Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND 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 December 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**

 

**BALLYTECHNOLOGIES, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**6601 S. Bermuda Rd.**

**Las Vegas, Nevada  89119**

(Address of principal executive offices)

 

**(702) 584-7700**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant: (1) has filed all reports 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 o                       |   | Smaller  Reporting Company o |
| (do not check if  a smaller reporting company) |   |                         |

 

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 February 1,2010, was 55,222,000 which do not include 3,673,000 shares held in treasury.

 

 

 

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Table ofContents

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                                          | ** ** | **Page** |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                          | ** ** | **3**    |
|              |                                                                                                                                |       |     |
| Item  1.          | Financial Statements                                                                                                                |       |     |
|              |                                                                                                                                |       |     |
|              | Unaudited  Condensed Consolidated Balance Sheets as of December 31, 2009 and  June 30, 2009                               |       | 3        |
|              |                                                                                                                                |       |     |
|              | Unaudited  Condensed Consolidated Statements of Operations for the Three and Six Months  Ended December 31, 2009 and 2008      |       | 4        |
|              |                                                                                                                                |       |     |
|              | Unaudited  Condensed Consolidated Statements of Stockholder’s Equity for the Six Months  Ended December 31, 2008 and 2009 |       | 5        |
|              |                                                                                                                                |       |     |
|              | Unaudited  Condensed Consolidated Statements of Cash Flows for the Six Months Ended  December 31, 2009 and 2008                |       | 6        |
|              |                                                                                                                                |       |     |
|              | Notes  to Unaudited Condensed Consolidated Financial Statements                                                                     |       | 8        |
|              |                                                                                                                                |       |     |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                         |       | 20       |
|              |                                                                                                                                |       |     |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk                                                                         |       | 33       |
|              |                                                                                                                                |       |     |
| Item 4.           | Controls and Procedures                                                                                                             |       | 34       |
|              |                                                                                                                                |       |     |
| **PART II.** | **OTHER INFORMATION**                                                                                                               | ** ** | **35**   |
|              |                                                                                                                                |       |     |
| Item 1.           | Legal Proceedings                                                                                                                   |       | 35       |
|              |                                                                                                                                |       |     |
| Item 1A.          | Risk Factors                                                                                                                        |       | 35       |
|              |                                                                                                                                |       |     |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                        |       | 35       |
|              |                                                                                                                                |       |     |
| Item 4.           | Submission  of Matters to a Vote of Security Holders                                                                                |       | 36       |
|              |                                                                                                                                |       |     |
| Item 6.           | Exhibits                                                                                                                            |       | 37       |
|              |                                                                                                                                |       |     |
| **SIGNATURES**    | ** **                                                                                                                          | ** ** | **38**   |

 

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Tableof Contents

 

