Table of Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended March 31,2009**

 

**OR**

 

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

 

**For the transition periodfrom              to**

 

**Commission File Number 001-31558**

 

**BALLY TECHNOLOGIES, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**6601S. Bermuda Rd.**

**LasVegas, Nevada  89119**

(Address of principal executive offices)

 

**(702) 584-7700**

(Registrant’s telephone number, includingarea code)

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.                                                                              x  Yes    o  No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T duringthe preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).                                                      o  Yes    o  No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

o  Yes    x  No

 

Thenumber of shares of Common Stock, $0.10 par value, outstanding as of May 5,2009, according to the records of the registrant’s registrar and transfer agentwas 54,464,000 which do not include 2,510,000 shares held in treasury.

 

 

 

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Table ofContents

 

**INDEX**

 
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                                    | ** ** |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
|              |       |                                                                                                                         |       |
| Item 1.           |       | Financial Statements                                                                                                         |       |
|              |       |                                                                                                                         |       |
|              |       | Unaudited  Condensed Consolidated Balance Sheets as of March 31, 2009 and  June 30, 2008                           |       |
|              |       |                                                                                                                         |       |
|              |       | Unaudited  Condensed Consolidated Statements of Operations for the Three and Nine Months  Ended March 31, 2009 and 2008 |       |
|              |       |                                                                                                                         |       |
|              |       | Unaudited  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended  March 31, 2009 and 2008           |       |
|              |       |                                                                                                                         |       |
|              |       | Notes to Unaudited  Condensed Consolidated Financial Statements                                                              |       |
|              |       |                                                                                                                         |       |
| Item 2.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  |       |
|              |       |                                                                                                                         |       |
| Item 3.           |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                  |       |
|              |       |                                                                                                                         |       |
| Item 4.           |       | Controls and  Procedures                                                                                                     |       |
|              |       |                                                                                                                         |       |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                        | ** ** |
| ** **        | ** ** | ** **                                                                                                                   | ** ** |
| Item 1.           |       | Legal Proceedings                                                                                                            |       |
|              |       |                                                                                                                         |       |
| Item 1A.          |       | Risk Factors                                                                                                                 |       |
|              |       |                                                                                                                         |       |
| Item 2.           |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                 |       |
|              |       |                                                                                                                         |       |
| Item 6.           |       | Exhibits                                                                                                                     |       |
|              |       |                                                                                                                         |       |
| **SIGNATURES**    |       |

 

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Table ofContents

 

**PART I**

**BALLY TECHNOLOGIES, INC.AND SUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                       | ** ** | **March 31,  2009**                                | ** ** | **June ****30,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(in 000s, except share amounts)** | ** ** |
| ASSETS                                                                                                                                           |       |                                                    |       |                        |       |
| Current assets:                                                                                                                                  |       |                                                    |       |                        |       |
| Cash and cash equivalents                                                                                                                        |       | $                                                       | 54,155     |                        | $          | 66,570 |   |
| Restricted cash                                                                                                                                  |       | 15,619                                                  |       | 13,111                      |       |
| Accounts and notes receivable, net of allowances for doubtful  accounts of $10,219 and $12,055                                                   |       | 192,934                                                 |       | 215,762                     |       |
| Inventories                                                                                                                                      |       | 60,457                                                  |       | 94,238                      |       |
| Income tax receivable                                                                                                                            |       | 23,861                                                  |       | 8,534                       |       |
| Deferred income tax assets                                                                                                                       |       | 66,033                                                  |       | 68,816                      |       |
| Deferred cost of revenue                                                                                                                         |       | 29,665                                                  |       | 58,983                      |       |
| Other current assets                                                                                                                             |       | 20,801                                                  |       | 21,673                      |       |
| Total current assets                                                                                                                             |       | 463,525                                                 |       | 547,687                     |       |
|                                                                                                                                             |       |                                                    |       |                        |       |
| Restricted long-term investments                                                                                                                 |       | 11,679                                                  |       | 10,469                      |       |
| Long-term receivables                                                                                                                            |       | 10,892                                                  |       | 10,653                      |       |
| Property, plant and equipment, net of accumulated depreciation of  $65,083 and $59,217                                                           |       | 76,414                                                  |       | 71,107                      |       |
| Leased gaming equipment, net of accumulated depreciation of $108,936  and $93,839                                                                |       | 94,731                                                  |       | 101,280                     |       |
| Goodwill                                                                                                                                         |       | 161,591                                                 |       | 162,727                     |       |
| Intangible assets, net                                                                                                                           |       | 34,232                                                  |       | 36,249                      |       |
| Deferred income tax assets                                                                                                                       |       | 14,652                                                  |       | 10,734                      |       |
| Long-term deferred cost of revenue                                                                                                               |       | 43,593                                                  |       | 35,211                      |       |
| Other assets, net                                                                                                                                |       | 15,410                                                  |       | 9,007                       |       |
| Total assets                                                                                                                                     |       | $                                                       | 926,719    |                        | $          | 995,124 |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                       |       |                                                    |       |                        |       |
| Current liabilities:                                                                                                                             |       |                                                    |       |                        |       |
| Accounts payable                                                                                                                                 |       | $                                                       | 19,170     |                        | $          | 44,888 |   |
| Accrued liabilities                                                                                                                              |       | 40,952                                                  |       | 63,328                      |       |
| Customer deposits                                                                                                                                |       | 14,534                                                  |       | 29,496                      |       |
| Jackpot liabilities                                                                                                                              |       | 15,553                                                  |       | 13,614                      |       |
| Deferred revenue                                                                                                                                 |       | 67,327                                                  |       | 129,909                     |       |
| Current maturities of long-term debt and capital leases                                                                                          |       | 37,314                                                  |       | 13,163                      |       |
| Total current liabilities                                                                                                                        |       | 194,850                                                 |       | 294,398                     |       |
|                                                                                                                                             |       |                                                    |       |                        |       |
| Long-term debt and capital leases, net of current maturities                                                                                     |       | 232,500                                                 |       | 291,341                     |       |
| Long-term deferred revenue                                                                                                                       |       | 65,690                                                  |       | 55,691                      |       |
| Other income tax liability                                                                                                                       |       | 20,954                                                  |       | 18,750                      |       |
| Other liabilities                                                                                                                                |       | 7,984                                                   |       | 9,837                       |       |
| Total liabilities                                                                                                                                |       | 521,978                                                 |       | 670,017                     |       |
| Minority interest                                                                                                                                |       | 2,131                                                   |       | 1,782                       |       |
| Commitments and contingencies (Note 9)                                                                                                           |       |                                                    |       |                        |       |
| Stockholders’ equity:                                                                                                                       |       |                                                    |       |                        |       |
| Special stock, 10,000,000 shares authorized: Series E, $100  liquidation value; 115 shares issued and outstanding                           |       | 12                                                      |       | 12                          |       |
| Common stock, $.10 par value; 100,000,000 shares authorized;  56,931,000 and 56,318,000 shares issued and 54,421,000 and 55,144,000  outstanding |       | 5,687                                                   |       | 5,626                       |       |
| Treasury stock at cost, 2,510,000 and 1,174,000 shares                                                                                           |       | (57,309                                                 | )          | (25,041                     | )          |
| Additional paid-in capital                                                                                                                       |       | 323,463                                                 |       | 302,146                     |       |
| Accumulated other comprehensive income (loss)                                                                                                    |       | (1,676                                                  | )          | 1,268                       |       |
| Retained earnings                                                                                                                                |       | 132,433                                                 |       | 39,314                      |       |
| Total stockholders’ equity                                                                                                                  |       | 402,610                                                 |       | 323,325                     |       |
| Total liabilities and stockholders’ equity                                                                                                  |       | $                                                       | 926,719    |                        | $          | 995,124 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

 

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 **BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                       | ** ** | **Three Months Ended  March 31,**                 | ** ** | **Nine Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Revenues:                                        |       |                                                             |       |                                            |       |   |   |   |   |
| Gaming equipment and systems                     |       | $                                                                | 126,828    |                                            | $          | 160,627 |   | $ | 443,643 |   | $ | 448,889 |   |
| Gaming operations                                |       | 69,986                                                           |       | 58,981                                          |       | 204,169 |   | 167,237 |   |
| Casino operations                                |       | 10,769                                                           |       | 13,001                                          |       | 30,463 |   | 36,165 |   |
|                                             |       | 207,583                                                          |       | 232,609                                         |       | 678,275 |   | 652,291 |   |
| Costs and expenses:                              |       |                                                             |       |                                            |       |   |   |   |   |
| Cost of gaming equipment and systems (1)         |       | 54,617                                                           |       | 74,918                                          |       | 194,430 |   | 205,720 |   |
| Cost of gaming operations                        |       | 19,349                                                           |       | 17,691                                          |       | 60,908 |   | 58,507 |   |
| Direct cost of casino operations                 |       | 4,227                                                            |       | 4,901                                           |       | 12,902 |   | 14,332 |   |
| Selling, general and administrative              |       | 53,126                                                           |       | 60,416                                          |       | 171,079 |   | 173,679 |   |
| Research and development costs                   |       | 19,291                                                           |       | 15,103                                          |       | 58,493 |   | 43,059 |   |
| Depreciation and amortization                    |       | 5,832                                                            |       | 4,725                                           |       | 16,396 |   | 14,175 |   |
|                                             |       | 156,442                                                          |       | 177,754                                         |       | 514,208 |   | 509,472 |   |
| Operating income                                 |       | 51,141                                                           |       | 54,855                                          |       | 164,067 |   | 142,819 |   |
|                                             |       |                                                             |       |                                            |       |   |   |   |   |
| Other income (expense):                          |       |                                                             |       |                                            |       |   |   |   |   |
| Interest income                                  |       | 698                                                              |       | 832                                             |       | 2,801 |   | 2,836 |   |
| Interest expense                                 |       | (4,181                                                           | )          | (6,326                                          | )          | (15,462 | ) | (20,833 | ) |
| Other, net                                       |       | (810                                                             | )          | 1,281                                           |       | (5,040 | ) | 2,274 |   |
|                                             |       |                                                             |       |                                            |       |   |   |   |   |
| Income before income taxes and minority interest |       | 46,848                                                           |       | 50,642                                          |       | 146,366 |   | 127,096 |   |
| Income tax expense                               |       | (16,232                                                          | )          | (18,939                                         | )          | (52,039 | ) | (47,283 | ) |
| Minority interest                                |       | (1,365                                                           | )          | (1,454                                          | )          | (1,208 | ) | (3,866 | ) |
|                                             |       |                                                             |       |                                            |       |   |   |   |   |
| Net income                                       |       | $                                                                | 29,251     |                                            | $          | 30,249 |   | $ | 93,119 |   | $ | 75,947 |   |
|                                             |       |                                                             |       |                                            |       |   |   |   |   |
| Basic and diluted earnings per share:            |       |                                                             |       |                                            |       |   |   |   |   |
| Basic earnings per share                         |       | $                                                                | 0.54       |                                            | $          | 0.55 |   | $ | 1.71 |   | $ | 1.40 |   |
| Diluted earnings per share                       |       | $                                                                | 0.52       |                                            | $          | 0.52 |   | $ | 1.63 |   | $ | 1.31 |   |
|                                             |       |                                                             |       |                                            |       |   |   |   |   |
| Weighted average shares outstanding:             |       |                                                             |       |                                            |       |   |   |   |   |
| Basic                                            |       | 54,204                                                           |       | 54,576                                          |       | 54,567 |   | 54,335 |   |
| Diluted                                          |       | 56,446                                                           |       | 58,396                                          |       | 57,104 |   | 58,114 |   |

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(1)          Cost of gaming equipment andsystems exclude amortization related to certain intangibles, including coretechnology and license rights, which are included in depreciation andamortization.

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

 

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**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | **(in 000s)**                              | ** ** |
| Cash flows from operating activities:                                              |       |                                            |       |   |   |
| Net income                                                                         |       | $                                               | 93,119     |   | $ | 75,947 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                            |       |   |   |
| Depreciation and amortization                                                      |       | 52,845                                          |       | 45,339 |   |
| Share-based compensation                                                           |       | 10,907                                          |       | 10,020 |   |
| Tax benefit of stock option exercises                                              |       | —                                          |       | 155 |   |
| Excess tax benefit of stock option exercises                                       |       | (760                                            | )          | (6,481 | ) |
| Income tax receivable                                                              |       | (14,251                                         | )          | — |   |
| Provision for doubtful accounts                                                    |       | 937                                             |       | 3,757 |   |
| Write-off of debt issuance costs                                                   |       | 786                                             |       | — |   |
| Inventory and other asset write-downs                                              |       | 3,667                                           |       | 7,587 |   |
| Other                                                                              |       | 3,903                                           |       | 1,017 |   |
| Changes in operating assets and liabilities:                                       |       |                                            |       |   |   |
| Accounts and notes receivable                                                      |       | 24,851                                          |       | (39,496 | ) |
| Inventories                                                                        |       | 5,583                                           |       | (65,650 | ) |
| Other current assets                                                               |       | 3,578                                           |       | (4,861 | ) |
| Accounts payable                                                                   |       | (25,794                                         | )          | (4,902 | ) |
| Accrued liabilities and jackpot liabilities                                        |       | (40,065                                         | )          | (8,953 | ) |
| Deferred revenue and deferred cost of revenue                                      |       | (31,647                                         | )          | 20,298 |   |
| Net cash provided by operating activities                                          |       | 87,659                                          |       | 33,777 |   |
|                                                                               |       |                                            |       |   |   |
| Cash flows from investing activities:                                              |       |                                            |       |   |   |
| Capital expenditures                                                               |       | (21,590                                         | )          | (12,565 | ) |
| Restricted cash and investments                                                    |       | (2,679                                          | )          | 3,567 |   |
| Additions to other long-term assets                                                |       | (5,154                                          | )          | (10,634 | ) |
| Net cash used in investing activities                                              |       | (29,423                                         | )          | (19,632 | ) |
|                                                                               |       |                                            |       |   |   |
| Cash flows from financing activities:                                              |       |                                            |       |   |   |
| Proceeds from revolving credit facility                                            |       | 25,000                                          |       | — |   |
| Payments on revolving credit facility                                              |       | (25,000                                         | )          | — |   |
| Capitalized debt issuance costs                                                    |       | (10,728                                         | )          | — |   |
| Pay-off of debt from refinancing                                                   |       | (14,553                                         | )          | — |   |
| Reduction of long-term debt and capital leases                                     |       | (20,125                                         | )          | (25,062 | ) |
| Purchase of treasury stock                                                         |       | (32,268                                         | )          | (16,720 | ) |
| Excess tax benefit of stock option exercises                                       |       | 760                                             |       | 6,481 |   |
| Proceeds from exercise of stock options and employee stock purchases               |       | 8,946                                           |       | 14,976 |   |
| Net cash used in financing activities                                              |       | (67,968                                         | )          | (20,325 | ) |
|                                                                               |       |                                            |       |   |   |
| Effect of exchange rate changes on cash                                            |       | (2,683                                          | )          | 1,380 |   |
|                                                                               |       |                                            |       |   |   |
| Cash and cash equivalents:                                                         |       |                                            |       |   |   |
| Decrease for period                                                                |       | (12,415                                         | )          | (4,800 | ) |
| Balance, beginning of period                                                       |       | 66,570                                          |       | 40,842 |   |
| Balance, end of period                                                             |       | $                                               | 54,155     |   | $ | 36,042 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

 

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 **BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

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

 

Thefollowing supplemental information is related to the unaudited condensed consolidatedstatements of cash flows:

 
| ** **                                                | ** ** | **Nine Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| ** **                                                | ** ** | **(in 000s)**                                   | ** ** |
| Cash paid for interest                                    |       | $                                               | 20,294     |   | $ | 21,942 |   |
| Cash paid for income taxes                                |       | 63,776                                          |       | 49,321 |   |
|                                                      |       |                                            |       |   |   |
| Non-cash investing and financing transactions:            |       |                                            |       |   |   |
| Pay-off of debt from refinancing                          |       | $                                               | 275,000    |   | $ | — |   |
| Transfer of inventory to leased gaming equipment (1)      |       | 34,233                                          |       | 56,964 |   |
| Reclassify property, plant and equipment to inventory (1) |       | 8,619                                           |       | 7,478 |   |
| Accrual of capital expenditures                           |       | 968                                             |       | 1,220 |   |

----

(1)          As a result of the inability to separately identifythe cash flows associated with the construction of leased gaming equipment, theCompany has included all additions to leased gaming equipment as an increase ininventory under cash used in operating activities in the unaudited condensedconsolidated statement of cash flows. In addition, cash generated from the saleof used gaming equipment classified as leased gaming equipment is also includedin cash provided by operating activities in the unaudited condensed consolidatedstatement of cash flows. The Company has one process to procure raw materialsfor the assembly of both inventory and leased gaming equipment. The materialsrequisition planning process considers the number of devices the Companyexpects to build for sale and for use in its gaming operations division duringa particular period, but it does not separately earmark purchases for leasedgaming equipment. Without such an earmarking process, the Company is unable todetermine whether the parts used to construct leased gaming equipment during aparticular period came from inventory on hand at the beginning of the period orwas constructed from inventory procured during the period of deployment, thusrequiring the expenditure of cash.

