                  An increase inother assets as a result of the following:

•                                    Increasein deferred costs due to shipments of games to the European market that willnot be completely installed until the first quarter of fiscal year 2006.

•                                    Increasein prepaid insurance and royalties.

 

•                  An increase inaccrued liabilities primarily as a result of the following:

•                                    Anaccrual of $7.4 million for damages awarded to Action Gaming and IGT for patentinfringement

 

***Cash Flow***

 

During the nine months ended March 31, 2005, cashflows provided by operating activities of continuing operations totaled $15.1 million as a result of:

•                  Reported net loss of $(25.2) million, which includescertain non-cash charges totaling $34.3 million.

•                  Increasesin inventory of $8.3 million.

•                  Timingof receivables collections resulting in net decrease of $18.5 million.

•                  Timingof payments made for accounts payable and jackpot liabilities, resulting in anet decrease of $12.8 million.

 

During the nine months ended March 31, 2005, cash flows used ininvesting activities of continuing operations totaled $51.5 million due to thefollowing:

•                  Capitalexpenditures of $9.1 million.

•                  Costsincurred to produce participation games totaling $30.1 million.

•                  Additionsto other long-term assets of $2.2 million.

•                  SDGearnout buyout of $12.0 million.

 

During the nine months ended March31, 2005, cash used in financing activities of continuing operationstotaled $107.1 million resulting from:

•                  Paydown on the term loan and revolver of $101.6 million.

•                  Principalpayments on other long term debt totaling $5.3 million.

•                  Cashprovided from exercise of stock options of $1.1 million.

•                  Cashused for the Loan Agreement amendment fees totaling $1.0 million.

 

***Contractual Commitments***

* *

There were no material changes during the quarter to the Company'scontractual obligations and commitments as disclosed in the Company's annualreport on Form 10-K for the year ended June 30, 2004.

 

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**ITEM3.  QUANTITATIVE AND QUALITATIVE****DISCLOSURES ABOUT MARKET RISK**

 

***Currency Rate Fluctuations***

 

Revenues and results of operations derived from our non-U.S.subsidiaries are denominated in their local currencies and are affected bychanges in the relative values of non-U.S. currencies and the U.S. dollar.  Most of the currencies in countries in whichwe have foreign operations have strengthened versus the U.S. dollar, whichresulted in assets and liabilities denominated in local currencies beingtranslated into more dollars.  TheCompany does not currently utilize hedging instruments.

 

***Market risks***

 

During the normal course of business, the Company is routinelysubjected to a variety of market risks, examples of which include, but are notlimited to, interest and currency rate movements, collectibility of accountsand notes receivable, and recoverability of residual values on leased assets.We constantly assess these risks and have established policies and practicesdesigned to protect against the adverse effects of these and other potentialexposures. Although we do not anticipate any material losses in these riskareas, no assurances can be made that material losses will not be incurred inthese areas in the future.

 

The Company has performed a sensitivity analysis of its financialinstruments, which consists of cash and cash equivalents and debt. The Companyhas no derivative financial instruments. In performing the sensitivityanalysis, the Company defined risk of loss as the hypothetical impact onearnings of changes in the market interest rates or currency exchange rates.

 

The results of the sensitivity analysis at March 31, 2005, are asfollows:

 

Interest Rate Risk:

 

The Company had total debt ofapproximately $350.2 million, consisting primarily of the $315.8 millionoutstanding term loan, the SDG earnout buyout of $28.0 million and other debtof approximately $6.4 million.  The bankfacility borrowings each have a term of six months at which time the interestrate is subject to adjustment to the then current rate. If the LIBOR rates wereto increase or decrease by 100 basis points, with all other factors remainingconstant, earnings would decrease or increase by approximately $3.5 millionannually on a pre-tax basis.

 

Foreign Currency Exchange Rate Risk:

 

Our foreign subsidiaries generally use their domestic currency as theirfunctional currency. A 10% fluctuation in the exchange rates of thesecurrencies against the U.S. dollar would result in a corresponding change inannual earnings reported in the consolidated group of approximately $0.5million, net of tax.

#### ** **

#### **Estimates:**

 

Our financial statementsare prepared using estimates and assumptions that affect the reported amountsof assets and liabilities. Actual results may differ from these estimateseither favorably or unfavorably, which may impact future results.