**PART I**

**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATEDBALANCE SHEETS**

** **
| ** **                                                                                                                                       | ** ** | **December 31,********2009**   | ** ** | **June 30,******** 2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(in 000s, except share amounts)** | ** ** |
| **ASSETS**                                                                                                                                       |       |                                |       |                                |       |
| Current assets:                                                                                                                                  |       |                                |       |                                |       |
| Cash and cash equivalents                                                                                                                        |       | $                                   | 71,315     |                                | $          | 64,598 |   |
| Restricted cash                                                                                                                                  |       | 7,587                               |       | 9,076                               |       |
| Accounts and notes receivable, net of allowances  for doubtful accounts of $9,165 and $8,939                                                     |       | 212,778                             |       | 174,698                             |       |
| Inventories                                                                                                                                      |       | 43,692                              |       | 52,942                              |       |
| Prepaid and refundable income tax                                                                                                                |       | 31,416                              |       | 43,756                              |       |
| Deferred income tax assets                                                                                                                       |       | 38,800                              |       | 36,114                              |       |
| Deferred cost of revenue                                                                                                                         |       | 17,990                              |       | 21,906                              |       |
| Prepaid assets                                                                                                                                   |       | 12,772                              |       | 7,531                               |       |
| Other current assets                                                                                                                             |       | 5,452                               |       | 13,018                              |       |
| Total current assets                                                                                                                             |       | 441,802                             |       | 423,639                             |       |
| Restricted long-term investments                                                                                                                 |       | 12,304                              |       | 12,097                              |       |
| Long-term receivables                                                                                                                            |       | 23,447                              |       | 9,826                               |       |
| Property, plant and equipment, net of accumulated  depreciation of $69,846 and $64,113                                                           |       | 74,330                              |       | 76,889                              |       |
| Leased gaming equipment, net of accumulated  depreciation of $137,743 and $117,638                                                               |       | 88,697                              |       | 95,012                              |       |
| Goodwill                                                                                                                                         |       | 162,085                             |       | 161,960                             |       |
| Intangible assets, net                                                                                                                           |       | 36,721                              |       | 32,198                              |       |
| Deferred income tax assets                                                                                                                       |       | 15,380                              |       | 15,373                              |       |
| Long-term deferred cost of revenue                                                                                                               |       | 35,997                              |       | 41,615                              |       |
| Other assets, net                                                                                                                                |       | 10,504                              |       | 12,273                              |       |
| Total assets                                                                                                                                     |       | $                                   | 901,267    |                                | $          | 880,882 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                    |       |                                |       |                                |       |
| Current liabilities:                                                                                                                             |       |                                |       |                                |       |
| Accounts payable                                                                                                                                 |       | $                                   | 21,328     |                                | $          | 20,574 |   |
| Accrued liabilities                                                                                                                              |       | 37,066                              |       | 47,405                              |       |
| Customer deposits                                                                                                                                |       | 9,226                               |       | 10,375                              |       |
| Jackpot liabilities                                                                                                                              |       | 10,825                              |       | 12,266                              |       |
| Deferred revenue                                                                                                                                 |       | 43,091                              |       | 49,122                              |       |
| Income tax payable                                                                                                                               |       | 2,005                               |       | 2,971                               |       |
| Current maturities of long-term debt                                                                                                             |       | 37,547                              |       | 35,337                              |       |
| Total current liabilities                                                                                                                        |       | 161,088                             |       | 178,050                             |       |
| Long-term debt, net of current maturities                                                                                                        |       | 153,750                             |       | 173,750                             |       |
| Long-term deferred revenue                                                                                                                       |       | 50,341                              |       | 60,464                              |       |
| Other income tax liability                                                                                                                       |       | 19,842                              |       | 22,072                              |       |
| Other liabilities                                                                                                                                |       | 8,418                               |       | 7,797                               |       |
| Total liabilities                                                                                                                                |       | 393,439                             |       | 442,133                             |       |
| 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; 58,606,000 and 57,091,000 shares issued and 55,028,000 and  54,312,000 outstanding |       | 5,854                               |       | 5,703                               |       |
| Treasury stock at cost, 3,578,000 and 2,779,000  shares                                                                                          |       | (96,148                             | )          | (64,727                             | )          |
| Additional paid-in capital                                                                                                                       |       | 366,479                             |       | 330,465                             |       |
| Accumulated other comprehensive loss                                                                                                             |       | (470                                | )          | (770                                | )          |
| Retained earnings                                                                                                                                |       | 229,500                             |       | 165,623                             |       |
| Total Bally Technologies, Inc. stockholders’  equity                                                                                   |       | 505,227                             |       | 436,306                             |       |
| Noncontrolling interests                                                                                                                         |       | 2,601                               |       | 2,443                               |       |
| Total stockholders’ equity                                                                                                                  |       | 507,828                             |       | 438,749                             |       |
| Total liabilities and stockholders’ equity                                                                                                  |       | $                                   | 901,267    |                                | $          | 880,882 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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 **BALLYTECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
| ** **                                                                | ** ** | **Three Months Ended  December 31,**              | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                | ** ** | **2009**                                                         | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Revenues:                                                                 |       |                                                             |       |                                              |       |   |   |   |   |
| Gaming equipment and systems                                              |       | $                                                                | 136,395    |                                              | $          | 157,241 |   | $ | 252,416 |   | $ | 316,815 |   |
| Gaming operations                                                         |       | 68,578                                                           |       | 66,407                                            |       | 139,887 |   | 134,183 |   |
| Casino operations                                                         |       | 8,500                                                            |       | 9,646                                             |       | 17,655 |   | 19,694 |   |
|                                                                      |       | 213,473                                                          |       | 233,294                                           |       | 409,958 |   | 470,692 |   |
| Costs and expenses:                                                       |       |                                                             |       |                                              |       |   |   |   |   |
| Cost of gaming equipment and systems (1)                                  |       | 53,803                                                           |       | 65,710                                            |       | 104,175 |   | 142,532 |   |
| Cost of gaming operations                                                 |       | 20,898                                                           |       | 20,999                                            |       | 39,989 |   | 41,559 |   |
| Direct cost of casino operations                                          |       | 3,624                                                            |       | 4,320                                             |       | 7,489 |   | 8,675 |   |
| Selling, general and administrative                                       |       | 55,552                                                           |       | 58,027                                            |       | 102,499 |   | 115,234 |   |
| Research and development costs                                            |       | 19,571                                                           |       | 19,331                                            |       | 39,042 |   | 39,202 |   |
| Depreciation and amortization                                             |       | 5,653                                                            |       | 5,458                                             |       | 11,477 |   | 10,564 |   |
|                                                                      |       | 159,101                                                          |       | 173,845                                           |       | 304,671 |   | 357,766 |   |
| Operating income                                                          |       | 54,372                                                           |       | 59,449                                            |       | 105,287 |   | 112,926 |   |
|                                                                      |       |                                                             |       |                                              |       |   |   |   |   |
| Other income (expense):                                                   |       |                                                             |       |                                              |       |   |   |   |   |
| Interest income                                                           |       | 685                                                              |       | 947                                               |       | 1,330 |   | 2,103 |   |
| Interest expense                                                          |       | (3,252                                                           | )          | (6,188                                            | )          | (6,538 | ) | (11,281 | ) |
| Other, net                                                                |       | (1,096                                                           | )          | (1,664                                            | )          | (968 | ) | (4,230 | ) |
|                                                                      |       |                                                             |       |                                              |       |   |   |   |   |
| Income before income taxes                                                |       | 50,709                                                           |       | 52,544                                            |       | 99,111 |   | 99,518 |   |
| Income tax expense                                                        |       | (17,106                                                          | )          | (18,670                                           | )          | (34,151 | ) | (35,807 | ) |
| Net income                                                                |       | 33,603                                                           |       | 33,874                                            |       | 64,960 |   | 63,711 |   |
| Less net income (loss) attributable to  noncontrolling interests          |       | 350                                                              |       | 310                                               |       | 1,083 |   | (157 | ) |
|                                                                      |       |                                                             |       |                                              |       |   |   |   |   |
| Net income attributable to Bally  Technologies, Inc.                 |       | $                                                                | 33,253     |                                              | $          | 33,564 |   | $ | 63,877 |   | $ | 63,868 |   |
|                                                                      |       |                                                             |       |                                              |       |   |   |   |   |
| Basic and diluted earnings per share:                                     |       |                                                             |       |                                              |       |   |   |   |   |
| Basic earnings attributable to Bally  Technologies, Inc. per share   |       | $                                                                | 0.61       |                                              | $          | 0.62 |   | $ | 1.17 |   | $ | 1.17 |   |
| Diluted earnings attributable to Bally  Technologies, Inc. per share |       | $                                                                | 0.58       |                                              | $          | 0.59 |   | $ | 1.11 |   | $ | 1.11 |   |
|                                                                      |       |                                                             |       |                                              |       |   |   |   |   |
| Weighted average shares outstanding:                                      |       |                                                             |       |                                              |       |   |   |   |   |
| Basic                                                                     |       | 54,518                                                           |       | 54,419                                            |       | 54,393 |   | 54,745 |   |
| Diluted                                                                   |       | 57,750                                                           |       | 56,731                                            |       | 57,718 |   | 57,428 |   |

 

----

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

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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**BALLYTECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’SEQUITY**