 

 

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**BALLYTECHNOLOGIES, INC.**

**FORM 10-Q**

Notesto Unaudited Condensed Consolidated Financial Statements

 

**1.             SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

*Principles of presentation and consolidation*

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America (“U.S. GAAP”) and reflect all adjustments, consistingof normal recurring adjustments, which management believes are necessary tofairly present the financial position, results of operations and cash flows ofBally Technologies, Inc. (“Bally” or the “Company”), a Nevada corporation,and its subsidiaries for the respective periods presented.  Certain information and note disclosuresnormally included in annual financial statements prepared in accordance withU.S. GAAP have been condensed or omitted pursuant to those rules andregulations. The results of operations for an interim period are notnecessarily indicative of the results that may be expected for any otherinterim period or the year as a whole. The accompanying unaudited condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto in the Company’s AnnualReport on Form 10-K for the fiscal year ended June 30, 2008.

 

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

 

Allintercompany accounts and transactions have been eliminated in consolidation.

 

*Recently adopted accounting pronouncements*

 

On October 1, 2008,the Company adopted Financial Accounting Standard Board (“FASB”) Statement ofFinancial Accounting Standards (“SFAS”) No. 161, *Disclosures about Derivative Instruments and HedgingActivities—An Amendment of FASB Statement No. 133.* SFAS No. 161enhances required disclosures regarding derivatives and hedging activities,including enhanced disclosures regarding how: (a) an entity usesderivative instruments; (b) derivative instruments and related hedgeditems are accounted for under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities;*and (c) derivative instruments and related hedged items affect an entity’sfinancial position, financial performance, and cash flows. The adoption of SFASNo. 161 did not have a material impact on the Company’s consolidatedresults of operations, financial position and cash flows.

 

OnOctober 1, 2008, the Company adopted FASB Staff Position (“FSP”) 140-4 andFASB Interpretation No. (“FIN”) 46(R)-8,*Disclosures by Public Entities (Enterprises) about Transfers of FinancialAssets and Interests in Variable Interest Entities*.* *FSP140-4 and FIN 46(R)-8 requires additional disclosures about an entity’sinvolvement with variable interest entities and transfers of financialassets.  The adoption of FSP 140-4 and FIN 46(R)-8 did not have a materialimpact on the Company’s consolidated results of operations, financial positionand cash flows.

 

OnJuly 1, 2008, the Company adopted FASB SFAS No. 157, *Fair Value Measurements,* for all financial assets andliabilities that are recognized or disclosed at fair value in its consolidatedfinancial statements. SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. This statement does not requireany new fair value measurements, but provides guidance on how to measure fairvalue by providing a fair value hierarchy used to classify the source of theinformation.

 

OnOctober 1, 2008, the Company adopted FSP 157-3,*Determining Fair Values of a Financial Asset When the Market for ThatAsset Is Not Active.* FSP 157-3 clarifies the application ofSFAS No. 157 to financial instruments in an inactive market. Theadoption of FSP 157-3 did not have a material impact on the Company’sconsolidated results of operations, financial position and cash flows.

 

 

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TheCompany has not adopted all the provisions of SFAS No. 157 as the FASBdelayed the effective date of the application of SFAS No. 157 tononfinancial assets and liabilities until fiscal years beginning after November 15,2008. The partial adoption of SFAS No. 157 did not have a material impacton the Company’s consolidated financial statements. The Company is currently inthe process of evaluating the impact of adopting the remaining provisions ofSFAS No. 157 on its consolidated results of operations, financial positionand cash flows.

 

SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB Statement No. 115*, becameeffective for the Company on July 1, 2008 and provides for an irrevocableoption to elect fair value for the initial and subsequent measurement forcertain financial assets and liabilities on a contract-by-contract basis withthe difference between the carrying value before election of the fair valueoption and the fair value recorded upon election as an adjustment to beginningretained earnings.  The Company chose notto elect to apply the fair value option to any of its financial instruments.

 

*Fair value of financial instruments*

 

The fair value of afinancial instrument is the amount at which the instrument could be exchangedin a current transaction between willing parties, other than in a forced saleor liquidation. The carrying amounts reflected in the accompanying unauditedcondensed consolidated balance sheets for cash and cash equivalents, accountsand notes receivable, restricted long-term investments, accounts payable,jackpot liabilities and variable rate long-term debt approximate theirrespective fair values.

 

SFASNo. 157 establishes a fair value hierarchy that requires an entity tomaximize the use of observable inputs and minimize the use of unobservableinputs when measuring fair value. A financial instrument’s categorizationwithin the fair value hierarchy is based upon the lowest level of input that issignificant to the fair value measurement. SFAS No. 157 establishes threelevels of inputs that may be used to measure fair value:

 
|   | ·       |   | Level 1:  quoted  prices in active markets for identical assets or liabilities;                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | ·       |   | Level 2:  inputs  other than Level 1 that are observable, either directly or indirectly,  such as quoted prices in active markets for similar assets or liabilities, quoted  prices for identical or similar assets or liabilities in markets that are not  active, or other inputs that are observable or can be corroborated by  observable market data for substantially the full term of the assets or  liabilities; or |
|   |         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | ·  |   | Level 3:  unobservable  inputs that are supported by little or no market activity and that are  significant to the fair value of the assets or liabilities.                                                                                                                                                                                                                                                                      |

 

TheCompany’s significant financial assets and liabilities measured at fair valueon a recurring basis, excluding accrued interest components, consisted of thefollowing types of instruments as of March 31, 2009 (which is included inaccrued liabilities in the unaudited condensed consolidated balance sheets):

 
| ** **                                | ** ** | **Fair Value Measurements Using Input Type** | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                | ** ** | **(in 000s)**                                | ** ** |
| ** **                                | ** ** | **Level 1**                                  | ** ** | **Level 2** | ** ** | **Total** | ** ** |
| Liabilities:                              |       |                                         |       |   |   |   |   |
| Derivative financial instrument liability |       | $                                            | —     |   | $ | 1,194 |   | $ | — |   |
|                                           |            |                                              |            |  |  |  |  |  |  |  |

 

TheCompany’s valuation techniques used to measure the fair values of thederivative financial instrument liability above in which the counterpartieshave high credit ratings, were derived from pricing models, such as discountedcash flow techniques, with all significant inputs derived from or corroboratedby observable market data. The Company’s discounted cash flow techniques use observablemarket inputs, such as LIBOR-based yield curves.

 

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*Accounting for DerivativeInstruments and Hedging Activity*

 

Inaccordance with SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activity*, the Company assesses, both at theinception of each hedge and on an on-going basis, whether the derivatives thatare used in its hedging transactions are highly effective in offsetting changesin cash flows of the hedged items. Derivatives that meet the requirements ofSFAS No. 133 are granted special hedge accounting treatment. The Company’sderivative financial instrument meets these requirements and is accounted foras a cash flow hedge.

 

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

 
| ** **                                                         | ** ** | **Amount of Gain (Loss)  Recognized in OCI on  Derivative (Effective Portion)** | ** ** | ** **              | ** ** | **Amount of Gain (Loss)  Reclassified from Accumulated  OCI into Income (Effective Portion)** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months Ended**                                                          | ** ** | **Nine Months Ended**   | ** ** | **Location of Gain (Loss)  Reclassified from Accumulated**                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| **Derivative in SFAS No. 133 Cash Flow Hedging Relationship** | ** ** | **March 31, 2009**                                                         | ** ** | **March 31, 2009** | ** ** | **OCI into Income (Effective  Portion)**                                                      | ** ** | **March 31, 2009** | ** ** | **March 31, 2009** | ** ** |
| ** **                                                         | ** ** | ** **                                                                      | ** ** | ** **              | ** ** | **(in 000s)**                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | ** **                                                                      | ** ** | ** **              | ** ** | ** **                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate swap agreement                                       |       | $                                                                               | (750       | )                       | $          | (1,430                                                                                        | )          | Interest expense |   | $ | (236 | ) | $ | (236 | ) |
|                                                                    |            |                                                                                 |            |                         |            |                                                                                               |            |  |  |  |  |  |  |  |  |  |  |

 

*Inventories*

 

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

 
| ** **      | ** ** | **March 31,  2009** | ** ** | **June 30,  2008** | ** ** |
|-----------------|------------|--------------------------|------------|-------------------------|------------|
| ** **      | ** ** | **(in 000s)**       | ** ** |
| Raw materials   |       | $                        | 46,406     |                    | $          | 59,423 |   |
| Work-in-process |       | 507                      |       | 709                     |       |
| Finished goods  |       | 13,544                   |       | 34,106                  |       |
| Total           |       | $                        | 60,457     |                    | $          | 94,238 |   |

 

TheCompany recorded inventory write-downs totaling approximately $0.9 million and$2.6 million and $3.7 million and $7.6 million for the three and nine monthsended March 31, 2009 and 2008, respectively. These charges are classifiedin cost of gaming equipment and systems in the unaudited condensed consolidatedstatements of operations.

 

*Hurricanedamage insurance recoveries*

 

In the second quarter offiscal 2009, the Company negotiated an insurance settlement related to the 2005U.S. Gulf Coast hurricane damages which destroyed or temporarily shut down itsgaming operations in the region when its rental and daily fee games weredestroyed in third party locations. The Company received a final payment of$3.0 million for business interruption during the second quarter, which wasincluded in selling, general and administrative expenses.

 

 

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*Recently issued accounting pronouncements not yet adopted*

 

InApril 2009, the FASB released FSP 107-1 and Accounting Principles Board (“APB”)Opinion No. 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*. This FSP amends SFAS No. 107,*Disclosures about Fair Values of FinancialInstruments*, to require disclosures about fair value of financialinstruments in interim financial statements as well as in annual financialstatements. The FSP also amends APB Opinion No. 28, *Interim Financial Reporting*, to require those disclosures inall interim financial statements. FSP 107-1 is effective for interim periodsending after June 15, 2009, but early adoption is permitted for interimperiods ending after March 15, 2009. The Company expects to adopt FSP107-1 and APB 28-1 beginning in the fourth quarter of fiscal 2009, but does notbelieve this guidance will have a significant impact on the Company’sconsolidated results of operations, financial position and cash flows.

 

InNovember 2008, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 08-7,*Accounting for Defensive Intangible Assets*.EITF No. 08-7 clarifies the accounting for certain separately identifiableintangible assets which an acquirer does not intend to actively use. EITF No. 08-7requires an acquirer in a business combination to account for a defensiveintangible asset as a separate unit of accounting which should be amortized toexpense over the period the asset diminishes in value. EITF No. 08-7 iseffective for fiscal years beginning after December 15, 2008, with earlyadoption prohibited. The Company expects to adopt EITF No. 08-7 beginningin fiscal 2010, but does not believe this guidance will have a significantimpact on the Company’s consolidated results of operations, financial positionand cash flows.

 

InApril 2008, the FASB issued FSP 142-3, *Determination of theUseful Life of Intangible Assets*, which amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under SFAS No. 142,*Goodwill and Other Intangible Assets.*FSP 142-3 is effective for fiscal years beginning after December 15, 2008,and interim periods within those fiscal years. The Company expects to adopt FSP142-3 beginning in fiscal 2010. The guidance contained in FSP 142-3 fordetermining the useful life of a recognized intangible asset shall be appliedprospectively to intangible assets acquired after the effective date. However,the disclosure requirements of FSP 142-3 must be applied prospectively to allintangible assets recognized in the Company’s financial statements as of theeffective date. The Company does not believe that the adoption of FSP 142-3will have a material effect on its consolidated results of operations,financial position and cash flows.

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007), *Business Combinations.* In April 2009, the FASB issuedFSP 141(R)-1 to further clarify and address application issues raised underSFAS No. 141-R. SFAS No. 141R will significantly change theaccounting for business combinations. Under SFAS No. 141R, an acquiringentity is required to recognize all of the assets acquired and liabilitiesassumed in a transaction at the acquisition-date fair value with limitedexceptions. SFAS No. 141R also includes a substantial number of newdisclosure requirements. SFAS No. 141R applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008, andaccordingly, the Company expects to adopt SFAS No. 141R beginning in fiscal2010. The Company expects that SFAS No. 141R and FSP 141(R)-1will have animpact on accounting for business combinations once adopted, but thesignificance of the effect is dependent upon acquisitions, if any, at thattime.

 

 

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In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements—An Amendment of ARB No. 51.*SFAS No. 160 establishes new accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. Specifically, this statement requires the recognition of anoncontrolling interest (minority interest) as equity in the consolidatedfinancial statements and separate from the parent’s equity. The amount of netincome attributable to the noncontrolling interest will be included inconsolidated net income on the face of the income statement. SFAS No. 160clarifies that changes in a parent’s ownership interest in a subsidiary that donot result in deconsolidation are equity transactions if the parent retains itscontrolling financial interest. In addition, this statement requires that aparent recognize a gain or loss in net income when a subsidiary isdeconsolidated. Such gain or loss will be measured using the fair value of thenoncontrolling equity investment on the deconsolidation date. SFAS No. 160also includes expanded disclosure requirements regarding the interests of theparent and its noncontrolling interest. SFAS No. 160 is effective forfiscal years, and interim periods within those fiscal years, beginning on orafter December 15, 2008, and accordingly, the Company expects to adoptSFAS No. 160 beginning in fiscal 2010. The Company is currently in theprocess of evaluating the impact SFAS No. 160 will have on itsconsolidated results of operations, financial position and cash flows, but itis not expected to be material.