# ** **

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# **ITEM 4.**                             CONTROLS AND PROCEDURES

 

The Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,conducted an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures as defined in Exchange Act Rule13a-15(e) as described at the end of the period covered by this report.  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that as of the end of the periodcovered by this report, the Company’s disclosure controls and procedures wereeffective.  During the period covered bythis report there have been no changes in the Company’s internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PART II**

 

**ITEM 1.****                                  Legal Proceedings**

 

In September 2004,a federal district court jury entered a $7.4 million verdict against theCompany in a suit filed by Action Gaming, Inc. and IGT. The suit alleged thatthe multi-hand video poker game deployed by the Company’s former subsidiary,United Coin Machine Co., infringed the plaintiffs’ patents. The district courtruled on summary judgment that the game does not infringe the patents. However,the court left to the jury the question whether the use of “autohold,” aspecific, optional feature of the game, caused it to infringe under the “doctrineof equivalents,” a doctrine of patent law. After a two-week trial, the jurydetermined that the game with the autohold option enabled did infringe underthe doctrine of equivalents and awarded damages accordingly. The feature hasbeen disabled on all affected games in the field, and the decision permitscontinued deployment of the game as long as the autohold feature is notincluded. The Company is pursuing various remedies and has posted a cash bondto stay payment of the judgment pending post-trial motions and appeal.

 

In June and July 2004, purportedclass actions were filed against Alliance Gaming Corporation and its officers,Robert Miodunski (the Company’s former Chief Executive Officer), Robert Saxton,Mark Lerner, and Steven Des Champs, in the Federal District Court for theDistrict of Nevada.  The nearly identicalcomplaints allege violations of the Securities Exchange Act of 1934 stemmingfrom the revision of earnings guidance and declines in the stock price.  The plaintiffs’ motions to consolidate thecases and appoint lead plaintiff counsel customary in such cases, were grantedin February 2005.  The next step will befor the plaintiffs to file a consolidated complaint. The Company believes thelawsuits are without merit and intends to vigorously defend the action.  In addition, in July 2004 two derivativelawsuits were filed in Nevada state court against the members of the board ofdirectors and the officers listed above. The Company is named as a nominal defendant in the derivative lawsuitsas the claims are purportedly asserted for the benefit of the Company.  These lawsuits assert claims for breach offiduciary duty and waste of corporate assets arising out of the same events asthose giving rise to the class actions described above. These two cases havealso been consolidated, and a consolidated complaint has been filed.  The defendants’ motions to dismiss or to staywere heard in January 2005 and the court granted the motions to dismiss inFebruary 2005. The Company is vigorously defending both lawsuits

 

In February 2005, the Securities and ExchangeCommission (the “SEC”) requested documents and information regarding mattersrelated to the allegations in the class actions and similar matters.  Management is cooperating fully with the SECin this matter.

 

A lawsuit filed against the Company in August 2004 byShuffle Master, Inc. in the U.S. District Court of Nevada, alleginginfringement of various patents is in the discovery phase.  A patent infringement lawsuit filed againstthe Company in December 2004 by IGT in the U.S. District Court, District ofNevada, is in the pleadings phase.  TheCompany is vigorously defending both lawsuits.

 

The Company is also aparty to various lawsuits relating to routine matters incidental to ourbusiness.  Management does not believethat the outcome of such litigation, including the matters above, in theaggregate, will have a material adverse effect on our financial position.

 

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**ITEM 6.           Exhibits**

 

a.                                       Exhibits

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

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto authorized.

 

 
|   | ALLIANCE  GAMING CORPORATION |                                          | Date:  May 9, 2005 |
|--------|------------------------------|-----------------------------------------------|--------------------|
|   | (Registrant)                 |                                          |
|   |                         |                                          |
|   |                         |
|   | By                           | /s/  Richard Haddrill                         |               |
|   |                         | Richard  Haddrill                             |
|   |                         | President  and Chief Executive Officer        |
|   |                         | (Principal  Executive Officer)                |
|   |                         |                                          |
|   |                         |                                          |
|   | By                           | /s/  Steven M. Des Champs                     |               |
|   |                         | Steven  M. Des Champs                         |
|   |                         | Senior  Vice President and                    |
|   |                         | Chief  Executive Officer                      |
|   |                         | (Principal  Financial and Accounting Officer) |
|        |                              |                                               |                    |  |  |  |

 

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