 
| ** **                                                                             | ** ** | **Common  Stock** | ** ** | **Series E  Special** | ** ** | **Treasury** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated  Other  Comprehensive  Income (Deficit)** | ** ** | **Retained**          | ** ** | **Noncontrolling** | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------|------------|-------------------------|------------|---------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Shares**        | ** ** | **Dollars**                | ** ** | **Stock**    | ** ** | **Stock**               | ** ** | **Capital**                                             | ** ** | **(“OCI”)** | ** ** | **Earnings**       | ** ** | **Interests**                 | ** ** | **Equity** | ** ** |
| ** **                                                                             | ** ** | **(in  000s)**    | ** ** |
| Balances  at June 30, 2008                                                        |       | 56,318            |       | $                          | 5,626      |         | $          | 12                      |       | $                                                       | (25,041    | )                     | $          | 302,146            |       | $                             | 1,268      |   | $ | 39,314 |   | $ | 1,782 |   | $ | 325,107 |   |
| Net  income (loss)                                                                     |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | 63,868             |       | (157                          | )          | 63,711 |   |
| Foreign  currency translation adjustment                                               |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | (580                  | )          | —             |       | —                        |       | (580 | ) |
| Unrealized  loss on derivative financial instruments                                   |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | (680                  | )          | —             |       | —                        |       | (680 | ) |
| Total  comprehensive income                                                            |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | —             |       | —                        |       | $ | 62,451 |   |
| Distributions  to noncontrolling interests                                             |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | —             |       | (662                          | )          | (662 | ) |
| Restricted  stock issued                                                               |       | 57                |       | 6                          |       | —       |       | —                  |       | (6                                                      | )          | —                |       | —             |       | —                        |       | — |   |
| Receipt  of stock from exercise of stock options and tax liability on restricted stock |       | —            |       | —                     |       | —       |       | (692                    | )          | —                                                  |       | —                |       | —             |       | —                        |       | (692 | ) |
| Purchase  of common stock for treasury                                                 |       | —            |       | —                     |       | —       |       | (27,035                 | )          | —                                                  |       | —                |       | —             |       | —                        |       | (27,035 | ) |
| Share-based  compensation                                                              |       |              |       | —                     |       | —       |       | —                  |       | 7,096                                                   |       | —                |       | —             |       | —                        |       | 7,096 |   |
| Shares  issued upon exercise of stock options                                          |       | 394               |       | 39                         |       | —       |       | —                  |       | 7,224                                                   |       | —                |       | —             |       | —                        |       | 7,263 |   |
| Shares  issued under ESPP plan                                                         |       | 39                |       | 4                          |       | —       |       | —                  |       | 752                                                     |       | —                |       | —             |       | —                        |       | 756 |   |
| Tax  benefit of employee stock option exercises                                        |       | —            |       | —                     |       | —       |       | —                  |       | 1,554                                                   |       | —                |       | —             |       | —                        |       | 1,554 |   |
| Balances  at December 31, 2008                                                    |       | 56,808            |       | $                          | 5,675      |         | $          | 12                      |       | $                                                       | (52,768    | )                     | $          | 318,766            |       | $                             | 8          |   | $ | 103,182 |   | $ | 963 |   | $ | 375,838 |   |
|                                                                                   |       |              |       |                       |       |         |       |                    |       |                                                    |       |                  |       |               |       |                          |       |   |   |
| Balances  at June 30, 2009                                                        |       | 57,091            |       | $                          | 5,703      |         | $          | 12                      |       | $                                                       | (64,727    | )                     | $          | 330,465            |       | $                             | (770       | ) | $ | 165,623 |   | $ | 2,443 |   | $ | 438,749 |   |
| Net  income                                                                            |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | 63,877             |       | 1,083                         |       | 64,960 |   |
| Foreign  currency translation adjustment                                               |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | 1,231                 |       | —             |       | —                        |       | 1,231 |   |
| Unrealized  loss on derivative financial instruments                                   |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | (931                  | )          | —             |       | —                        |       | (931 | ) |
| Total  comprehensive income                                                            |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | —             |       | —                        |       | $ | 65,260 |   |
| Distributions  to noncontrolling interests                                             |       | —            |       | —                     |       | —       |       | —                  |       | —                                                  |       | —                |       | —             |       | (925                          | )          | (925 | ) |
| Restricted  stock issued and RSUs released                                             |       | 113               |       | 11                         |       | —       |       | —                  |       | (11                                                     | )          | —                |       | —             |       | —                        |       | — |   |
| Receipt  of stock from exercise of stock options and tax liability on restricted stock |       | —            |       | —                     |       | —       |       | (360                    | )          | —                                                  |       | —                |       | —             |       | —                        |       | (360 | ) |
| Purchase  of common stock for treasury                                                 |       | —            |       | —                     |       | —       |       | (31,061                 | )          | —                                                  |       | —                |       | —             |       | —                        |       | (31,061 | ) |
| Shares  issued upon exercise of warrants                                               |       | 14                |       | 2                          |       | —       |       | —                  |       | (2                                                      | )          | —                |       | —             |       | —                        |       | — |   |
| Share-based  compensation                                                              |       | —            |       | —                     |       | —       |       | —                  |       | 7,131                                                   |       | —                |       | —             |       | —                        |       | 7,131 |   |
| Shares  issued upon exercise of stock options                                          |       | 1,363             |       | 135                        |       | —       |       | —                  |       | 18,352                                                  |       | —                |       | —             |       | —                        |       | 18,487 |   |
| Shares  issued under ESPP plan                                                         |       | 25                |       | 3                          |       | —       |       | —                  |       | 866                                                     |       | —                |       | —             |       | —                        |       | 869 |   |
| Tax  benefit of employee stock option exercises                                        |       | —            |       | —                     |       | —       |       | —                  |       | 9,678                                                   |       | —                |       | —             |       | —                        |       | 9,678 |   |
| Balances  at December 31, 2009                                                    |       | 58,606            |       | $                          | 5,854      |         | $          | 12                      |       | $                                                       | (96,148    | )                     | $          | 366,479            |       | $                             | (470       | ) | $ | 229,500 |   | $ | 2,601 |   | $ | 507,828 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | **(in 000s)**                                | ** ** |
| Cash flows from operating activities:                                              |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 64,960     |   | $ | 63,711 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                      |       | 39,083                                            |       | 34,982 |   |
| Share-based compensation                                                           |       | 7,131                                             |       | 7,096 |   |
| Amortization of deferred debt issuance costs                                       |       | 1,405                                             |       | 703 |   |
| Income tax (benefit) expense                                                       |       | (4,541                                            | )          | 281 |   |
| Provision for doubtful accounts                                                    |       | 870                                               |       | 193 |   |
| Write-off of debt issuance costs                                                   |       | —                                            |       | 786 |   |
| Inventory and other asset write-downs                                              |       | 1,216                                             |       | 2,810 |   |
| Excess tax benefit of stock option exercises                                       |       | (9,047                                            | )          | (565 | ) |
| Other                                                                              |       | 786                                               |       | 2,825 |   |
| Changes in operating assets and liabilities:                                       |       |                                              |       |   |   |
| Accounts and notes receivable                                                      |       | (44,314                                           | )          | 19,357 |   |
| Inventories                                                                        |       | (12,572                                           | )          | 10,992 |   |
| Prepaid and refundable income tax and income tax  payable                          |       | 21,052                                            |       | (5,203 | ) |
| Other current assets                                                               |       | 2,317                                             |       | (2,004 | ) |
| Accounts payable                                                                   |       | 730                                               |       | (15,028 | ) |
| Accrued liabilities, customer deposits and jackpot  liabilities                    |       | (12,027                                           | )          | (27,174 | ) |
| Deferred revenue and deferred cost of revenue                                      |       | (6,619                                            | )          | (20,246 | ) |
| Net cash provided by operating activities                                          |       | 50,430                                            |       | 73,516 |   |
|                                                                               |       |                                              |       |   |   |
| Cash flows from investing activities:                                              |       |                                              |       |   |   |
| Capital expenditures                                                               |       | (6,491                                            | )          | (14,016 | ) |
| Restricted cash and investments                                                    |       | 1,282                                             |       | (2,844 | ) |
| Financing arrangement with customers                                               |       | (15,750                                           | )          | — |   |
| Additions to other long-term assets                                                |       | (2,006                                            | )          | (4,095 | ) |
| Net cash used in investing activities                                              |       | (22,965                                           | )          | (20,955 | ) |
|                                                                               |       |                                              |       |   |   |
| Cash flows from financing activities:                                              |       |                                              |       |   |   |
| Capitalized debt issuance costs                                                    |       | —                                            |       | (10,728 | ) |
| Pay-off of debt from refinancing                                                   |       | —                                            |       | (14,553 | ) |
| Reduction of long-term debt and capital leases                                     |       | (17,813                                           | )          | (9,233 | ) |
| Distributions to noncontrolling interests                                          |       | (925                                              | )          | (662 | ) |
| Purchase of treasury stock                                                         |       | (31,421                                           | )          | (27,727 | ) |
| Excess tax benefit of stock option exercises                                       |       | 9,047                                             |       | 565 |   |
| Proceeds from exercise of stock options and  employee stock purchases              |       | 19,356                                            |       | 8,019 |   |
| Net cash used in financing activities                                              |       | (21,756                                           | )          | (54,319 | ) |
|                                                                               |       |                                              |       |   |   |
| Effect of exchange rate changes on cash                                            |       | 1,008                                             |       | (1,603 | ) |
|                                                                               |       |                                              |       |   |   |
| Cash and cash equivalents:                                                         |       |                                              |       |   |   |
| Increase (decrease) for period                                                     |       | 6,717                                             |       | (3,361 | ) |
| Balance, beginning of period                                                       |       | 64,598                                            |       | 66,570 |   |
| Balance, end of period                                                             |       | $                                                 | 71,315     |   | $ | 63,209 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