 

**2.             EARNINGS PER SHARE**

 

Basic earnings per shareare computed by dividing diluted earnings by the weighted average number ofshares of common stock outstanding during the period. Diluted earnings pershare reflect the additional dilution from all potentially dilutive securities.

 

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

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,**                 | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                   | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Net income                                                                   |       | $                                                                | 29,251     |                                            | $          | 30,249 |   | $ | 93,119 |   | $ | 75,947 |   |
| After tax interest expense on convertible debt                               |       | 14                                                               |       | 66                                              |       | 145 |   | 234 |   |
| Diluted earnings                                                             |       | $                                                                | 29,265     |                                            | $          | 30,315 |   | $ | 93,264 |   | $ | 76,181 |   |
|                                                                         |       |                                                             |       |                                            |       |   |   |   |   |
| Weighted average common shares outstanding                                   |       | 54,204                                                           |       | 54,576                                          |       | 54,567 |   | 54,335 |   |
| Dilutive effect of:                                                          |       |                                                             |       |                                            |       |   |   |   |   |
| Stock options, Restricted Stock Units (“RSU”) and restricted stock |       | 2,120                                                            |       | 3,616                                           |       | 2,331 |   | 3,511 |   |
| Warrants                                                                     |       | —                                                           |       | 41                                              |       | 7 |   | 33 |   |
| Convertible debt (1)                                                         |       | 122                                                              |       | 163                                             |       | 198 |   | 235 |   |
| Weighted average diluted shares outstanding                                  |       | 56,446                                                           |       | 58,396                                          |       | 57,103 |   | 58,114 |   |
|                                                                         |       |                                                             |       |                                            |       |   |   |   |   |
| Basic earnings per share                                                     |       | $                                                                | 0.54       |                                            | $          | 0.55 |   | $ | 1.71 |   | $ | 1.40 |   |
| Diluted earnings per share                                                   |       | $                                                                | 0.52       |                                            | $          | 0.52 |   | $ | 1.63 |   | $ | 1.31 |   |

----

(1)          The Company has certain related party debt outstandingwhich is convertible into common stock at the Company’s discretion. SeeNote 5, Related Party Transactions.

 

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

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **(in 000s)**                               | ** ** |
| Stock options, RSU and restricted stock |       | 2,589                                            |       | 84                                              |       | 2,061 |   | 149 |   |
| Warrants                                |       | 100                                              |       | —                                          |       | — |   | — |   |
| Total                                   |       | 2,689                                            |       | 84                                              |       | 2,061 |   | 149 |   |

 

 

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** **

**3.             GOODWILL ANDINTANGIBLE ASSETS**

 

Intangible assets consistof the following:

 
| ** **        | ** ** | ** **                      | ** ** | **March 31, 2009** | ** ** | **June 30, 2008**   | ** ** |
|-------------------|------------|---------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **        | ** ** | **Useful  Life  (Years)**       | ** ** | **Gross  Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| ** **        | ** ** | **(dollars in 000s)** | ** ** |
| Computer software |       | 3 - 9                 |       | $                            | 27,005     |                          | $          | (17,542 | ) | $ | 9,463 |   | $ | 25,207 |   | $ | (14,506 | ) | $ | 10,701 |   |
| License rights    |       | 3 - 5                 |       | 2,039                        |       | (1,696                        | )          | 343 |   | 2,199 |   | (1,630 | ) | 569 |   |
| Trademarks        |       | 5                               |       | 2,203                        |       | (2,119                        | )          | 84 |   | 2,203 |   | (1,792 | ) | 411 |   |
| Core technology   |       | 5 - 8                 |       | 22,763                       |       | (5,400                        | )          | 17,363 |   | 19,595 |   | (2,949 | ) | 16,646 |   |
| Contracts         |       | 10                              |       | 10,043                       |       | (5,113                        | )          | 4,930 |   | 10,043 |   | (4,359 | ) | 5,684 |   |
| Other intangibles |       | 3 - 7                 |       | 7,753                        |       | (5,704                        | )          | 2,049 |   | 7,676 |   | (5,438 | ) | 2,238 |   |
| Total             |       |                            |       | $                            | 71,806     |                          | $          | (37,574 | ) | $ | 34,232 |   | $ | 66,923 |   | $ | (30,674 | ) | $ | 36,249 |   |

 

For the three and ninemonths ended March 31, 2009 and 2008, total amortization expense relatedto intangible assets was $2.6 million and $1.4 million and $7.1million and $4.5 million, respectively, which included computer softwareamortization expense of $1.0 million and $0.9 million and $3.0million and $2.4 million, respectively.

 

Future amortization ofintangible assets is scheduled as follows:

 

| **Year Ended June 30,**       | ** ** | **(in 000s)** | ** ** |
|----------------------------------------------|------------|--------------------|------------|
| 2009 (remaining three months of fiscal year) |       | $                  | 2,751      |   |
| 2010                                         |       | 9,798              |       |
| 2011                                         |       | 7,862              |       |
| 2012                                         |       | 5,712              |       |
| 2013                                         |       | 4,994              |       |
| Thereafter                                   |       | 3,115              |       |
| Total                                        |       | $                  | 34,232     |   |

 

All goodwill isassociated with the Gaming Equipment and Systems segment. The changes inthe carrying amount of goodwill for the nine months ended March 31, 2009,are as follows:

 

| ** **                              | ** ** | **(in 000s)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| Balance at June 30, 2008           |       | $                  | 162,727    |   |
| Foreign currency translation adjustment |       | (1,136             | )          |
| Balance at March 31, 2009          |       | $                  | 161,591    |   |

 

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

 

Long-termdebt and capital leases consist of the following:

 
| ** **                                                 | ** ** | **March 31,  2009** | ** ** | **June 30,   2008** | ** ** |
|------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                 | ** ** | **(in 000s)**       | ** ** |
| Revolving credit facility                                  |       | $                        | 50,000     |                     | $          | — |   |
| Term loan facility                                         |       | 212,500                  |       | 289,553                  |       |
| Capital lease obligations                                  |       | 4,458                    |       | 9,262                    |       |
| Related party debt (see Note 5)                            |       | 2,800                    |       | 5,600                    |       |
| Other, generally unsecured                                 |       | 56                       |       | 89                       |       |
| Long-term debt and capital leases                          |       | 269,814                  |       | 304,504                  |       |
| Less current maturities                                    |       | (37,314                  | )          | (13,163                  | )          |
| Long-term debt and capital leases, less current maturities |       | $                        | 232,500    |                     | $          | 291,341 |   |

 

 

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On September 29,2008, the Company entered into a new $225.0 million term loan and a new $75.0million revolving credit facility (collectively, the “Credit Facility”). TheCompany also has the option to request an increase in the size of the term loanand/or revolving credit facility by up to $50.0 million in the aggregateprovided that certain conditions are met. The proceeds from the CreditFacility were used to repay existing bank term loans totaling $289.6 millionand to pay for transaction fees and expenses totaling $10.7 million which arebeing amortized to interest expense over the term of the Credit Facility.

 

As of March 31,2009, there was $25.0 million of undrawn availability under the revolvingcredit facility. Availability under the revolving credit facility is reduced tothe extent of outstanding letters of credit.

 

The interest rate on theCredit Facility was set at LIBOR plus 3.25% through March 2009 andthereafter, is subject to a leverage-based pricing grid. If the Company’sleverage ratio, as defined under the Credit Facility, is greater than 1.5, theinterest rate will be LIBOR plus a margin of 3.25%; if the leverage ratio isbetween 1.0 and 1.5, the interest rate will be LIBOR plus a margin of 3.00%;and if the leverage ratio is below 1.0, the interest rate will be LIBOR plus amargin of 2.75%. In December 2008, the Company entered into afloating-to-fixed interest rate swap, as discussed below, to fix theinterest rate of the term loan at 1.89% plus the applicable margin (3.25% at March 31, 2009) for theremaining term. The interest rate on the revolving credit facility was 3.73% atMarch 31, 2009.

 

The term loan requiresquarterly principal reductions of $6.25 million during the first year, $8.75million during the second year and $11.25 million during each of the third andfourth years, with a balloon payment due in September 2012. The CreditFacility matures in September 2012. The Credit Facility is collateralizedby substantially all of the Company’s domestic property and is guaranteed byeach of the Company’s domestic subsidiaries, other than the entity that holdsthe Company’s interest in its Rainbow Casino, and is secured by a pledgeagreement. The Credit Facility contains a number of maintenance and othercovenants that, among other things, restrict the ability of the Company andcertain of its subsidiaries to dispose of assets, incur additional indebtednessor issue preferred stock, pay dividends or make other distributions, enter intocertain acquisitions, repurchase equity interests or subordinated indebtedness,issue or sell equity interests of the Company’s subsidiaries, engage in mergersor acquisitions or certain transactions with subsidiaries and affiliates, andthat otherwise restrict corporate activities. The Company was in compliance with these covenants as of March 31,2009.

 

The financial covenantsunder the Credit Facility consist of a leverage ratio and a fixed chargescoverage ratio. The leverage ratio is computed as total debt outstanding at theend of the quarter divided by the trailing twelve months Earnings BeforeInterest, Taxes, Depreciation and Amortization (“EBITDA”), excluding certaincash and non-cash charges. The Company’s leverage ratio as of March 31,2009 was 0.90 versus a maximum allowable of 2.50 through March 31, 2009. From April 1, 2009 to March 31,2010, the Company’s maximum leverage ratio is 2.25; from April 1, 2010 andthereafter, the maximum leverage ratio is 2.00 until maturity of the CreditFacility. The fixed charges coverage ratio is computed as EBITDA, adjusted forboth the trailing twelve months capital expenditures and cash taxes paid,divided by the trailing twelve months interest charges plus all payments ofprincipal made during the previous twelve months. The fixed charges coverageratio as of March 31, 2009 was 3.14 versus the covenant minimum of 2.00.

 

Capital lease obligationsrepresent amounts owed under lease or sale-lease back transactions primarilyrelated to equipment used in the Company’s Gaming Equipment and Systemssegment. Based on different installation dates over a four month period, threeseparate payment streams of thirty six equal installments were created with anaggregate monthly payment of approximately $655,000 at an average interest rateof 9.11%.

 

The Company’s relatedparty debt, which totaled $2.8 million and $5.6 million as of March 31,2009 and June 30, 2008, respectively, consists primarily of the debt owedto the former principals of Sierra Design Group (“SDG”). See Note 5,Related Party Transactions.

 

*Interest Rate Swap Agreement*

 

InDecember 2008, the Company entered into a floating-to-fixed interest rate swap agreementwith a notional value of $218.8 million and a maturity date of September 26,2012. This interest rate swap serves to fix the floating LIBOR based debt underthe term loan to fixed rate debt at an interest rate of 1.89% plus theapplicable margin described above (3.25% at March 31, 2009) to manage therisk exposure to interest rate fluctuations.

 

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TheCompany has documented and designated this interest rate swap as a cash flowhedge. Based on the assessment of effectiveness using statistical regression,the Company determined that the interest rate swap is effective. Effectiveness testing of the hedgerelationship and measurement to quantify ineffectiveness is performed eachfiscal quarter using the hypothetical derivative method. As the interestrate swap qualifies as a cash flow hedge, the Company adjusts the cash flowhedge on a quarterly basis to its fair value with a corresponding offset toaccumulated Other Comprehensive Income (“OCI”). The interest rate swap has been and is expected toremain highly effective for the life of the hedge. Effective amounts arereclassified to interest expense as the related hedged expense is incurred. Anyineffectiveness is reclassified from accumulated other comprehensive income toother income (expense). As of March 31, 2009, the Company had noineffectiveness on its cash flow hedge. Amounts related to the swap expected tobe reclassified from other comprehensive income to interest expense in the nexttwelve months total $1.45 million.

 

Additional information on the Company’s interestrate swap is as follows:

 
| **Interest Rate Swaps**                       | ** ** | **Balance Sheet Location** | ** ** | **Fair Value  (in 000s)** | ** **  | **Location of Offsetting  Balance** |
|---------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|-------------|-----------------------------------------------|
| Cash flow hedge - $212.5 million LIBOR based  debt |       | Accrued liabilities                  |       | $                                   |  1,194 |                                          | Accumulated other  comprehensive income (loss) |
|                                                         |            |                                      |            |                                     |             |                                               |  |

 

**5.             RELATED PARTY TRANSACTIONS**

 

In connection with theprevious acquisition of SDG, the consideration paid included subordinated debtissued to the former principals of SDG. Certain of the former principals arenow employees of the Company. The following table presents the outstandingrelated party debt and interest rates as of March 31, 2009 and June 30,2008:

 
| ** **                                  | ** ** | **March 31, 2009** | ** ** | **June 30, 2008** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **Interest  Rate**           | ** ** | **Outstanding  Debt**       | ** ** | **Interest  Rate** | ** ** | **Outstanding  Debt** | ** ** |
| ** **                                  | ** ** | **(in 000s)**           | ** ** |
| SDG                                         |       | 3.12                         | %          | $                           | 2,800      |   | 7.24 | % | $ | 5,600 |   |
| Less current maturities                     |       |                         |       | (2,800                      | )          |   |   | (2,800 | ) |
| Related party debt, less current maturities |       |                         |       | $                           | —     |   |   |   | $ | 2,800 |   |

 

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

 

The Company completed theacquisition of substantially all of the assets and liabilities of MindPlayduring fiscal 2004. The initial purchase price for MindPlay included, amongother things, the issuance of a note payable which was settled in full infiscal 2008.The settlement resulted in a gain of approximately $2.7 millionwhich is included in selling, general and administrative expense in the threeand nine months ended March 31, 2008.

 

In November 2007,the Company repurchased 149,253 shares of common stock for $6.0 millionfrom Mr. Robert Luciano, a former principal of SDG and the Company’s ChiefTechnology Officer. The shares are included in treasury stock.

 

TheCompany leases a warehouse and office facility from an entity owned by Mr. Luciano.Rental payments totaled $120,000 and $117,000 for the three months ended March 31,2009 and 2008, respectively, and $360,000 and $341,000 for the nine monthsended March 31, 2009 and 2008, respectively.

 

**6.            ****STOCKHOLDERS’ EQUITY AND SHARE****-BASEDAWARD PLANS AND COMPENSATION**

 

*ShareRepurchase Plan*

 

On January 28, 1999,the Company’s Board of Directors approved a share repurchase plan under which,subject to price and market conditions, purchases of shares can be made fromtime to time in the open market or in privately negotiated transactions usingavailable cash. On February 14, 2008, the Company’s Board of Directorsincreased the amount of common stock authorized to be repurchased to$75 million. On August 12, 2008, the Company’s Board of Directorsreset the limit under its existing share repurchase plan to $100 million.

 

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During the nine months endedMarch 31, 2009, the Company repurchased 1,291,216 shares of common stockfor $30.9 million under the share repurchase plan. As of March 31,2009, $69.1 million was authorized to be repurchased in future periods.