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

 

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

 
| ** **                                                 | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| ** **                                                 | ** ** | **(in 000s)**                                | ** ** |
| Cash paid for interest                                     |       | $                                                 | 6,118      |   | $ | 15,963 |   |
| Cash paid for income taxes, net of refunds                 |       | 11,960                                            |       | 38,005 |   |
|                                                       |       |                                              |       |   |   |
| Non-cash investing and financing transactions:             |       |                                              |       |   |   |
| Pay-off of debt from refinancing                           |       | $                                                 | —     |   | $ | 275,000 |   |
| Transfer of inventory to leased gaming equipment (1)       |       | 21,019                                            |       | 24,132 |   |
| Reclassify property, plant and equipment to  inventory (1) |       | 2,451                                             |       | 6,767 |   |
| Acquisition of Bally trademark                             |       | 7,500                                             |       | — |   |
| Accrual of capital expenditures                            |       | 393                                               |       | 1,334 |   |

 

----

(1)                                  As a result ofthe inability to separately identify the cash flows associated with theconstruction of leased gaming equipment, the Company has included all additionsto leased gaming equipment as an increase in inventory under cash used inoperating activities in the unaudited condensed consolidated statement of cashflows. In addition, cash generated from the sale of used gaming equipmentclassified as leased gaming equipment is also included in cash provided byoperating activities in the unaudited condensed consolidated statement of cashflows. The Company has one process to procure raw materials for the assembly ofboth inventory and leased gaming equipment. The materials requisition planningprocess considers the number of devices the Company expects to build for saleand for use in its gaming operations division during a particular period, butit does not separately earmark purchases for leased gaming equipment. Withoutsuch an earmarking process, the Company is unable to determine whether theparts used to construct leased gaming equipment during a particular period camefrom inventory on hand at the beginning of the period or was constructed frominventory procured during the period of deployment, thus requiring theexpenditure of cash.

 

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**BALLY TECHNOLOGIES, INC.AND SUBSIDIARIES**

Notesto Unaudited Condensed Consolidated Financial Statements

 

**1.             SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

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

 

The Company is thegeneral partner of Rainbow Casino Vicksburg Partnership (“RCVP”), which operatesthe Rainbow Casino. The limited partner is entitled to receive 10% of the netavailable cash flows of RCVP after debt service and other items, as defined inthe limited partnership agreement, which increases to 20% of the net availablecash flows based on the incremental amount of revenues in excess of $35.0million, payable quarterly through December 31, 2010. The Company holdsthe remaining economic interest in the partnership. The Company consolidatesRCVP and records an adjustment to reflect the portion of the earnings of RCVPattributable to the limited partner as a noncontrolling interest.

 

Allintercompany accounts and transactions have been eliminated in consolidation.

 

The Company has evaluated the financialstatements for subsequent events occurring between the end of our most recentfiscal quarter and February 2, 2010, the date of filing of this Form 10-Q.

 

*Expense classification*

 

The classification of certain costs within theUnaudited Condensed Consolidated Statement of Operations for the three and sixmonths ended December 31, 2008 has been corrected to conform to thecurrent year presentation. The reclassification reflects certain costs ofservices associated with revenue presented in *Cost ofgaming equipment and systems* of $1.5 million and $2.7 million forthe three and six months ended December 31, 2008, respectively, that hadpreviously been presented as a component of *Selling, general andadministrative expenses*. This correction was not material to thepreviously issued financial statements and did not have any impact on incomefrom continuing operations, earnings per share, retained earnings, or cashflows.

 

*Recently adopted accounting pronouncements - revenuerecognition*

 

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

 

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

 

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

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

 

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

 

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

 

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

 
| ** **                   | ** ** | **Three Months Ended  December 31, 2009** | ** ** | **Six Months Ended  December 31, 2009**                         | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **As  Reported**                                         | ** ** | **Pro  Forma Basis as  if the Previous  Accounting  Guidance Were in  Effect** | ** ** | **As  Reported** | ** ** | **Pro  Forma Basis as  if the Previous  Accounting  Guidance Were in  Effect** | ** ** |
| ** **                   | ** ** | **(in 000s)**                                       | ** ** |
| Revenues:                    | ** ** | ** **                                               | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gaming Equipment             |       | $                                                        | 78,791     |                                                                           | $          | 73,314 |   | $ | 140,794 |   | $ | 133,649 |   |
| Systems                      |       | 57,604                                                   |       | 56,754                                                                         |       | 111,622 |   | 110,772 |   |
| Gaming equipment and systems |       | $                                                        | 136,395    |                                                                           | $          | 130,068 |   | $ | 252,416 |   | $ | 244,421 |   |

 

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

 

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

 

*Other recently adopted accounting pronouncements*

 

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

 

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

 

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

 

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

 

*Fair value of financial instruments*

 

Thefair value of a financial instrument is the amount at which the instrumentcould be exchanged in a current transaction between willing parties, other thanin a forced sale or liquidation. The carrying amounts reflected in theaccompanying unaudited condensed consolidated balance sheets for cashequivalents, accounts and notes receivable, investment to fund jackpotliabilities, accounts payable, jackpot liabilities and long-term debtapproximate their respective fair values.

 

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

 

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

 

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

 

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

 

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TheCompany’s only significant financial asset or liability measured at fair valueon a recurring basis, excluding accrued interest components, consisted of acash flow hedge related to a variable rate debt instrument as of December 31,2009 (which is included in accrued liabilities in the unaudited condensedconsolidated balance sheets) as follows:

 
| ** **                      | ** ** | **Fair  Value Measurements  Using Input Type** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|
| ** **                      | ** ** | **Level 1**                               | ** ** | **Level 2** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **(in  000s)**                                 | ** ** |
| Liability:                      |       |                                           |       |   |   |   |   |
| Derivative financial instrument |       | $                                              | —     |   | $ | 1,040 |   | $ | — |   |
|                                 |            |                                                |            |  |  |  |  |  |  |  |

 

AtJune 30, 2009, the derivative financial instrument was an asset valued at$255,000. The valuation techniques used to measure the fair value of thederivative financial instrument above in which the counterparties have highcredit ratings, were derived from pricing models, such as discounted cash flowtechniques, with all significant inputs derived from or corroborated byobservable market data. The Company’s discounted cash flow techniques useobservable market inputs, such as LIBOR-based yield curves. See Note 4 tounaudited condensed consolidated financial statements, *Long-TermDebt*.

 

*Accounting for Derivative Instruments and HedgingActivity*

 

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

 

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

 

Fiscal 2010:

 
| ** **                                         | ** ** | **Amount of Gain (Loss)  Recognized in OCI on  Derivative (Effective Portion)** | ** ** | ** **                 | ** ** | **Amount of Gain (Loss)  Reclassified from Accumulated  OCI into Income (Effective  Portion)** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **Three Months Ended**                                                          | ** ** | **Six Months Ended**       | ** ** | **Location of Gain (Loss)  Reclassified from Accumulated**                                     | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** |
| **Derivative  in Cash Flow Hedging  Relationship** | ** ** | **December 31, 2009**                                                      | ** ** | **December 31, 2009** | ** ** | **OCI into Income (Effective  Portion)**                                                       | ** ** | **December 31, 2009** | ** ** | **December 31, 2009** | ** ** |
| ** **                                         | ** ** | **(in 000s)**                                                              | ** ** |
| ** **                                         | ** ** | ** **                                                                      | ** ** | ** **                 | ** ** | ** **                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate swap agreement                       |       | $                                                                               | (568       | )                          | $          | (2,798                                                                                         | )          | Interest  expense |   | $ | (822 | ) | $ | (1,503 | ) |
|                                                    |            |                                                                                 |            |                            |            |                                                                                                |            |  |  |  |  |  |  |  |  |

 

Fiscal2009:

 
| ** **                                        | ** ** | **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**                                                         | ** ** | **Six Months  Ended**      | ** ** | **Location of Gain (Loss)  Reclassified from Accumulated**                                     | ** ** | **Three Months   Ended** | ** ** | **Six Months  Ended** | ** ** |
| **Derivative  in Cash Flow Hedging Relationship** | ** ** | **December 31, 2008**                                                      | ** ** | **December 31, 2008** | ** ** | **OCI into Income (Effective  Portion)**                                                       | ** ** | **December 31, 2008** | ** ** | **December 31, 2008** | ** ** |
| ** **                                        | ** ** | **(in 000s)**                                                              | ** ** |
| ** **                                        | ** ** | ** **                                                                      | ** ** | ** **                 | ** ** | ** **                                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate swap agreement                      |       | $                                                                               | (680       | )                          | $          | (680                                                                                           | )          | Interest  expense |   | $ | — |   | $ | — |   |
|                                                   |            |                                                                                 |            |                            |            |                                                                                                |            |  |  |  |  |  |  |  |  |

 

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*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:

 
| ** **      | ** ** | **December 31,  2009** | ** ** | **June 30,  2009** | ** ** |
|-----------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **      | ** ** | **(in 000s)**          | ** ** |
| Raw materials   |       | $                           | 34,726     |                    | $          | 40,662 |   |
| Work-in-process |       | 1,007                       |       | 1,432                   |       |
| Finished goods  |       | 7,959                       |       | 10,848                  |       |
| Total           |       | $                           | 43,692     |                    | $          | 52,942 |   |

 

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

 

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

 

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

 
| ** **                                                                    | ** ** | **Three Months Ended  December 31,**              | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                                         | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                    | ** ** | **(in 000s, except per share amounts)** | ** ** |
| Net income attributable to Bally  Technologies, Inc.                     |       | $                                                                | 33,253     |                                              | $          | 33,564 |   | $ | 63,877 |   | $ | 63,868 |   |
| After tax interest expense on convertible debt                                |       | —                                                           |       | 62                                                |       | 14 |   | 131 |   |
| Diluted earnings attributable to Bally  Technologies, Inc.               |       | $                                                                | 33,253     |                                              | $          | 33,626 |   | $ | 63,891 |   | $ | 63,999 |   |
|                                                                          |       |                                                             |       |                                              |       |   |   |   |   |
| Weighted average common shares outstanding                                    |       | 54,518                                                           |       | 54,419                                            |       | 54,393 |   | 54,745 |   |
| Dilutive effect of:                                                           |       |                                                             |       |                                              |       |   |   |   |   |
| Stock options, Restricted Stock Units (“RSU”) and  restricted stock |       | 3,206                                                            |       | 2,038                                             |       | 3,257 |   | 2,436 |   |
| Warrants                                                                      |       | 26                                                               |       | —                                            |       | 24 |   | 11 |   |
| Convertible debt (1)                                                          |       | —                                                           |       | 274                                               |       | 44 |   | 236 |   |
| Weighted average diluted shares outstanding                                   |       | 57,750                                                           |       | 56,731                                            |       | 57,718 |   | 57,428 |   |
|                                                                          |       |                                                             |       |                                              |       |   |   |   |   |
| Basic earnings attributable to Bally  Technologies, Inc. per share       |       | $                                                                | 0.61       |                                              | $          | 0.62 |   | $ | 1.17 |   | $ | 1.17 |   |
| Diluted earnings attributable to Bally  Technologies, Inc. per share     |       | $                                                                | 0.58       |                                              | $          | 0.59 |   | $ | 1.11 |   | $ | 1.11 |   |

 

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(1) The Company had certain related partydebt outstanding which was convertible into common stock at the Company’sdiscretion. The related party debt was paid in full in December 2009. SeeNote 5 to unaudited condensed consolidated financial statements, *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  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                              | ** ** | **(in 000s)**                                  | ** ** |
| Stock options, RSU and restricted stock |       | 394                                                 |       | 2,523                                             |       | 323 |   | 869 |   |
| Warrants                                |       | —                                              |       | 100                                               |       | — |   | — |   |
|                                    |       | 394                                                 |       | 2,623                                             |       | 323 |   | 869 |   |

 

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**3.             GOODWILL ANDINTANGIBLE ASSETS**

 

Intangible assets consistof the following:

 
| ** **                           | ** ** | ** **                      | ** ** | **December 31, 2009** | ** ** | **June 30, 2009**   | ** ** |
|--------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **Useful  Life  (Years)**       | ** ** | **Gross  Carrying  Amount**     | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| ** **                           | ** ** | **(dollars in 000s)** | ** ** |
| Computer software                    |       | 3 - 9                 |       | $                               | 33,794     |                          | $          | (25,874 | ) | $ | 7,920 |   | $ | 27,488 |   | $ | (19,083 | ) | $ | 8,405 |   |
| License rights                       |       | 3 - 5                 |       | 3,764                           |       | (1,952                        | )          | 1,812 |   | 2,117 |   | (1,814 | ) | 303 |   |
| Trademarks                           |       | 5                               |       | 2,203                           |       | (1,889                        | )          | 314 |   | 2,203 |   | (1,693 | ) | 510 |   |
| Core technology                      |       | 5 - 8                 |       | 22,763                          |       | (8,465                        | )          | 14,298 |   | 22,763 |   | (6,585 | ) | 16,178 |   |
| Contracts                            |       | 10                              |       | 10,043                          |       | (5,866                        | )          | 4,177 |   | 10,043 |   | (5,364 | ) | 4,679 |   |
| Other intangibles                    |       | 3 - 7                 |       | 1,686                           |       | (986                          | )          | 700 |   | 7,627 |   | (5,504 | ) | 2,123 |   |
| Total finite lived intangible assets |       |                            |       | 74,253                          |       | $                             | (45,032    | ) | $ | 29,221 |   | $ | 72,241 |   | $ | (40,043 | ) | $ | 32,198 |   |
| Trademark                            |       | indefinite                      |       | 7,500                           |       | —                        |       | 7,500 |   | — |   | — |   | — |   |
| Total                                |       |                            |       | $                               | 81,753     |                          | $          | (45,032 | ) | $ | 36,721 |   | $ | 72,241 |   | $ | (40,043 | ) | $ | 32,198 |   |