 

*Share-BasedAward Plans*

 

Stock option activity as ofand for the nine months ended March 31, 2009 is summarized below:

 
| ** **                                    | ** ** | ** **         | ** ** | **Weighted Average** | ** ** | ** **                       | ** ** |
|-----------------------------------------------|------------|--------------------|------------|---------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **Shares**         | ** ** | **Exercise  Price**       | ** ** | **Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                                    | ** ** | **(in 000s)** | ** ** | **(per share)**      | ** ** | **(years)**                      | ** ** | **(in 000s)** | ** ** |
| Balance outstanding as of June 30, 2008  |       | 7,087              |       | $                         | 17.61      |                             |       |   | $ | 115,883 |   |
| Granted                                       |       | 447                |       | 21.75                     |       |                             |       |   |   |
| Exercised                                     |       | (442               | )          | 17.39                     |       |                             |       |   |   |
| Forfeited or expired                          |       | (54                | )          | 20.56                     |       |                             |       |   |   |
| Balance outstanding as of March 31, 2009 |       | 7,038              |       | $                         | 17.87      |                             | 5.55       |   | $ | 21,875 |   |
| Exercisable as of March 31, 2009         |       | 5,025              |       | $                         | 16.44      |                             | 5.09       |   | $ | 18,237 |   |

 

Restricted stock and RSUactivity as of and for the nine months ended March 31, 2009 is summarizedbelow:

 
|                                          |   | **Restricted  Stock** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **RSUs**           | ** ** | **Weighted  Average  Grant Date  Fair Value** |   |
|-----------------------------------------------|--------|-----------------------|------------|---------------------------------------------------------|------------|--------------------|------------|---------------------------------------------------------|--------|
|                                          |   | **(in 000s)**    | ** ** | **(per share)**                                    | ** ** | **(in 000s)** | ** ** | **(in 000s)**                                      |   |
| Balance outstanding as of June 30, 2008  |   | 385                   |       | $                                                       | 26.64      |               | 556        |                                                    | 17.07  |   |
| Granted                                       |   | 100                   |       | 24.62                                                   |       | 67                 |       | 23.04                                                   |   |
| Vested                                        |   | (164                  | )          | 18.17                                                   |       | —             |       | —                                                  |   |
| Forfeited or expired                          |   | —                |       | —                                                  |       | —             |       | —                                                  |   |
| Balance outstanding as of March 31, 2009 |   | 321                   |       | $                                                       | 30.31      |               | 623        |                                                    | $      | 17.71 |   |
| Vested as of March 31, 2009              |   | —                |       | —                                                  |       | 534                |       | $                                                       | 16.04  |   |

 

*Share-BasedCompensation*

 

The following table presentsshare-based compensation expense included in the Company’s unaudited condensedconsolidated statements of operations:

 
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **(in 000s)**                               | ** ** |
| Selling, general and administrative                 |       | $                                                | 3,025      |                                            | $          | 2,937 |   | $ | 8,794 |   | $ | 8,562 |   |
| Research and development                            |       | 745                                              |       | 470                                             |       | 2,004 |   | 1,367 |   |
| Cost of gaming equipment and systems and operations |       | 41                                               |       | 28                                              |       | 109 |   | 91 |   |
| Share-based compensation expense before tax         |       | 3,811                                            |       | 3,435                                           |       | 10,907 |   | 10,020 |   |
| Income tax benefit                                  |       | 1,334                                            |       | 1,202                                           |       | 3,818 |   | 3,507 |   |
| Net share-based compensation expense                |       | $                                                | 2,477      |                                            | $          | 2,233 |   | $ | 7,089 |   | $ | 6,513 |   |

 

As of March 31,2009, there was $14.8 million of total unrecognized compensation expenserelated to the unvested portion of stock options which will be recognized overthe subsequent 1.54 years. In addition, as of March 31, 2009, there was$8.4 million of total unrecognized compensation expense related to theunvested portion of restricted stock and RSUs which will be recognized over thesubsequent 1.83 years.

 

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**7.             COMPREHENSIVEINCOME**

 

Comprehensive incomeconsists of net income, foreign currency translation gains and losses andlosses related to certain of our derivative financial instruments that arereflected in stockholders’ equity instead of net income. The following tablesets forth the calculation of comprehensive income:

 
| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                            | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                            | ** ** | **(in 000s)**                               | ** ** |
| Net income                                            |       | $                                                | 29,251     |                                            | $          | 30,249 |   | $ | 93,119 |   | $ | 75,947 |   |
| Change in foreign currency translation gains (losses) |       | (1,170                                           | )          | 718                                             |       | (1,750 | ) | 1,295 |   |
| Unrealized losses on derivative financial instruments |       | (514                                             | )          | —                                          |       | (1,194 | ) | — |   |
| Total comprehensive income                            |       | $                                                | 27,567     |                                            | $          | 30,967 |   | $ | 90,175 |   | $ | 77,242 |   |

 

**8.             INCOME TAXES**

 

The provision for incometaxes for interim periods is based on the current estimate of the annualeffective tax rate expected to be applicable for the full fiscal year and theimpact of discrete items, if any, and is adjusted as necessary for quarterlyevents. The effective income tax rate was approximately 36% and 37% for the ninemonths ended March 31, 2009 and 2008, respectively. The lower rate infiscal 2009 reflected the reinstatement of the research and development taxcredit which previously expired on December 31, 2007.

 

TheInternal Revenue Service (“IRS”) commenced examination of the Company’s UnitedStates federal income tax returns for 2003 through 2005 in the fourth quarterof 2006. Throughout the examination, the IRS has proposed, and managementhas agreed to, certain adjustments related to the open tax years that have beenrecorded in the income tax provision. In January 2009, the IRScompleted its field examination of the open tax years and issued a RevenueAgent’s Report (“RAR”). Also in January 2009, the Company paid $3.4million in tax and $1.2 million in interest to the IRS to settle certain agreedadjustments. The RAR also included several unagreed adjustments that, if theIRS were to prevail in full, would require additional income tax provisions ofapproximately $5.4 million, plus interest, for the tax years through 2005. TheCompany filed a formal protest defending its position which, if successful,would result in a reduction to unrecognized tax benefits and a correspondingreduction of income tax provisions of approximately $4.8 million. Consequently,it is reasonably possible that within the next twelve months the Company willresolve some of the matters in the RAR, which may increase or decreaseunrecognized tax benefits for the open tax years.

 

Asof March 31, 2009, the Company has $21.9 million related to uncertaintax positions, excluding related accrued interest and penalties,$17.9 million of which, if recognized, would impact the effective taxrate.  As of March 31, 2009, theCompany has $4.6 million and $135,000 accrued for the payment of interest andpenalties, respectively.

 

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**9.             COMMITMENTS AND CONTINGENCIES**

 

***Litigation***

 

InDecember 2004, International Game Technology (“IGT”) filed a patentinfringement lawsuit against the Company in the United States District Court forthe District of Nevada. The complaint asserted that the Company’s wheel-basedgames, such as Monte CarloTM, Lucky WheelTM and Cash For LifeTM, its games with areel in the top box, such as Bonus FrenzyTM, and its iVIEWTM products infringedon patents held by IGT, and sought injunctive relief and damages in unspecifiedamounts. As part of its defense, the Company asserted counterclaims seekingdamages and other relief against IGT, including claims that IGT’s patents wereinvalid, unenforceable and not infringed, as well as several claims that IGTengaged in anti-competitive conduct in violation of state and federal antitrustlaws. In October 2008, the court granted the Company’s motions for summaryjudgment, ruling that IGT’s two “wheel” patents and a touch-screenplayer-tracking patent were invalid; that even if the patents were valid, theCompany’s wheel-based games at issue would not infringe; and that certain ofthe Company’s iVIEW products do not infringe the two asserted player-trackingpatents. The court also found issues of material fact regarding IGT’s allegedinequitable conduct before the U.S. Patent and Trademark Office and denied IGT’smotions to dismiss those claims, leaving them for trial. However, the courtpostponed the trial until after IGT has appealed the court’s summary judgmentson the Company’s antitrust allegations against IGT. IGT’s appeal is pending.

 

InApril 2006, IGT filed a patent infringement lawsuit against the Company inthe United States District Court for the District of Delaware. The complaintasserted that the Company’s Bally Power BonusingTM products infringe patentsheld by IGT, and sought injunctive relief and damages in unspecified amounts.The court took IGT’s motion for a preliminary injunction off-calendar, and a June 1, 2009trial date has been set. Of the nine patents and 200 claims originally filed inthe case by IGT, all but three patents and eight claims were dismissed. On April 28,2009, the District Court issued an order finding that Bally’s Power Promotions,Power Bank, and SDS/CMP Power Winners products do not infringe IGT’s patents.The court also found that Bally’s ACSC Power Winners and ACSC Power Rewardproducts infringe some patent claims asserted by IGT, but not others. Appealsby both parties are likely. In the meantime, the Company has undertaken technicalchanges to ensure non-infringement for the two products partially in question.The Company does not believe that potential infringement damages, if any, wouldbe material to the Company’s financial position as the revenues from these twoproducts to date have not been material.

 

In September 2006,the Company filed a patent infringement lawsuit against IGT in the UnitedStates District Court for the District of Nevada. The complaint asserted thatcertain of IGT’s bonus wheel games infringe a patent held by the Company, andsought injunctive relief and damages. IGT filed an answer generally denying theclaims and moved for summary judgment. In September 2008, the courtgranted IGT’s motions for summary judgment, declaring the wheel patent “obvious”and therefore invalid. This case is on appeal.

 

The Company is also aparty to various lawsuits relating to routine matters incidental to itsbusiness. Management does not believe that the outcome of such litigation,including the matters above, in the aggregate, will have a material adverseeffect on the Company’s consolidated financial position, results of operationsor cash flows.

 

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**10.****         ****SEGMENTAND GEOGRAPHICAL INFORMATION**

 

The Company operates intwo business segments: (i) Bally Gaming Equipment and Systems whichdesigns, manufactures, assembles, distributes and operates gaming devices andlicenses computerized monitoring and bonusing systems for gaming devices, and (ii) CasinoOperations which owns and operates a casino in Vicksburg, Mississippi. Certainexpenses related to Company-wide initiatives are managed at the corporate leveland not allocated to any operating segment. The accounting policies of thesesegments are consistent with the Company’s policies for the unaudited condensedconsolidated financial statements. The table below presents information as tothe Company’s revenues and operating income (loss) by segment:

 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                   | ** ** | **(in 000s)**                               | ** ** |
| Revenues:                    |       |                                             |       |                                            |       |   |   |   |   |
| Gaming Equipment and Systems |       | $                                                | 196,814    |                                            | $          | 219,608 |   | $ | 647,812 |   | $ | 616,126 |   |
| Casino Operations            |       | 10,769                                           |       | 13,001                                          |       | 30,463 |   | 36,165 |   |
| Total revenues               |       | $                                                | 207,583    |                                            | $          | 232,609 |   | $ | 678,275 |   | $ | 652,291 |   |
|                         |       |                                             |       |                                            |       |   |   |   |   |
| Inter-segment revenues:      |       |                                             |       |                                            |       |   |   |   |   |
| Gaming Equipment and Systems |       | $                                                | 144        |                                            | $          | 490 |   | $ | 1,164 |   | $ | 924 |   |
| Casino Operations            |       | —                                           |       | —                                          |       | — |   | — |   |
| Total inter-segment revenues |       | $                                                | 144        |                                            | $          | 490 |   | $ | 1,164 |   | $ | 924 |   |
|                         |       |                                             |       |                                            |       |   |   |   |   |
| Operating income (loss):     |       |                                             |       |                                            |       |   |   |   |   |
| Gaming Equipment and Systems |       | $                                                | 51,752     |                                            | $          | 56,221 |   | $ | 173,554 |   | $ | 154,113 |   |
| Casino Operations            |       | 3,698                                            |       | 5,387                                           |       | 9,052 |   | 13,429 |   |
| Corporate                    |       | (4,309                                           | )          | (6,753                                          | )          | (18,539 | ) | (24,723 | ) |
| Total operating income       |       | $                                                | 51,141     |                                            | $          | 54,855 |   | $ | 164,067 |   | $ | 142,819 |   |

 

The Company hasoperations based primarily in the United States as well as significant salesand distribution offices based in Europe and other foreign locations, includingSouth America. The table below presents information as to the Company’srevenues and operating income by geographic region which is determined bycountry of destination:

 

| ** **               | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **               | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **               | ** ** | **(in 000s)**                               | ** ** |
| Revenues:                |       |                                             |       |                                            |       |   |   |   |   |
| United States and Canada |       | $                                                | 161,662    |                                            | $          | 190,458 |   | $ | 565,746 |   | $ | 555,147 |   |
| Europe                   |       | 11,246                                           |       | 17,466                                          |       | 27,303 |   | 37,215 |   |
| Other foreign            |       | 34,675                                           |       | 24,685                                          |       | 85,226 |   | 59,929 |   |
| Total revenues           |       | $                                                | 207,583    |                                            | $          | 232,609 |   | $ | 678,275 |   | $ | 652,291 |   |
|                     |       |                                             |       |                                            |       |   |   |   |   |
| Operating income:        |       |                                             |       |                                            |       |   |   |   |   |
| United States and Canada |       | $                                                | 38,170     |                                            | $          | 45,087 |   | $ | 136,571 |   | $ | 123,038 |   |
| Europe                   |       | 4,096                                            |       | 5,993                                           |       | 8,310 |   | 12,614 |   |
| Other foreign            |       | 8,875                                            |       | 3,775                                           |       | 19,186 |   | 7,167 |   |
| Total operating income   |       | $                                                | 51,141     |                                            | $          | 54,855 |   | $ | 164,067 |   | $ | 142,819 |   |

 

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**ITEM 2.****                       ****MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Webegin this section with a summary of our key operating business divisions as ofMarch 31, 2009 and a brief overview of this Management’s Discussion andAnalysis of Financial Condition and Results of Operations. The overview isfollowed by a detailed analysis of our results of operations and our financialcondition and liquidity as of and for the three and nine months ended March 31,2009 and 2008. References to “we,” “our,” “us,” or the “Company” refer to BallyTechnologies, Inc. and its subsidiaries.

 

**Forward Looking Statements**

 

Certainstatements made or incorporated by reference in this Quarterly Report on Form 10-Q,in our other filings with the Securities and Exchange Commission (“SEC”), inour press releases and in statements made by or with the approval of authorizedpersonnel constitute “forward looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”) and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”), andare subject to the safe harbor created thereby. Forward looking statements reflect intent, belief or currentexpectations with respect to, among other things, future events and financialtrends affecting us. Forward looking statements are typically identified bywords such as “believes,” “estimates,” “expects,” “anticipates,” “plans,” “should,”“would” and similar expressions.

 

Althoughwe believe the expectations reflected in any forward looking statements arereasonable, readers are cautioned that forward looking statements involve knownand unknown risks and uncertainties, are not guarantees of future performanceand that actual results, performance or achievements may differ materiallyfrom any future results, performance or achievements expressed or implied bysuch forward looking statements. These differences can arise as a result of therisks described in Item 1A, Risk Factors included in our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2008 (the “2008 10-K”), as modified inour Quarterly Report on Form 10-Q for the three months ended September 30,2008, as well as other factors such as the impact of competition, the impact ofany prolonged downturn in the economy or the financial markets, our ability toservice debt, product development, foreign operations, dependence on keypersonnel, the ability to integrate future acquisitions, regulation by gamingauthorities, the outcome of pending litigation matters, gaming taxes, marketrisks and the potential adverse effects to our financial condition, results ofoperations or prospects.