 

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

 

Total amortizationexpense related to finite lived intangible assets for the three months ended December 31,2009 and 2008 was $2.5 million and $2.3 million, respectively, which includedcomputer software amortization expense of $1.1 million and$1.0 million, respectively. Total amortization expense related to finitelived intangible assets for the six months ended December 31, 2009 and2008 was $5.0 million and $4.5 million, respectively, which included computersoftware amortization expense of $2.3 million and $2.0 million,respectively. Future amortization of finite lived intangible assets is scheduled asfollows:

 
| **Year Ended June 30,**     | ** ** | **(in 000s)** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| 2010 (remaining six months of fiscal year) |       | $                  | 5,151      |   |
| 2011                                       |       | 8,519              |       |
| 2012                                       |       | 6,261              |       |
| 2013                                       |       | 5,170              |       |
| 2014                                       |       | 1,516              |       |
| Thereafter                                 |       | 2,604              |       |
| Total                                      |       | $                  | 29,221     |   |

 

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

 
| ** **                              | ** ** | **(in 000s)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| Balance at June 30, 2009           |       | $                  | 161,960    |   |
| Foreign currency translation adjustment |       | 125                |       |
| Balance at December 31, 2009       |       | $                  | 162,085    |   |

 

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**4.             LONG-TERM DEBT**

 

Long-termdebt consists of the following:

 
| ** **                                | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2009**              | ** ** | **2009**          | ** ** |
| ** **                                | ** ** | **(in 000s)**    | ** ** |
| Term loan facility                        |       | $                     | 191,250    |              | $          | 206,250 |   |
| Related party debt (see Note 5)      |       | —                |       | 2,800             |       |
| Other, generally unsecured                |       | 47                    |       | 37                |       |
| Long-term debt                            |       | 191,297               |       | 209,087           |       |
| Less current maturities                   |       | (37,547               | )          | (35,337           | )          |
| Long-term debt, net of current maturities |       | $                     | 153,750    |              | $          | 173,750 |   |

 

OnSeptember 29, 2008, the Company entered into a $225.0 million termloan and a $75.0 million revolving credit facility (collectively, the “CreditFacility”). The Credit Facility matures in September 2012. The Company hasthe option to request an increase in the size of the term loan and/or revolvingcredit facility by up to $50.0 million in the aggregate provided thatcertain conditions are met. The proceeds from the Credit Facility andcash-on-hand of $14.6 million were used to repay the then existing bankterm loans totaling $289.6 million. The Company also used cash-on-hand topay for transaction fees and expenses totaling $10.7 million, which arebeing amortized to interest expense over the term of the Credit Facility.

 

Asof December 31, 2009, there was approximately $75.0 million ofundrawn availability under the revolving credit facility. Availability underthe revolving credit facility is reduced to the extent of outstanding lettersof credit.

 

Theinterest rate on the term loan is subject to a leverage-based pricing grid. Ifthe Company’s leverage ratio, as defined under the term loan, is greater than1.5, the interest rate will be LIBOR plus a margin of 3.25%; if the leverageratio is between 1.0 and 1.5, the interest rate will be LIBOR plus a margin of3.00%; and if the leverage ratio is below 1.0, the interest rate will be LIBORplus a margin of 2.75%. In December 2008, the Company entered into afloating-to-fixed interest rate swap, as discussed below, fixing the interestrate of the term loan at 1.89% plus the applicable margin (2.75% at December 31,2009) for the remaining term.

 

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

 

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

 

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

 

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

 

TheCompany was in compliance with all of the Credit Facility covenants as of December 31,2009.

 

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TheCompany’s related party debt, which totaled approximately $2.8 million asof June 30, 2009, was paid in full during the quarter. It consisted of thedebt owed to the former principals of Sierra Design Group (“SDG”). SeeNote 5, *Related Party Transactions*.

 

*Interest Rate Swap Agreement*

 

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

 

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

 

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

 
| **Interest Rate Swaps**                                    | ** ** | **Balance Sheet Location** | ** ** | **Fair Value  (in 000s)** | ** **  | **Location of Offsetting Balance** | ** **                            |
|------------------------------------------------------------|------------|----------------------------|------------|---------------------------|-------------|------------------------------------|---------------------------------------|
| Cash flow hedge—$191.3 million LIBOR based  debt |       | Accrued Liabilities        |       | $                         |  1,040 |                               | Accumulated  other comprehensive loss |   |
|                                                            |            |                            |            |                           |             |                                    |                                       |  |

 

**5.             RELATED PARTY TRANSACTIONS**

 

Inconnection with the acquisition of SDG, the consideration paid includedsubordinated debt issued to the former principals of SDG. Certain of the formerprincipals are now employees of the Company. At the Company’s discretion, theprincipal and accrued interest thereon can be paid in cash, or can be convertedinto shares of the Company’s common stock using the average stock price for the20 business days prior to the delivery of such shares. As of June 30,2009, the subordinated debt totaled $2.8 million, all of which was included incurrent maturities. The subordinated debt was paid in full in December 2009.

 

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**6.            ****SHARE****-BASEDCOMPENSATION**

 

*Employee Stock Purchase Plan*

 

InFebruary 2008, the Company’s stockholders approved the 2008 Employee StockPurchase Plan (the “2008 ESPP Plan”). The 2008 ESPP Plan provides that eligibleemployees are able to contribute up to 10% of their eligible earnings towardsthe quarterly purchase of the Company’s common stock. The employee’s purchaseprice is equal to 85% of the fair market value on date of purchase. During thesix months ended December 31, 2009 and 2008, employees purchased 24,935shares and 39,305 shares of common stock for approximately $0.9 million and$0.8 million, respectively, under the 2008 ESPP Plan.

 

*Share-BasedAward Plans*

 

Stock option activity as ofand for the six months ended December 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, 2009     |       | 6,903              |       | $                         | 17.96      |                             |       |   | $ | 85,222 |   |
| Granted                                          |       | 317                |       | 40.10                     |       |                             |       |   |   |
| Exercised                                        |       | (1,363             | )          | 13.57                     |       |                             |       |   |   |
| Forfeited or expired                             |       | (38                | )          | 27.45                     |       |                             |       |   |   |
| Balance outstanding as of December 31, 2009 |       | 5,819              |       | $                         | 20.13      |                             | 5.09       |   | $ | 123,679 |   |
| Exercisable as of December 31, 2009         |       | 4,348              |       | $                         | 17.92      |                             | 4.76       |   | $ | 101,816 |   |

 

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

 
| ** **                                       | ** ** | **Restricted  Stock** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **RSUs**    | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|-------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **(in 000s)**    | ** ** | **(per share)**                          | ** ** | **(years)** | ** ** | **(in 000s)**                            | ** ** |
| Balance outstanding as  of June 30, 2009    |       | 310                   |       | $                                             | 30.42      |        | 623        |                                          | $          | 17.71 |   |
| Granted                                          |       | 105                   |       | 38.98                                         |       | 42          |       | 38.98                                         |       |
| Released                                         |       | (26                   | )          | 21.38                                         |       | (8          | )          | 41.60                                         |       |
| Forfeited or expired                             |       | —                |       | —                                        |       | —      |       | —                                        |       |
| Balance outstanding as of December 31, 2009 |       | 389                   |       | $                                             | 33.35      |        | 657        |                                          | $          | 18.77 |   |
| Vested as of December 31, 2009              |       |                  |       |                                          |       | 537         |       | $                                             | 16.18      |   |