 

Forwardlooking statements in this Quarterly Report on Form 10-Q speak only as ofthe date hereof, and forward looking statements in documents incorporated byreference speak only as of the date of those documents. Unless otherwiserequired by law, we undertake no obligation to publicly update or revise theseforward looking statements, whether as a result of new information, futureevents or otherwise. In light of these risks and uncertainties, we cannotassure you that the forward looking statements contained in this QuarterlyReport on Form 10-Q will, in fact, transpire.

 

**OurBusiness**

 

We are a diversified,worldwide gaming company that designs, manufactures, distributes and operatesgaming devices and computerized monitoring and accounting systems for gamingdevices. In addition to selling our gaming devices, we also offer our customersa wide range of rental options. Our primary technologies include gaming devicesfor land-based, riverboat and Native American casinos, video lottery andcentral determination markets and specialized system-based hardware andsoftware products. Our specialized system-based hardware and software productsprovide casinos with a wide range of marketing, data management, accounting,security and other software applications and tools to more effectively managetheir operations. We also own and operate the Rainbow Casino, a docksideriverboat casino in Vicksburg, Mississippi.

 

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We derive our revenuefrom the following four sources:

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

 

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

 

We design, manufacture,assemble, sell, maintain and operate a full range of technology-based gamingdevices and related equipment, parts and conversion kits. These devices arenormally configured to specific requirements based on a customer’s particularorder. Gaming devices are differentiated by a number of factors including, butnot limited to, game theme, cabinet style, pay table, game layout, bettingdenomination and minimum/maximum betting amount.

 

Our gaming devicesinclude a variety of innovative features and layouts in both video andmechanical-reel formats. Our gaming devices come in several different cabinetstyles with some devices featuring high-profile top boxes with various gamefeatures and varying sizes geared towards specific market niches. The gaming productswe create are the result of comprehensive product development efforts thatinclude extensive internal and third party testing. We also perform markettests of our products with the cooperation of casino operators to assessreliability and player appeal. We offer a number of different cabinet designs,from a standard upright to dramatic tower units to our new bar-top cabinet.

 

Our ALPHA EliteTM cabinetseries features interchangeable video and mechanical-reel configurations and isrecognized for its modularity, meaning that gaming operators can easily convertone game into another without having to invest in a whole new device. Inaddition to easily changing the cabinet from one game to another, themodularity of our cabinets allows gaming operators to convert cabinets fromvideo to mechanical-reel games and easily replace top boxes, button decks, andother key parts, protecting gaming operators’ previously invested capital. Themodularity of our cabinets, combined with the use of common parts, also makes maintenanceeasier for our customers, providing labor-saving benefits to gaming operators,while enabling a quicker manufacturing turn-around.

 

Our CineVisionTM cabinetseries features a wide-screen display that enables unique, on-screenprogressive features and bonus events. Enhancing this immersive interaction forplayers is a dynamic new surround-sound audio system and an advanced ergonomicdesign including padded armrests that creates a unique zone of comfort andprivacy for players.

 

Our CineReelsTM CineVisioncabinet design enables us to offer the industry’s first seven-reel mechanicalgaming device and another industry first, “micro-stepping” technology, thatprovides “all-stop” player control. This technology allows the player toimmediately stop all of the reels at once by tapping the “spin” button, thusenabling the player to establish their own rhythm of game play rather than havethe game dictate the pace of play.

 

Each gaming devicecontains an operating system referred to as a game platform. The game platformmanages the software needed to run the device. Game platforms and the relatedcomputer systems are constantly updated and revised to keep pace with theever-increasing complexity of modern game play requirements. The change in gameplay requirements is driven by, among other things, changes in consumer demand,capacity, security and regulation. The Linux-based ALPHA OSTM   is the platform for our entire video andmechanical reel gaming device product offerings.

 

The ALPHA OS platform isdesigned to separate the gaming operating system from the game layer, whichreduces the time required for game development. ALPHA OS is also designed toincorporate bonusing, free spin, scatter and other advanced game features,while providing internal and third-party developers with a secure, easy-to-useprogramming environment that incorporates an advanced set of development tools.Moreover, ALPHA OS is designed to support networked and server-based gaminginitiatives, including download of game results and game content andconfiguration management. Additionally, our layered architecture and modulardesign allows for adaptability and simplified requirement changes. ALPHA OS isdesigned to support Gaming Standard Association (“GSA”) standards and iscompatible with most common accounting, ticketing and bonusing systems. ALPHAOS also supports various game bonusing, multi-denomination, multi-game andmulti-pay table game configurations and can operate with stand alone, local andwide-area progressive products.

 

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Our sales are not limitedto our gaming devices. Customers that purchase or rent our gaming devicestypically purchase replacement parts, upgrades, game conversion kits and otherproducts from us to keep the devices in good working order and to enhance theunderlying performance of the devices. Certain equipment within gaming devicessuch as video monitors, bill validators, logic boards and printers aretypically replaced, whether as a result of part failures or new technologyofferings by our suppliers. These sales may also include game conversion kitsthat provide our customers the opportunity to offer a new theme or variant onthe existing product without the necessity of purchasing an entirely new gamingdevice.

 

We generally offer a90-day parts and labor warranty for new gaming devices. We provide severalafter-sale services to our customers including customer education programs, a24-hour customer service telephone hot-line, a web site for technical support,field service support programs and spare parts programs. Our historicalwarranty expense as a percentage of revenues has been less than 1%. From timeto time, we also sell used gaming devices, including products made by us aswell as those produced by our competitors. Generally, we acquire used devicesas trade-ins toward the purchase of new gaming devices. While a small secondarymarket exists in the United States, used devices are typically resold ininternational markets where new device purchases often prove to be too costly.Where appropriate, we incur costs to recondition used devices for resale or wemay elect to destroy the devices. We also occasionally sell used equipment inlots on an “as is” basis to used device brokers and customers.

 

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

 

We offer our customers awide range of rental options through our Gaming Operations division.Specifically, these arrangements are available under four business models:linked progressive systems, rental and daily fee games, video lottery systemsand centrally determined systems. In most cases, operating gaming devices undera rental arrangement requires us to invest capital in manufacturing the gamingdevice and related equipment, purchasing signs and seating and, in certaincases, acquiring certain intellectual property rights.

 

*LinkedProgressive Systems:*  We offer our customers gaming devices thatfeature a common jackpot or prize award that can be linked (within a casino, ina local-area network, or among multiple casinos within a market orjurisdiction) in a wide-area network. Progressive gaming devices are typicallyoffered to customers under a daily fee arrangement that is based on apercentage of the money wagered on the participating gaming devices. In manycases, we use a portion of these revenues to fund the ultimate payment of thejackpot awards.

 

*Rentaland Daily-Fee Games:*  We offer a variety of non-linked games andcontent on a rental basis for either a fixed daily fee or a fee based on thepercentage of the net win generated by the gaming device. This categoryincludes both gaming devices in which we retain ownership and depreciate overtheir estimated useful lives and gaming devices the casino purchases which areclassified as game sales revenues in which we provide the game content on adaily-fee basis, that results in a lower daily-fee than if we were to lease theentire gaming device. We market our rental and daily-fee games under suchtitles as Hot Shot ProgressiveTM, Quick Hit PlatinumTM, Golden MonkeyTM, ReelWinnersTM, Hee Haw® and Monte CarloTM.

 

*VideoLottery Systems:*  We offer both video and mechanical reeldevices that can operate as stand-alone devices or can interact with, or bemonitored by, central computers maintained by governmental agencies. Thefinancial model for this market requires us to build, deploy and maintain thedevices as well as provide the related equipment in return for a share of thenet win generated by the device.

 

*CentrallyDetermined Systems:*  We offer video and mechanical reel devicesthat connect to a central server which determines the outcome of the game.These systems primarily operate in Native American casinos in Washington,Florida and Oklahoma as well as in Mexico. In certain of these jurisdictions,our customers purchase our gaming devices, in which case the purchases areclassified as game sales revenues. In other jurisdictions, our customers rentthe gaming device, in which case the rental payments are classified as gamingoperations revenues. In each case, for the use of our central determinationsoftware we receive either a fixed daily fee or a percentage of the net wingenerated by the devices connected to the system.

 

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

 

We design, program,license and support casino enterprise systems for a wide range of customers ofvarying size and complexity under our Systems division. We believe we are theonly provider in the industry that offers a selection of technology platformoptions to our customers. Our products, which support GSA protocols, operate onplatforms such as Windows®, AS/400 (iSeries), Linux and UNIX which allows our customers tochoose a technology solution that meets their existing or future infrastructurerequirements.

 

Our systems typicallyprovide casino operators features such as active, real-time monitoring toolsfor gaming devices, tools to collect and manage customer data, security toprotect against theft and data loss, and marketing programs to enhance thegaming experience. Our casino enterprise product functionality has evolved frombasic automation of manual activities to highly integrated mission criticalapplications as a result of the convergence of gaming content and systemapplications into a single gaming-floor network. We market a number oftechnology solutions as Bally’s Networked Floor of the Future*TM*. Our Networked Floor of the Futureproduct suite features products and technologies that are designed for and takeadvantage of high-speed Ethernet gaming-floor network environments.

 

The following are theprimary systems we license to our customers:

 

·**                 ***Slot Floor Management:* Our game monitoring products are comprised of system-based hardwareconsisting of micro controller-based printed circuit boards installed withinthe gaming device as well as card readers, displays and keypads. We alsodevelop proprietary firmware that controls and manages the hardware componentsof our systems. This equipment provides casinos the ability to track playergaming activity through our casino management systems and monitor employeeaccess to gaming devices.

 

·**                 ***Casino Management:* Our casino management systems are composed of various system-basedhardware and software products that provide casino operators player loyaltysolutions comparable to frequent guest programs offered in other leisure andretail industries; database marketing and table game accounting solutionsincluding the calculation of all revenue and expense related items; and cageand credit accountability for all extensions of credit and cage cash balancingfunctions. Our solutions are designed and deployed in both domestic andinternational markets and adaptable to foreign languages and currencies. OurTableView product brings management of table game activities directly to thetable with a high-tech touch screen.

 

·**                 ***iVIEWTMPlayer-Communication Network:*  Our iVIEWnetwork leverages a small, horizontal liquid-crystal display screen andaccompanying hardware and software that resides in the gaming devices andserves as a communication tool to end players. Our iVIEW network is alsodesigned to work with our Bally Power BonusingTM suite of products and other newtechnologies under development. The network is being expanded to includedpicture in picture images in the main and secondary game screens through theuse of Display ManagerTM.

 

·**                 ***Bally Power Bonusing:* The Bally Power Bonusing products represent an integrated set ofcashless and bonusing features to enhance the gaming experience of casinopatrons. These products allow the transfer of funds using bar-coded coupons and/orencrypted PIN numbers to download either restricted or unrestricted credits tothe gaming device. These products, combined with innovative and excitingpromotions, allow casino operators to reduce cash and coin-handling expenses,minimize overall operating expenditures and provide creative marketingincentives to their casino patrons.

 

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

 

·**                 ***Download andConfiguration Manager (DCM):*  Our DCMproduct enables casinos to download marketing content on iVIEWs, configuregaming device paytables and game play options, and deliver new game content andgame libraries from a central server.

 

We market our systemproduct solutions under the broad categories of Bally CMS® (Casino Management Systems), Bally SMS® (Slot Management Systems) and Bally TMSTM(Table Management Systems).

 

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***Casino Operations***

 

The Rainbow Casino, locatedin Vicksburg, Mississippi, began operations in July 1994. It is one offive casinos operating in the Vicksburg, Mississippi market during the period.The facility includes a 33,000 square-foot casino with an average of 795 gamingdevices and 9 table games, a large buffet-style restaurant, and a 20,000square-foot conference center. The Casino also includes the 89-room RainbowHotel, which is owned and operated by a third party. Rainbow is marketed as a “locals”casino and draws mid-level gaming customers principally from within a 75-mileradius of Vicksburg. Our promotions are focused primarily on direct mail andspecial promotional events.

 

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

 

The operation of casinosis a highly competitive business. Gaming of all types is available throughoutMississippi in numerous locations as well as in surrounding markets. Theprincipal competitive factors in the industry include the structure, age andlocation of the facility, the nature, variety and quality of the amenities andcustomer services offered, and the continuous development, implementation andsuccess of a variety of marketing programs. Our Rainbow Casino faces intensedirect competition from other gaming facilities servicing the Vicksburg market,and, to a lesser degree, indirect competition from those servicing the GulfCoast region. A new casino project adjacent to the Rainbow Casino opened inlate October 2008 and a nearby competitor property recently expanded itscasino and added 500 slot machines and the market’s largest live poker room.

 

**Overview**

 

Wereport our revenue and income in two reportable segments: the Bally GamingEquipment and Systems segment, which includes our Gaming Equipment, Gaming Operationsand Systems divisions, and our Casino Operations segment. Our total revenueswere $207.6 million and $232.6 million and $678.3 million and $652.3 millionfor the three and nine months ended March 31, 2009 and 2008, respectively.Revenue from our Bally Gaming Equipment and Systems segment representedapproximately 95% and 94% of our total revenues for the three months ended March 31,2009 and 2008, respectively, and 96% and 94% of our total revenues for the ninemonths ended March 31, 2009 and 2008, respectively.

 

Wereview certain financial measures in assessing our financial condition andoperating performance not only in connection with creating our forecasts and inmaking comparisons to financial results from prior periods, but also in makingcomparisons to our competitors’ financial results. We focus on fluctuations inrevenue, cost and gross margin in the Bally Gaming Equipment and Systems andCasino Operations segments and also pay close attention to improvements inconsolidated operating income, net income, diluted earnings per share, adjustedEBITDA (earnings before interest, taxes, depreciation and amortization,including asset charges and share-based compensation) and cash flows fromoperations as they are key indicators of our success in growing our business.We also measure changes in selling, general and administrative expenses as apercent of revenue, which indicate management’s ability to control costs, aswell as changes in research and development as a percent of revenue, whichdemonstrate investment in our technology assets.  The measures listed above are not acomprehensive list of all factors considered by us in assessing our financialcondition and operating performance, and we may consider other individualmeasures as required by trends and discrete events arising in a specificperiod, but they are the key indicators that we generally weigh most heavilyfrom period to period.

 

Weare currently operating in a challenging economic environment and thecombination of economic uncertainty, lower demand for replacement products andreduced opportunities from new or expanded markets has negatively impacted ourconsolidated results. We expect to benefit from certain new or expansionprojects currently in process, but the breadth and timing of such opportunitiesremains uncertain due to the difficult credit environment facing our customersand the risk of continued economic uncertainty. While we expect demand in the replacement market will remain sluggish inthe near term, we are becoming cautiously optimistic that gaming operators’replacement game buying demand will begin to improve in calendar 2010.

 

GamingEquipment sales by our Bally Gaming Equipment and Systems segment in NorthAmerica have been adversely affected by the sluggish demand for replacementproducts. During the three and nine months ended March 31, 2009 and 2008,we sold 4,368 and 6,742 and 17,065 and 19,037 new gaming devices, respectively.Additionally, during the third quarter, our game sales margins were negativelyimpacted from the lower mix of higher margin products sold and a higher perunit allocation of overhead due to the decrease in the number of unitsproduced.

 

Theadverse affects of these matters were partially offset by our continuedexpansion into international markets during the period. International revenueswere $45.9 million and $42.2 million and $112.5 million and $97.1 million forthe three and nine months ended March 31, 2009 and 2008, respectively.

 

Revenuesfrom the Rainbow Casino also decreased in both the three and nine months ended March 31,2009, when compared to the same period last year, reflecting the impact of thecurrent economic conditions.

 

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Despitethe challenging economic conditions, we have experienced continued strength inGaming Operations and Systems revenues during the period. Gaming Operationsrevenues were $70.0 million and $58.9 million and $204.2 million and $167.2million during the three and nine months ended March 31, 2009 and 2008,respectively. Revenues were significantly higher than in the prior periods dueprimarily to the continued performance of existing and new premium game unitsand expansion in our Class II business. Gaming operations margins improveddue to better management of our capital, more strategic placements and supplychain efficiencies. In addition, we experienced significant growth in theinstalled base of our centrally determined systems which increased byapproximately 4,700 units over March 31, 2008 due primarily to increasedplacements, especially in the Class II and centrally determined markets.We have just released, or will soon release, some new products including ournew spinning-wheel game, Cash WheelTM, Transparent ReelsTM, our all new Digital Tower Series platform,which includes 77777 JackpotTM, and FireballTM, and our Jumbo and DualVisionTMcabinets. We continue to focus our efforts on the introduction of new andinnovative games and cabinets both for our video and stepper platforms.

 

Systemsrevenues were $56.6 million and $57.0 million and $164.8 million and $152.4million for the three and nine months ended March 31, 2009 and 2008,respectively. Maintenance revenue increased 25% and 24% in the three and ninemonths ended March 31, 2009, respectively, when compared to the sameperiods last year as a result of an increased install base of customers on oursystems. For systems, the new SDS version 11, which runs on both Unix andWindows off the same code base, our iVIEW Display ManagerTM, and our Power Bonusing products are generatingpositive interest. Over the last few years, we have continued our focus on thebasics of enterprise software development, delivery, customer support andservices discipline, on improving core products, providing good upgradepossibilities for our customers, and increasing customer satisfaction levelsbased on better service and support which are all serving us well in thesedifficult economic times.

 

Managementcontinuously monitors and reviews its operating expenses and selling, generaland administrative expenses in comparison to revenues.  Despite lower revenues during the threemonths ended March 31, 2009, when compared to the same period last year,our selling, general and administrative expenses remained at 26% of revenues.Selling, general and administrative expenses as a percentage of revenuedeclined to 25% during the nine months ended March 31, 2009, when compared to27% during the same period last year.

 

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**Resultsof Operations**

 

***Bally Gaming Equipment and Systems***

 

The summary financialresults and operating statistics for our Bally Gaming Equipment and Systemssegment for the three months and nine months ended March 31, 2009 and 2008were as follows:

 
| ** **                          | ** **             | **Three Months Ended March 31,** | ** **             | **Nine Months Ended March 31,** | ** ** |
|-------------------------------------|------------------------|------------------------------------------------------|------------------------|-----------------------------------------------------|------------|
| ** **                          | **   ** | **2009**                                             | **   ** | **% Rev**                                      | ** ** | **2008** | **   ** | **% Rev** | ** ** | **2009** | **   ** | **% Rev** | ** ** | **2008** | **   ** | **% Rev** | ** ** |
| ** **                          | ** **             | **(dollars in millions)**                  | ** **             |
| Revenues:                           |                   |                                                 |                   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment                    |                   | $                                                    | 70.2                   |                                                | 36         | % | $ | 103.7 |   | 47 | % | $ | 278.8 |   | 43 | % | $ | 296.4 |   | 48 | % |
| Gaming Operations                   |                   | 70.0                                                 |                   | 35                                                  | %          | 58.9 |   | 27 | % | 204.2 |   | 32 | % | 167.2 |   | 27 | % |
| Systems                             |                   | 56.6                                                 |                   | 29                                                  | %          | 57.0 |   | 26 | % | 164.8 |   | 25 | % | 152.5 |   | 25 | % |
| Total revenues                      |                   | $                                                    | 196.8                  |                                                | 100        | % | $ | 219.6 |   | 100 | % | $ | 647.8 |   | 100 | % | $ | 616.1 |   | 100 | % |
|                                |                   |                                                 |                   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross Margin:                       |                   |                                                 |                   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment (1)                |                   | $                                                    | 31.2                   |                                                | 45         | % | $ | 45.5 |   | 44 | % | $ | 128.5 |   | 46 | % | $ | 132.1 |   | 45 | % |
| Gaming Operations                   |                   | 50.7                                                 |                   | 72                                                  | %          | 41.3 |   | 70 | % | 143.3 |   | 70 | % | 108.7 |   | 65 | % |
| Systems (1)                         |                   | 41.0                                                 |                   | 72                                                  | %          | 40.2 |   | 71 | % | 120.7 |   | 73 | % | 111.1 |   | 73 | % |
| Total gross margin                  |                   | $                                                    | 122.9                  |                                                | 62         | % | $ | 127.0 |   | 58 | % | $ | 392.5 |   | 61 | % | $ | 351.9 |   | 57 | % |
|                                |                   |                                                 |                   |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative |                   | $                                                    | 46.9                   |                                                | 24         | % | $ | 52.0 |   | 24 | % | $ | 146.7 |   | 23 | % | $ | 143.6 |   | 23 | % |
| Research and development costs      |                   | 19.3                                                 |                   | 10                                                  | %          | 15.1 |   | 7 | % | 58.5 |   | 9 | % | 43.1 |   | 7 | % |
| Depreciation and amortization       |                   | 4.9                                                  |                   | 2                                                   | %          | 3.7 |   | 2 | % | 13.7 |   | 2 | % | 11.1 |   | 2 | % |
| Operating income                    |                   | $                                                    | 51.8                   |                                                | 26         | % | $ | 56.2 |   | 25 | % | $ | 173.6 |   | 27 | % | $ | 154.1 |   | 25 | % |

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

 
| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Operating Statistics                                    |       |                                             |       |                                            |       |   |   |   |   |
| New gaming devices                                      |       | 4,368                                            |       | 6,742                                           |       | 17,065 |   | 19,037 |   |
| Original Equipment Manufacturer (“OEM”) units |       | —                                           |       | —                                          |       | 505 |   | — |   |
| New unit Average Selling Price (“ASP”)        |       | $                                                | 14,191     |                                            | $          | 13,427 |   | $ | 14,263 |   | $ | 13,281 |   |
|                                                    |       |                                             |       |                                            |       |   |   |   |   |
|                                                    |       |                                             |       |                                            |       | **As of March 31,** |   |
|                                                    |       |                                             |       |                                            |       | **2009** |   | **2008** | ** ** |
| End of period installed base:                           |       |                                             |       |                                            |       |   |   |   |   |
| Gaming monitoring units installed base                  |       |                                             |       |                                            |       | 355,000 |   | 315,000 |   |
| Systems managed cashless games                          |       |                                             |       |                                            |       | 306,000 |   | 272,000 |   |
|                                                    |       |                                             |       |                                            |       |   |   |   |   |
| Wide-area progressive                                   |       |                                             |       |                                            |       | 1,029 |   | 990 |   |
| Local-area progressive                                  |       |                                             |       |                                            |       | 192 |   | 269 |   |
| Total linked progressive systems                        |       |                                             |       |                                            |       | 1,221 |   | 1,259 |   |
|                                                    |       |                                             |       |                                            |       |   |   |   |   |
| Rental and daily-fee games                              |       |                                             |       |                                            |       | 12,208 |   | 12,377 |   |
| Lottery systems                                         |       |                                             |       |                                            |       | 8,152 |   | 7,980 |   |
| Centrally determined systems                            |       |                                             |       |                                            |       | 47,637 |   | 42,924 | (1) |
|                                                         |            |                                                  |            |                                                 |            |  |  |  |  |  |  |  |  |

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(1)          Daily fee revenue fromapproximately 9,100 units included in the centrally determined systems end ofperiod installed base total as of March 31, 2008 was deferred, and was notincluded in gaming operations revenue until the second quarter of fiscal 2009when the completion of certain contractual commitments necessary to recognizerevenue under the Company’s revenue-recognition policy occurred.

 

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**Three Months Ended March 31, 2009 Compared to Three Months Ended March 31,2008**

 

Totalrevenues for our Bally Gaming Equipment and Systems segment decreased $22.8million, or 10%, in the three months ended March 31, 2009, when comparedto the same period last year, as a result of the following:

 

*Gaming Equipment Revenue**.*Gaming Equipment revenue decreased by $33.5 million, or 32%, toapproximately $70.2 million primarily as a result of a 35% decrease in newgaming device sales to 4,368 units in the three months ended March 31,2009, when compared to 6,742 units sold in the same period last year. Thedecrease in new gaming device sales was offset by a 6% increase in the ASP,excluding OEM units, of new gaming devices as the result of a reduction indiscounts and trade-ins with customers and the increase in international unitsales, as compared to domestic unit sales, which had a higher ASP during theperiod. In addition , used game revenue and sales of parts decreased $2.8million, or 32%, during the three months ended March 31, 2009, whencompared to the same period last year.

 

*Gaming Equipment Gross Margin*. GamingEquipment gross margin increased to 45% in the three months ended March 31,2009 from 44%, in the same period last year, primarily as a result of theincreased ASP and a reduction in discounts and trade-ins with customers. Duringthe current quarter, there were $0.8 million in inventory write-downs as comparedto $2.6 million in the same period last year. The decrease in inventorywrite-downs was aresult of improved material planning efforts and a concentrated effort toconvert or rework slower moving inventory during the current fiscal year.

 

*Gaming Operations Revenue**.*Gaming Operations revenue increased $11.1 million, or 19%, toapproximately $70.0 million in the three months ended March 31, 2009, whencompared to the same period last year, primarily as a result of an increase inthe installed base of centrally determined systems, and the impact from theintroduction of certain flat fee rental units.

 

AtMarch 31, 2009, there was a slight decrease in our installed base ofrental and daily fee games from 12,377 units as of March 31, 2008 to12,208 units as of March 31, 2009.

 

Ourinstalled base of devices connected to our centrally determined systems (Class II,Video Lottery and iVIEW network) increased 11% from 42,924 units as of March 31,2008 to 47,637 units as of March 31, 2009 due primarily to units added inMexico, Alabama and Washington.

 

*Gaming Operations Gross Margin*. Gross margin increased to72% in the three months ended March 31, 2009 from 70%, in the same periodlast year, primarily as a result of a significant increases in license, rentaland participation revenue which had little associated variable costs. Cost ofgaming operations increased $1.7 million, or 9%, in the three months ended March 31,2009, as compared to the prior year period, primarily due to depreciationexpense included in cost of gaming operations which was higher due to theincrease in gaming operations units placed and infrastructure installed incustomer locations under rental and participation arrangements. The increase indepreciation expense was offset by decreases in expenditures for parts, signsand meters and royalty expense during the same period due to more strategicmanagement of our capital.

 

*Systems Revenue**.*Systems revenue decreased by$0.4 million to approximately $56.6 million in the three months ended March 31,2009 when compared to the same period last year. Systems maintenance revenuewas $13.1 million, representing an increase of $2.6 million, or 25%, in thethree months ended March 31, 2009 when compared to $10.5 million in thesame period last year.

 

*Systems Gross Margin.*Systems gross marginincreased to 72% in the three months ended March 31, 2009 from 71%, in thesame period last year, primarily as a result of product mix.

 

 

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*Selling, General and Administrative Expenses**.*Selling, general and administrativeexpenses decreased $5.1 million, or 10%, in the three months ended March 31,2009, when compared to the same period last year. Legal fees decreased $0.9million during the three months ended March 31, 2009, when compared to thesame period last year, due to a reduction in activity while certain casesremain on appeal. In addition, temporary labor and related outside servicesexpense decreased $2.0 million, and supplies and printing expense decreased$1.2 million during the same period. Bad debt expense also decreased$1.0 million during the three months ended March 31, 2009, whencompared to the same period last year, due to a reduction in net write-offsduring the period. These decreases were partially offset by an increase insalaries and related expenses of $3.9 million, or 10%, in the three monthsended March 31, 2009, when compared to the same period last year, dueprimarily to increases in staffing to meet growing demands of the businessincluding expansion in international markets.

 

*Research and Development Costs*. Research and development costs increased$4.2 million, or 28%, in the three months ended March 31, 2009, whencompared to the same period last year, as a result of the increase in projectscoupled with an increase in staffing, primarily in our India DevelopmentCenters. We remain focused on our technology assets due to the competitivelandscape that requires a continual investment in future generations of gamingproducts and systems.

 

*Depreciation and Amortization Expense*. Depreciationand amortization expense increased $1.2 million, or 32%, in the three monthsended March 31, 2009, when compared to same period last year, primarily asa result of certain intangible assets which began amortizing during the currentperiod.

 

**Nine Months Ended March 31, 2009 Compared to Nine Months Ended March 31,2008**

 

Totalrevenues for our Bally Gaming Equipment and Systems segment increased $31.7million, or 5%, in the nine months ended March 31, 2009, when compared tothe same period last year, as a result of the following:

 

*Gaming Equipment Revenue**.*Gaming Equipment revenue decreased by $17.6 million, or 6%, to approximately$278.8 million primarily as a result of a 10% decrease in new gaming devicesales to 17,065 units in the nine months ended March 31, 2009, whencompared to 19,037 units sold in the same period last year and the sale of 505OEM units during the current period. There were no sales of OEM units in thenine months ended March 31, 2008. In addition, there was a 7% increase inthe ASP, excluding OEM units, of new gaming devices as the result of productmix, including the sale of certain premium units, a reduction in discounts andtrade-ins with customers and an increase in international sales with a higherASP during the same period. Used game revenue and sales of parts decreased$10.2 million during the nine months ended March 31, 2009 when compared tothe same period last year.

 

*Gaming Equipment Gross Margin*. GamingEquipment gross margin increased to 46% in the nine months ended March 31,2009 from 45%, in the same period last year, primarily as a result of theincreased ASP and lower material and production costs of our products. Royaltyexpense increased $1.1 million in the nine months ended March 31, 2009,when compared to the same period last year, due to an increase in feesassociated with unit sales and game conversions with third party titles. In addition,there were $3.6 million in inventory write-downs during the period as comparedto $7.6 million in the same period last year. The reduction in inventorywrite-downs was theresult of improved material planning efforts and a concentrated effort to convertor rework slower moving inventory during the period.

 

*Gaming Operations Revenue**.*Gaming Operations revenue increased $37.0 million, or 22%, toapproximately $204.2 million in the nine months ended March 31, 2009, whencompared to the same period last year, due primarily to an increase in theinstalled base of centrally determined systems.

 

Ourinstalled base of devices connected to our centrally determined systems (Class II,Video Lottery and iVIEW network) increased 11% from 42,924 units as of March 31,2008 to 47,637 units as of March 31, 2009 primarily due to units added inMexico, Alabama and Washington.

 

 

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*Gaming Operations Gross Margin*. Gross margin increased to70% in the nine months ended March 31, 2009 from 65%, in the same periodlast year, primarily as a result of the significant increases in both rentaland participation revenue which had little associated variable costs. Cost ofgaming operations increased $2.4 million, or 4%, in the nine months ended March 31,2009, as compared to the prior year period, primarily due to depreciationexpense included in cost of gaming operations which was higher due to theincrease in gaming operations units placed and infrastructure installed incustomer locations under rental and participation arrangements. The increase indepreciation expense was offset by decreases in expenditures for parts, signsand meters and royalty expense during the same period. Royalty expensedecreased $2.2 million due to the removal and fewer new placements of certainthird party titles during the same period last year.