 

*Share-BasedCompensation*

 

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

 
|                                                 |   | **Three Months Ended  December 31,** |       | **Six Months Ended  December 31,** |       |
|------------------------------------------------------|--------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
|                                                 |   | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                 |   | **(in 000s)**                                  |       |
| Selling, general and administrative                  |   | $                                                   | 2,818      |                                              | $          | 2,874 |   | $ | 5,459 |   | $ | 5,769 |   |
| Research and development                             |   | 777                                                 |       | 633                                               |       | 1,596 |   | 1,259 |   |
| Cost of gaming equipment and systems and  operations |   | 37                                                  |       | 31                                                |       | 76 |   | 68 |   |
| Share-based compensation expense before tax          |   | 3,632                                               |       | 3,538                                             |       | 7,131 |   | 7,096 |   |
| Income tax benefit                                   |   | 1,271                                               |       | 1,239                                             |       | 2,496 |   | 2,484 |   |
| Net share-based compensation expense                 |   | $                                                   | 2,361      |                                              | $          | 2,299 |   | $ | 4,635 |   | $ | 4,612 |   |

 

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As of December 31,2009, there was $14.6 million of total unrecognized compensation expenserelated to the unvested portion of stock options which will be recognized overthe subsequent 1.90 years. In addition, as of December 31, 2009, there was$10.0 million of total unrecognized compensation expense related to theunvested portion of restricted stock and RSUs which will be recognized over thesubsequent 1.70 years.

 

**7****.            ****STOCKHOLDERS’ EQUITY,WARRANTS AND RIGHTS**

 

*Warrants*

 

TheCompany issued 100,000 stock purchase warrants in February 2004 inconnection with an acquisition. The strike price of the warrant is $24.69 witha term of seven years. During the six months ended December 31, 2009,36,710 stock purchase warrants were exercised and converted into 14,290 sharesof the Company’s common stock. The exercises were cashless and net shares wereissued for the difference between the strike price of the warrant and themarket value of the Company’s common stock upon exercise.

 

*Share Repurchase Plan*

 

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

 

During the six months ended December 31,2009 and 2008, the Company repurchased 793,869 shares and 1,066,000 shares ofcommon stock for $31.1 million and $27.0 million, respectively, under theprevious share repurchase plan. As of January 1, 2010, $100.0 millionis available to be repurchased under the new share repurchase plan.

 

*Special Stock*

 

TheCompany’s Articles of Incorporation authorize the issuance of up to 10,000,000shares of special stock (“Special Stock”). The Special Stock may be issued fromtime to time in one or more series, each having such designations, preferencesand relative, participating, optional or other special rights, qualifications,limitations or restrictions as shall be stated and expressed in the resolutionproviding for the issuance of Special Stock or any series thereof adopted bythe Board of Directors. Special Stock consists of non-voting stock where no holderof the Special Stock shall be entitled to vote at any meeting of stockholdersor otherwise, except as may be specifically provided by law or as approved bythe Board of Directors in certain limited circumstances at the time of thestock issuance.

 

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

 

**8.             INCOMETAXES**

 

Theprovision for income taxes for interim periods is based on the current estimateof the annual effective tax rate expected to be applicable for the full fiscalyear and the impact of discrete items, if any. The effective income tax ratewas approximately 33.7% and 35.5% for the three months ended December 31,2009 and 2008, respectively, and 34.5% and 36.0% for the six months ended December 31,2009 and 2008, respectively. The lower rate in fiscal 2010 predominantlyreflects changes in the forecasted geographical mix of taxable income for thefiscal year.

 

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TheInternal Revenue Service (“IRS”) is examining the Company’s United Statesfederal income tax returns for 2003 through 2005. Throughout the examination,the IRS has proposed, and management has agreed to certain adjustments relatedto the open tax years that have been recorded in the income tax provision. In January 2009,the IRS completed its field examination of the open tax years and issued aRevenue Agent’s Report (“RAR”). Also in January 2009, the Company paid$3.4 million in tax and $1.2 million in interest to the IRS to settlecertain agreed adjustments. The Company filed a formal protest regardingcertain unagreed adjustments and the case was assigned to the IRS AppealsOffice in August 2009. The opening conference with the IRS Appeals Officeris set for March 2010. If successful in defending the Company’s position,it would result in a reduction to unrecognized tax benefits and a correspondingreduction of income tax provisions of approximately $4.8 million,excluding interest. If the IRS were to prevail in full, it would result inadditional income tax provisions of approximately $5.4 million, plusinterest, for the tax years through 2005.

 

Itis reasonably possible that within the next twelve months the Company willresolve some of the matters presently under consideration with the IRS whichmay increase or decrease unrecognized tax benefits for the open tax years.However, an estimate of such increase or decrease cannot reasonably be made.

 

Asof December 31, 2009, the Company has accrued $17.1 million relatedto uncertain tax positions, excluding related accrued interest and penalties,$15.2 million of which, if recognized, would impact the effective taxrate. As of December 31, 2009, the Company has $5.4 million accrued forthe payment of interest and penalties.

 

**9.             COMMITMENTS AND CONTINGENCIES**

 

***Litigation***

 

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

 

OnDecember 7, 2004, IGT filed a patent infringement lawsuit against theCompany in the United States District Court for the District of Nevada. Thecomplaint asserted that the Company’s wheel-based games, such as Monte CarloTM,Lucky WheelTM and Cash For LifeTM, its games with a reel in the top box, such asBonus FrenzyTM, and its iVIEWTM products infringed on patents held by IGT, andsought injunctive relief and damages in unspecified amounts. As part of thedefense, the Company asserted counterclaims seeking damages and other reliefagainst IGT, including claims that IGT’s patents were invalid, unenforceableand not infringed, as well as several claims that IGT engaged inanti-competitive conduct in violation of state and federal antitrust laws. In October 2008,the court granted the Company’s motions for summary judgment, ruling that IGT’stwo “wheel” patents and a touch-screen player-tracking patent were invalid;that even if the patents were valid, the Company’s wheel-based games at issuewould not infringe; and that certain of its iVIEW products do not infringe thetwo asserted player-tracking patents. The court also found issues of materialfact regarding IGT’s alleged inequitable conduct before the U.S. Patentand Trademark Office and denied IGT’s motions to dismiss those claims, leavingthem for trial. However, the court postponed the trial until after IGT hasappealed the court’s summary judgments on patent infringement and validility.IGT appealed, and on October 22, 2009, the U.S. Court of Appeals for theFederal Circuit affirmed the District Court’s decision in its entirety.

 

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

 

InSeptember 2006, the Company filed a patent infringement lawsuit againstIGT in the United States District Court for the District of Nevada. Thecomplaint asserted that certain of IGT’s bonus wheel games infringe a patent heldby the Company, and sought injunctive relief and damages. IGT filed an answergenerally denying the claims and filed a motion for summary judgment which wasgranted in September 2008 declaring the wheel patent “obvious” andtherefore invalid. On October 22, 2009, the U.S. Court of Appeals for theFederal Circuit affirmed the District Court’s decision.