 

*Systems Revenue**.*Systems revenue increased$12.3 million, or 8%, to approximately $164.8 million in the nine months ended March 31,2009 when compared to the same period last year primarily as a result ofcontinued acceptance of our products, including our iVIEW player-communicationdevices and Bally Power Bonusing software, and an increase in the number ofgo-lives with new customers and incremental sales to existing customers duringthe period. Systems maintenance revenue was $37.6 million representing anincrease of $7.3 million, or 24%, in the nine months ended March 31, 2009when compared to $30.3 million in the same period last year.

 

*Systems Gross Margin.*Systems gross margin was 73%in both the nine months ended March 31, 2009 and 2008.

 

*Selling, General and Administrative Expenses**.*Selling, general and administrativeexpenses increased $3.1 million, or 2%, in the nine months ended March 31,2009, when compared to the same period last year. Salaries and related expensesincreased $19.2 million, or 18%, in the nine months ended March 31,2009, when compared to the same period last year, due primarily to increases instaffing to meet growing demands of the business including expansion ininternational markets.

 

The increase in salariesand related expenses was offset by a $3.0 million insurance reimbursement inthe second quarter from previous claims for the 2005 U.S. Gulf Coasthurricanes. In addition, temporary labor and related outside servicesexpenditures decreased $4.0 million, legal fees decreased $1.1 million due to areduction in activity while certain cases remain on appeal,  supplies and printing expense decreased $1.0million and bad debt expense decreased $2.8 million during the sameperiod. The decrease in bad debt expense was due to a reduction in netwrite-offs during the period.

 

*Research and Development Costs*. Research and development costs increased$15.4 million, or 36%, in the nine months ended March 31, 2009, whencompared to the same period last year, primarily as a result of the increase inprojects coupled with an increase in staffing, primarily in our IndiaDevelopment Centers. We remain focused on our technology assets due to thecompetitive landscape that requires a continual investment in futuregenerations of gaming products and systems.

 

*Depreciation and Amortization Expense*. Depreciationand amortization expense increased $2.6 million, or 23%, in the nine monthsended March 31, 2009, when compared to same period last year, primarily asa result of certain intangible assets which began amortizing during the currentperiod.

 

 

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*** ***

***Casino Operations***

 

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

 
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                             | ** ** | **% Rev**                                      | ** ** | **2008** | ** ** | **% Rev** | ** ** | **2009** | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** |
| ** **                          | ** ** | **(dollars in millions)**                  | ** ** |
| Revenue                             |       | $                                                    | 10.8       |                                                | 100        | % | $ | 13.0 |   | 100 | % | $ | 30.5 |   | 100 | % | $ | 36.2 |   | 100 | % |
|                                |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative |       | $                                                    | 1.9        |                                                | 18         | % | $ | 2.0 |   | 15 | % | $ | 6.1 |   | 20 | % | $ | 6.4 |   | 18 | % |
| Depreciation and amortization       |       | $                                                    | 0.9        |                                                | 8          | % | $ | 0.7 |   | 5 | % | $ | 2.4 |   | 8 | % | $ | 2.0 |   | 6 | % |
| Operating income                    |       | $                                                    | 3.7        |                                                | 34         | % | $ | 5.4 |   | 41 | % | $ | 9.1 |   | 30 | % | $ | 13.4 |   | 37 | % |
|                                |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating statistics:               |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Average number of gaming devices    |       | 769                                                  |       |                                                |       | 831 |   |   |   | 795 |   |   |   | 830 |   |   |   |
| Average number of table games       |       | 7                                                    |       |                                                |       | 10 |   |   |   | 9 |   |   |   | 10 |   |   |   |

 

**Three Months Ended March 31, 2009 Compared to Three Months Ended March 31,2008**

 

*Casino Operations.*Revenue decreased by 17% forthe three months ended March 31, 2009 when compared to the same periodlast year due primarily toincreased competition from the opening of a new casino adjacent to our propertyin October 2008, the recent expansion of a nearby casino and an increasein promotional offers from other competitors in the Vicksburg market. TheMississippi River counties reported an 8% decline in gaming revenues for thethree months ended March 31, 2009, when compared to the same period lastyear, which also negatively affected the casino during the quarter. Inaddition, there was a 7% reduction in the average number of gaming devices and30% reduction in the average number of table games in the three months ended March 31,2009 when compared to the same period last year. The reduction in table gameshad a minimal effect on revenue because their removal made room for automatedroulette games. The reduction in gaming devices was temporary during aremodeling project at the casino. In April 2009, the casino had over 800gaming devices on the casino floor.

 

*Selling, General and Administrative Expenses*. Selling,general and administrative expenses decreased by $0.1 million, or 5%, for thethree months ended March 31, 2009 when compared to the same period lastyear due primarily to a 4% decrease in salaries and related expenses during thecurrent period. In addition, there was a 14% decrease in advertising andpromotional expenditures during the current period due to a reduction intelevision advertising at higher rates per advertisement, offset by an increasein billboard advertising at lower rates per advertisement.

 

*Depreciation and Amortization Expense*. Depreciation andamortization expense increased $0.2 million, or 29%, for the three months endedMarch 31, 2009, when compared to the same period last year, as a result ofequipment and leasehold additions during the period.

 

**NineMonths Ended March 31, 2009 Compared to Nine Months Ended March 31,2008**

 

*Casino Operations.*Revenue decreased by 16% forthe nine months ended March 31, 2009 when compared to the same period lastyear due primarily tothe increased competition in the area discussed above and a slowdown in theeconomy. The Mississippi River counties reported an 8% decline in gamingrevenues for the nine months ended March 31, 2009, when compared to thesame period last year, which negatively affected the casino during the period.In addition, there was a reduction in the average number of gaming devices andtable games by 4% and 10%, respectively, for the nine months ended March 31,2009 when compared to the same period last year.

 

*Selling, General and Administrative Expenses*. Selling,general and administrative expenses decreased by $0.3 million, or 5%, for thenine months ended March 31, 2009 when compared to the same period lastyear due primarily to a decrease in advertising and promotional expendituresduring the current period. The decrease in advertising and promotionalexpenditures was due to a reduction in television advertising with higher ratesper advertisement offset by an increase in newspaper and billboard advertisingwith lower rates per advertisement.

 

 

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*Depreciationand Amortization Expense*. Depreciation and amortization expenseincreased $0.4 million, or 20%, for the nine months ended March 31, 2009,when compared to the same period last year, as a result of equipment andleasehold additions and new slot machines deployed during the period.

 

***Parent Company***

 

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

 
| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                    | ** ** | **(dollars in millions)**                  | ** ** |
| General and administrative    |       | $                                                    | 4.3        |                                                | $          | 6.4 |   | $ | 18.3 |   | $ | 23.7 |   |
| Depreciation and amortization |       | —                                               |       | 0.3                                                 |       | 0.3 |   | 1.0 |   |
| Operating loss                |       | $                                                    | 4.3        |                                                | $          | 6.7 |   | $ | 18.6 |   | $ | 24.7 |   |
|                          |       |                                                 |       |                                                |       |   |   |   |   |
| Other income (expense)        |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income               |       | $                                                    | 0.7        |                                                | $          | 0.8 |   | $ | 2.8 |   | $ | 2.8 |   |
| Interest expense              |       | (4.2                                                 | )          | (6.3                                                | )          | (15.5 | ) | (20.8 | ) |
| Other, net                    |       | (0.8                                                 | )          | 1.3                                                 |       | (5.0 | ) | 2.3 |   |
| Total other expense           |       | $                                                    | (4.3       | )                                                   | $          | (4.2 | ) | $ | (17.7 | ) | $ | (15.7 | ) |
|                          |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax expense            |       | $                                                    | (16.2      | )                                                   | $          | (18.9 | ) | $ | (52.0 | ) | $ | (47.3 | ) |
| Minority interest             |       | $                                                    | (1.4       | )                                                   | $          | (1.5 | ) | $ | (1.2 | ) | $ | (3.9 | ) |

 

**Three Months Ended March 31, 2009 Compared to Three Months Ended March 31,2008**

 

*General and Administrative Expenses.*General and administrativeexpenses decreased $2.1 million, or 33%, in the three months ended March 31,2009, when compared to the same period last year. During the three months endedMarch 31, 2009, payroll and related expenses decreased $3.0 million,primarily due to an adjustment in the Company’s performance-based incentiveplan accrual during the period. In addition, during the same period, accountingand professional fees and legal fees decreased $1.5 million. These decreaseswere offset by a $2.7million reduction in miscellaneous income as a result of a gain related to theMindPlay settlement (see Note 5 to the unaudited condensed consolidatedfinancial statements*, Related PartyTransactions*) recognized in the same period last year.

 

*Depreciation and Amortization.*Depreciation andamortization expense decreased $0.3 million in the three months ended March 31,2009, when compared to the same period last year, primarily as a result ofcertain intangible assets fully amortizing earlier in the fiscal year.

 

*Other Income (Expense).*Other expense increased $0.1 million, or 2%, inthe three months ended March 31, 2009, when compared to the same periodlast year. The increase in other expense was primarily due to an increase inlosses incurred on foreign currency transactions as a result of thestrengthening U.S. dollar. Interest expense decreased $2.1 million due to thereduction in both the principal balance and the interest rate on the term loan,which decreased from 7.36% in three months ended March 31, 2008 to 5.14%in the same period this year, as discussed below under *FinancialCondition and Liquidity — Working Capital*. In December 2008, weentered into a floating-to-fixed interest rate swap to fixthe interest rate at 1.89% plus an applicable margin (3.25%, as of March 31,2009) until the term loan’s maturity in September 2012.

 

OurCredit Facility provides for leveraged based pricing starting on March 31,2009.  As our leverage ratio was below1.0 as of March 31, 2009, the interest rate on our term loan will be 1.89%plus an applicable margin of 2.75% starting on April 1, 2009 and willcontinue at that rate for the life of the loan provided our leverage ratioremains below 1.0.

 

*Income Tax Expense.*The effective income tax rate for the three monthsended March 31, 2009 was 35% compared to 37% for the same period lastyear. At the end of each interim period, we make our best estimate of theeffective tax rate expected to be applicable for the full fiscal year and theimpact of discrete items, if any, and adjust the quarterly rate, as necessary.

 

 

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*MinorityInterest.*Minorityinterest expense decreased in the three months ended March 31, 2009, whencompared to the same period last year, due primarily to a reduction in earningsfrom the Rainbow Casino and certain variable interest entities during thequarter.

 

**Nine Months Ended March 31, 2009 Compared to Nine Months Ended March 31,2008**

 

*General and Administrative Expenses.*General and administrativeexpenses decreased $5.4 million, or 23%, in the nine months ended March 31,2009, when compared to the same period last year. During the nine months ended March 31,2009, payroll and related expenses decreased $3.4 million, primarily due to areduction in bonus expense during the period, accounting and professional feesdecreased $1.3 million and legal fees decreased $2.8 million due to a reduction in activity whilecertain cases remain on appeal. These decreases were offset by a $2.6 million reduction inmiscellaneous income as a result of a gain related to the MindPlay settlement (*see*Note 5 to the unaudited condensed consolidated financial**statements*, Related PartyTransactions*) recognized in the same period last year.

 

*Other Income (Expense).*Other expense increased $2.0 million, or 13%, inthe nine months ended March 31, 2009, when compared to the same periodlast year. Other expense increased primarily due to the write-off of previouslycapitalized debt issuance costs of $0.8 million upon the financing of our newterm loan and revolving credit facility and an increase in losses incurred onforeign currency transactions as a result of the strengthening U.S. dollar.Interest expense decreased $5.3 million primarily due to the reduction in boththe principal balance and the interest rate on the term loan, which decreasedfrom an average of 8.25% in nine months ended March 31, 2008 to average of6.61% in the same period this year, as discussed below under *Financial Condition and Liquidity — Working Capital*.

 

*Income Tax Expense.*The effective income tax rate for the nine monthsended March 31, 2009 was 36% compared to 37% for the same period lastyear. The effective income tax rate for the nine months ended March 31,2009 reflected the retroactive reinstatement of a research and development taxcredit of approximately $2.3 million. Further, we are undergoing an examinationwith the Internal Revenue Service (“IRS”) of our United States federal income taxreturns for 2003 through 2005 and resolved certain items in the second quarter,which resulted in an adjustment to the income tax provision, which largelyoffset the research and development tax credit.

 

*MinorityInterest.*Minorityinterest expense decreased $2.7 million in the nine months ended March 31,2009, when compared to the same period last year, due primarily to a reductionin earnings from Rainbow Casino and certain variable interest entities duringthe period.

 

**Financial Condition and Liquidity**

 

*WorkingCapital*

 

Selectedbalance sheet accounts are as follows:

 
| ** **                              | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **Increase (decrease)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **2009**           | ** ** | **2008**          | ** ** | **Amount**                   | ** ** | **%** | ** ** |
| ** **                              | ** ** | **(in 000s)** | ** ** |
| Cash and cash equivalents               |       | $                  | 54,155     |              | $          | 66,570                       |       | $ | (12,415 | ) | (19 | )% |
|                                    |       |               |       |              |       |                         |       |   |   |
| Total long-term debt and capital leases |       | $                  | 269,814    |              | $          | 304,504                      |       | $ | (34,690 | ) | (11 | )% |
|                                    |       |               |       |              |       |                         |       |   |   |
| Total current assets                    |       | $                  | 463,525    |              | $          | 547,687                      |       | $ | (84,162 | ) | (15 | )% |
| Total current liabilities               |       | 194,850            |       | 294,398           |       | (99,548                      | )          | (34 | )% |
| Net working capital                     |       | $                  | 268,675    |              | $          | 253,289                      |       | $ | 15,386 |   | 6 | % |

 

As of March 31, 2009 and June 30, 2008, wehad $54.2 million and $66.6 million, respectively, in consolidated cash andcash equivalents which included approximately $4.5 million and $3.5 million,respectively, of cash utilized in our Casino Operations segment that is held invaults, cages or change banks. Pursuant to various state gaming regulations,certain cash accounts are maintained to ensure availability of funds to paywide-area progressive jackpot awards in installments rather than in onelump-sum. At March 31, 2009 and June 30, 2008, these accounts had anaggregate value of approximately $15.6 million and $13.1 million, respectively,which are classified as restricted cash in our unaudited condensed consolidatedbalance sheets. In addition, we purchase

 

 

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U.S. Treasury Strip Securities for the benefit ofjackpot winners who elect to receive winnings in annual or weekly installmentpayments. These securities are included in restricted long-term investments inthe accompanying unaudited condensed consolidated balance sheets, and totaled$11.7 million and $10.5 million as of March 31, 2009 and June 30,2008, respectively.

 

Our net working capitalincreased $15.4 million for the nine months ended March 31, 2009 and wasprimarily affected by the following components:

 

·                  A decrease in cash and cash equivalents of $12.4million due primarily to the purchase of equipment and technology assets, therepayment of debt and capital lease obligations and the repurchase of shares ofour common stock;

 

·                  A decrease of $62.6 million in deferred revenue,offset by a $29.3 million decrease in deferred cost of revenue, due to therecognition of previously deferred sales and related costs, due to satisfactionof criterion under our revenue recognition policy;

 

·                  A decrease of $48.1 million in accounts payable andaccrued liabilities due primarily to a reduction in expenditures as we continueto improve processes in managing cash including the implementation of purchasing and inventory controls;

 

·                  A decrease of $33.8 million in inventories due to ourefforts to reduce our overall costs by utilizing warehouse inventory to fulfillorders pertaining to the deployment of gaming operations units and eliminatingbuild-to-stock orders as we improve our forecasting and specific inventorydemand analyses;

 

·                  A decrease of $22.8 million in accounts receivable dueto increased collection efforts coupled with the application of $15.0 millionin customer deposits during the period; and

 

·                  An increase of $24.2 million in current maturities oflong-term debt and capital leases due primarily to the recent refinancing ofour term loan, offset by reductions in other notes payable and capital leaseobligations during the nine months ended March 31, 2009.

 

On September 29,2008, we entered into a new $225.0 million term loan and a new $75.0 millionrevolving credit facility (collectively, the “Credit Facility”). We also havethe option to request an increase in the size of the term loan and/or CreditFacility by up to $50.0 million in the aggregate provided that certain conditionsare met. The proceeds from the Credit Facility were used to repay existingbank term loans totaling $289.6 million and to pay for transaction fees andexpenses totaling $10.7 million which are being amortized over the term of theCredit Facility.

 

As of March 31,2009, there was $25.0 million of undrawn availability under the revolvingcredit facility. Availability under the revolving credit facility is reduced tothe extent of outstanding letters of credit.

 

The interest rate on theCredit Facility was set at LIBOR plus 3.25% through March 2009 andthereafter is subject to a leverage based pricing grid. If our leverage ratio,as defined under the Credit Facility, is greater than 1.5, the interest ratewill be LIBOR plus a margin of 3.25%; if the leverage ratio is between 1.0 and1.5, the interest rate will be LIBOR plus a margin of 3.00%; and if theleverage ratio is below 1.0, the interest rate will be LIBOR plus a margin of2.75%. In December 2008, we entered into a floating-to-fixed interest rateswap to fix the floating LIBOR based debt under the term loan to fixed ratedebt at an interest rate of 1.89% plus an applicable margin (3.25%, as of March 31,2009). The interest rate on the revolving credit facility was 3.73% at March 31,2009. See Note 4 tothe unaudited condensed consolidated financial statements, *Long-Term Debt and Capital Leases*.

 

The term loan requiresquarterly principal reductions of $6.25 million during the first year, $8.75million during the second year and $11.25 million during each of the third andfourth years, with a balloon payment due in September 2012. The CreditFacility matures in September 2012. The Credit Facility is collateralizedby substantially all of our domestic property and is guaranteed by each of ourdomestic subsidiaries, other than the entity that holds our interest in theRainbow Casino, and is secured by a pledge agreement.

 

 

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The Credit Facilitycontains a number of maintenance and other covenants that, among other things,restrict our ability and certain of our subsidiaries to dispose of assets,incur additional indebtedness or issue preferred stock, pay dividends or makeother distributions, enter into certain acquisitions, repurchase equityinterests or subordinated indebtedness, issue or sell equity interests of oursubsidiaries, engage in mergers or acquisitions or certain transactions withsubsidiaries and affiliates, and that otherwise restrict corporateactivities.  We were in compliance withthese covenants as of March 31, 2009.

 

The financial covenantsunder the Credit Facility consist of a leverage ratio and a fixed chargescoverage ratio. The leverage ratio is computed as total debt outstanding at theend of the quarter divided by the trailing twelve months Earnings BeforeInterest, Taxes, Depreciation and Amortization (“EBITDA”), excluding certaincash and non-cash charges. Our leverage ratio as of March 31, 2009 was0.90 versus a maximum allowable of 2.50 through March 31, 2009. From April 1,2009 to March 31, 2010, our maximum leverage ratio is 2.25; from April 1,2010 and thereafter, the maximum leverage ratio is 2.00 until maturity of theCredit Facility. The fixed charges coverage ratio is computed as EBITDA,adjusted for both the trailing twelve months capital expenditures and cashtaxes paid, divided by the trailing twelve months interest charges plus allpayments of principal made during the previous twelve months. The fixed chargescoverage ratio as of March 31, 2009 was 3.14 versus the covenant minimumof 2.00.

 

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

 

At March 31, 2009,we had no material commitments for capital expenditures.

 

***Cash Flow Summary***

 

Cashflows from operating activities are derived primarily from our two businesssegments, the Bally Gaming Equipment and Systems segment and the Rainbow Casinooperating segment. The Bally Gaming Equipment and Systems segment consists ofthree primary cash flow sources: Gaming Equipment, which includes the sale ofgaming devices and related equipment, parts and conversion kits; GamingOperations, which includes the operation of linked progressive systems, videolottery and centrally determined systems and the rental of gaming devices andcontent; and Systems, which includes the sale and support of computerizedmonitoring systems. Cash flows from Casino Operations are derived from theoperation of the Rainbow Casino. We utilize our cash to acquire materials forthe manufacture of goods for resale, to pay payroll, interest, taxes andselling, general and administrative expenses and to fund research anddevelopment activities.

 

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

 

Cashflows provided by operating activities were $87.7 million in the nine monthsended March 31, 2009 as compared to $33.8 million in the same period lastyear, a $53.9 million, or 160%, improvement primarily due to a $17.2 millionincrease in net income and the positive impact from a $40.1 million netincrease in changes in operating assets and liabilities during the same period.The net increase in changes in operating assets and liabilities included areduction in accounts and notes receivable and inventory due to increasedcollections on accounts receivable and improvements in inventory management,respectively, which was offset by a reduction in accounts payable, accrued liabilitiesand net deferrals of revenue and related costs during the same period,discussed above under *Financial Condition and Liquidity** — Working Capital*.

 

Inaddition, during the second quarter of fiscal 2009, we negotiated and receiveda final insurance settlement of $3.0 million related to 2005 U.S. Gulf Coasthurricane damages which destroyed or temporarily shut down our gamingoperations in the region when our rental and daily fee games were destroyed inthird party locations.

 

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Cashutilized for investing activities is primarily for additions to property, plantand equipment for purchases of furniture, fixtures, office and gamingequipment, improvements in leaseholds and the manufacture of goods for lease orrental, as well as investments in technology assets. During the nine monthsended March 31, 2009, we made capital expenditures of $21.6 million. Inaddition, during the second quarter of fiscal 2009, we purchased $5.2 millionin certain long-term and intangible assets including CoolSigndigital signagetechnology. The technology is for networked or standalone digital displays thatwork with our iVIEW display manager, allowing casinos to show messages on themain screen of electronic casino games, on top of games, in overhead displaysand in picture-in-picture scenarios.

 

Cashutilized for financing activities is primarily for the payment of capitalizeddebt fees and principal payments on our debt, as well as for the purchase ofshares of our common stock. On September 29, 2008, we entered into the Credit Facility. Theproceeds from the Credit Facility were used to repay existing bank term loanstotaling $289.6 million and to pay for transaction fees and expenses totaling$10.7 million, which are being amortized over the term of the Credit Facility.We made payments on notes payable and capital lease obligations of $20.1million during the nine months ended March 31, 2009, and we purchased1,291,216 shares of our common stock for $30.9 million under our sharerepurchase plan during the same period.

 

Cash provided by financing activities is primarilyfrom borrowings under our revolving credit facility and proceeds from theexercise of stock options and purchases of stock by employees under ourEmployee Stock Purchase Plan (“ESPP”). During the nine months ended March 31,2009, employees exercised options for 441,860 shares of common stock for $7.7million and purchased 71,530 shares of common stock for $1.3 million under ourESPP.

 

**Critical Accounting Policies**

 

Adescription of our critical accounting policies can be found in Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations in the 2008 10-K. There were no material changes to those policiesduring the nine months ended March 31, 2009.

 

**Recently Issued Accounting Pronouncements**

 

For a description ofrecently issued accounting pronouncements, see Note 1 to the unauditedcondensed consolidated financial statements, *Summary ofSignificant Accounting Policies.*

 

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**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*Interest Rate Risk*

 

As of March 31, 2009, we had total debtoutstanding of approximately $269.8 million, consisting primarily of $212.5million outstanding under our term loan, $50.0 million borrowed under ourrevolving credit facility, $2.8 million in related party debt, (see Note 5 tounaudited condensed consolidated financial statements, *RelatedParty Transactions*) and $4.5 million in capital lease obligationsand other debt. The interest rate for the revolving credit facility wasvariable, based on LIBOR for six months after closing of the transaction andthereafter is subject to a leveraged based pricing grid. The interest rate onthe term loan is fixed as a result of the floating-to-fixed interest rate swapentered into in December 2008. See Note 4 to unaudited condensedconsolidated financial statements, *Long-Term Debt and CapitalLeases*. The related party debt is variable and is based on LIBOR. Ifthe LIBOR rates were to increase or decrease by 100 basis points, with allother factors remaining constant, earnings would decrease or increase byapproximately $0.5 million annually, on a pre-tax basis.

 

*Foreign Currency Exchange Rate Risk*

 

Ourforeign subsidiaries generally use their domestic currency as their functionalcurrency. A 10% fluctuation in the exchange rates of these currencies againstthe U.S. dollar would result in a corresponding change in earnings reported inthe consolidated group of approximately $0.3 million.

 

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# **ITEM4. CONTROLS AND PROCEDURES**

# ** **

**Disclosure Controls and Procedures**

 

Asrequired by Rule 13a-15(b) promulgated under the Exchange Act, ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofour disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e),as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

Basedon this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that, as of March 31, 2009, our disclosure controls and procedureswere not effective due to the existing material weaknesses in our internalcontrol over financial reporting previously identified and discussed in the2008 10-K and below under “Management’s Report on Internal Control OverFinancial Reporting —Material Weakness in Internal Control Over FinancialReporting Previously Reported.”

 

While management hasconcluded that we have a material weakness related to internal control over financialreporting, we have devoted a significant amount of time and resources to theanalysis of the financial statements presented in this Quarterly Report on Form 10-Qfor the fiscal period ended March 31, 2009. Accordingly, managementbelieves that the financial statements included in this report fairly presentin all material respects, our financial condition, results of operations andcash flows.

 

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

 

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

 

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

 

Duringthe third quarter of fiscal 2009, management continued to implement itsremediation plan for the previously reported material weakness. The remediationplan was developed through investigations and reviews of the processes andactivities surrounding the previously reported material weakness and includeschanges in the design of these processes to prevent or detect similar futureoccurrences. We began implementing the remediation plan with respect to thepreviously reported material weakness, as discussed immediately below, duringthe second quarter of fiscal 2009 and continued to do so through the thirdquarter of fiscal 2009 and expect to have the material weakness remediated by June 30,2009.

 

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

 

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

 

As of June 30, 2008,we had a material weakness related to the operating effectiveness of revenuerecognition controls as the newly implemented controls had not been operatingfor a sufficient period of time to be considered effective. Specific controlsthat we believe were not effective as of June 30, 2008, include: (i) ourpolicies and guidelines pertaining to the identification and communication byour sales organization of all terms of customer arrangements relevant torevenue recognition, (ii) our controls over reviews of changes tostandardized contract language and timely communication of non-standardcontract terms as it relates to revenue recognition, (iii) our controlsover the accumulation of vendor specific objective evidence of fair value forundelivered software elements and identification of elements for which suchanalysis is required, and (iv) our review of customer parts ordersassociated with systems sales prior to shipment for terms or conditions thatmay impact revenue recognition.

 

**Changes in Internal Control OverFinancial Reporting during the Quarter Ended March 31, 2009**

 

Whilemanagement has continued to implement certain remediation activities describedin the 2008 10-K, there were no changes in our internal control over financialreporting that occurred in the three months ended March 31, 2009 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. The material weakness previouslydisclosed in the 2008 Form 10-K continues to exist as of March 31,2009.

 

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**PART II**

 

# **ITEM1.**          LEGAL PROCEEDINGS

# ** **

For a description of ourlegal proceedings, see Note 9 to the unaudited condensed consolidated financialstatements, *Commitments and Contingencies,* which isincorporated by reference in response to this item.

 

**ITEM 1A.       RISK FACTORS**

 

We are subject to risks and uncertainties that couldcause our actual results to differ materially from the expectations expressedin the forward looking statements. Factors that could cause our actual resultsto differ from expectations are described under “Item 1A. Risk Factors” in the2008 10-K as modified in our Quarterly Report on Form 10-Q for thethree months ended September 30, 2008.

 

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

 

On January 28, 1999,our Board of Directors approved a share repurchase plan under which, subject toprice and market conditions, purchases of shares can be made from time to timein the open market or in privately negotiated transactions using availablecash. On August 12, 2008, our Board of Directors reset the existing sharerepurchase plan to purchase up to $100 million of common stock.  Our quarterly share repurchases under thisplan were as follows:

 
| **Period**                                       | **    ** | **Total  Number  of Shares  (or Units)  Purchased** | **    ** | **Average Price  Paid Per  Share  (or Unit)** | **    ** | **Total Number of  Shares  (or Units) Purchased  as Part of Publicly  Announced   Plans or Programs** | **    ** | **Maximum Number  (or Approximate Dollar  Value)  of Shares (or Units)  That May Yet Be Purchased  Under the Plans or Programs** | **   ** |
|--------------------------------------------------|------------------------------|---------------------------------------------------------------|------------------------------|--------------------------------------------------------------|------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|
|                                             |                         |                                                          |                         |                                                         |                         |                                                                                                                                                    |                         | $                                                                                                                                                                                                 | 72,965,196             |   |
| January 1 - January 31, 2009 |                         | —                                                        |                         | $                                                            | —                       |                                                                                                                                                    | —                       |                                                                                                                                                                                              | $                      | 72,965,196 |   |
| February 1 -  February 28, 2009   |                         | 100,200                                                       |                         | $                                                            | 19.46                        |                                                                                                                                                    | 100,200                      |                                                                                                                                                                                              | $                      | 71,014,987 |   |
| March 1 - March 31, 2009     |                         | 125,000                                                       |                         | $                                                            | 15.58                        |                                                                                                                                                    | 125,000                      |                                                                                                                                                                                              | $                      | 69,067,337 |   |
| Total                                            |                         | 225,200                                                       |                         | $                                                            | 17.31                        |                                                                                                                                                    | 225,200                      |                                                                                                                                                                                              |                   |   |

 

Information with respect to working capital restrictions andother limitations upon the payment of dividends is set forth in Note 4 to theunaudited condensed consolidated financial statements, *Long-termDebt and Capital Leases*, and is incorporated herein by reference.

 

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**ITEM 6.          EXHIBITS**

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

 

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**SIGNATURES**

 

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

 

| BALLY TECHNOLOGIES, INC. | Date: May 8, 2009                                          |
|-------------------------------|-----------------------------------------------------------------|
|                          |                                                            |
|                          |                                                            |
| By                            | /s/ Richard Haddrill                                            |   |
|                          | Richard Haddrill                                                |   |
|                          | President and Chief Executive Officer                           |   |
|                          | (Principal Executive Officer)                                   |   |
|                          |                                                            |   |
| By                            | /s/ Robert C. Caller                                            |   |
|                          | Robert C. Caller                                                |   |
|                          | Executive Vice President, Chief Financial Officer and Treasurer |   |
|                          | (Principal Financial Officer)                                   |   |

 

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