 

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

 

TheCompany operates in two business segments: (i) Bally Gaming Equipment andSystems which designs, manufactures, assembles, distributes and operates gamingdevices and licenses computerized monitoring and bonusing systems for gamingdevices, and (ii) Casino Operations which owns and operates a casino inVicksburg, Mississippi.

 

Certainexpenses related to Company-wide initiatives are managed at the corporate leveland are not allocated to either operating segment. The accounting policies ofthese segments are consistent with the Company’s policies for the unauditedconsolidated condensed financial statements.

 
| ** **                   | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                   | ** ** | **(in 000s)**                                  | ** ** |
| Revenues:                    |       |                                                |       |                                              |       |   |   |   |   |
| Gaming Equipment and Systems |       |                                                |       |                                              |       |   |   |   |   |
| Gaming Equipment             |       | $                                                   | 78,791     |                                              | $          | 101,335 |   | $ | 140,794 |   | $ | 208,575 |   |
| Gaming Operations            |       | 68,578                                              |       | 66,407                                            |       | 139,887 |   | 134,183 |   |
| Systems                      |       | 57,604                                              |       | 55,906                                            |       | 111,622 |   | 108,240 |   |
|                         |       | 204,973                                             |       | 223,648                                           |       | 392,303 |   | 450,998 |   |
| Casino Operations            |       | 8,500                                               |       | 9,646                                             |       | 17,655 |   | 19,694 |   |
| Total revenues               |       | $                                                   | 213,473    |                                              | $          | 233,294 |   | $ | 409,958 |   | $ | 470,692 |   |
|                         |       |                                                |       |                                              |       |   |   |   |   |
| Gross Margin(1):             |       |                                                |       |                                              |       |   |   |   |   |
| Gaming Equipment and Systems |       |                                                |       |                                              |       |   |   |   |   |
| Gaming Equipment             |       | $                                                   | 41,418     |                                              | $          | 49,944 |   | $ | 70,912 |   | $ | 97,288 |   |
| Gaming Operations            |       | 47,680                                              |       | 45,408                                            |       | 99,898 |   | 92,624 |   |
| Systems                      |       | 41,174                                              |       | 41,587                                            |       | 77,329 |   | 76,995 |   |
|                         |       | 130,272                                             |       | 136,939                                           |       | 248,139 |   | 266,907 |   |
| Casino Operations            |       | 4,876                                               |       | 5,326                                             |       | 10,166 |   | 11,019 |   |
| Total gross margin           |       | $                                                   | 135,148    |                                              | $          | 142,265 |   | $ | 258,305 |   | $ | 277,926 |   |
|                         |       |                                                |       |                                              |       |   |   |   |   |
| Operating income:            |       |                                                |       |                                              |       |   |   |   |   |
| Gaming Equipment and Systems |       | $                                                   | 57,588     |                                              | $          | 62,697 |   | $ | 109,608 |   | $ | 121,802 |   |
| Casino Operations            |       | 2,091                                               |       | 2,467                                             |       | 4,639 |   | 5,354 |   |
| Corporate                    |       | (5,307                                              | )          | (5,715                                            | )          | (8,960 | ) | (14,230 | ) |
| Total operating income       |       | $                                                   | 54,372     |                                              | $          | 59,449 |   | $ | 105,287 |   | $ | 112,926 |   |

 

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(1)                                 Gross Marginfrom Gaming Equipment and Systems excludes amortization related to certainintangibles including core technology and license rights, which are included indepreciation and amortization.

 

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

 
| ** **               | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **               | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **               | ** ** | **(in 000s)**                                  | ** ** |
| Revenues:                |       |                                                |       |                                              |       |   |   |   |   |
| United States and Canada |       | $                                                   | 173,700    |                                              | $          | 200,844 |   | $ | 334,706 |   | $ | 404,084 |   |
| International            |       | 39,773                                              |       | 32,450                                            |       | 75,252 |   | 66,608 |   |
| Total revenues           |       | $                                                   | 213,473    |                                              | $          | 233,294 |   | $ | 409,958 |   | $ | 470,692 |   |
|                     |       |                                                |       |                                              |       |   |   |   |   |
| Operating income:        |       |                                                |       |                                              |       |   |   |   |   |
| United States and Canada |       | $                                                   | 43,693     |                                              | $          | 52,551 |   | $ | 85,071 |   | $ | 98,401 |   |
| International            |       | 10,679                                              |       | 6,898                                             |       | 20,216 |   | 14,525 |   |
| Total operating income   |       | $                                                   | 54,372     |                                              | $          | 59,449 |   | $ | 105,287 |   | $ | 112,926 |   |

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

 

Webegin this section with a summary of our key operating business divisions as ofDecember 31, 2009. The overview is followed by a detailed analysis of ourresults of operations and our financial condition and liquidity as of and forthe three and six months ended December 31, 2009 and 2008. References to “we,”“our,” “us,” or the “Company” refer to Bally Technologies, Inc. and itssubsidiaries.

 

**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 statementsreflect intent, belief or current expectations with respect to, among otherthings, future events and financial trends affecting us. Forward lookingstatements are typically identified by words such as “believes,” “estimates,” “expects,”“anticipates,” “plans,” “should,” “would” and similar expressions.

 

Althoughwe believe the expectations reflected in any forward looking statements arereasonable, readers are cautioned that forward looking statements involve knownand unknown risks and uncertainties, are not guarantees of future performanceand that actual results, performance or achievements may differ materiallyfrom any future results, performance or achievements expressed or implied bysuch forward looking statements. These differences can arise as a result of therisks described in Item 1A, Risk Factors included in our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2009 (the “2009 10-K”), as well asother factors such as the impact of competition, the impact of any prolonged downturnin the economy or the financial markets, our ability to service debt, productdevelopment, foreign operations, dependence on key personnel, the ability tointegrate future acquisitions, regulation by gaming authorities, the outcome ofpending litigation matters, gaming taxes, market risks and the potentialadverse effects to our financial condition, results of operations or prospects.

 

Forwardlooking statements in this Quarterly Report on Form 10-Q speak only as ofthe date hereof, and forward looking statements in documents incorporated byreference speak only as of the date of those documents. Unless 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.

 

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**Business Overview**

 

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

 

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.                                                                                                       |

 

Wereport our revenue and income in two reportable segments: the Bally Gaming Equipmentand Systems segment, which includes our Gaming Equipment, Gaming Operations andSystems divisions, and our Casino Operations segment. Our total revenues were$213.5 million and $233.3 million for the three months ended December 31,2009 and 2008, respectively, and $410.0 million and $470.7 million for the sixmonths ended December 31, 2009 and 2008, respectively. Revenue from ourBally Gaming Equipment and Systems segment represented approximately 96% of ourtotal revenues for both the three and six months ended December 31, 2009and 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 and also pay close attention to changes inconsolidated operating income, net income, diluted earnings per share, adjustedEBITDA (earnings before interest, taxes, depreciation and amortization,including asset charges and share-based compensation), cash flows fromoperations and free cash flow (cash flows from operating activities lesscapital expenditures) as they are key indicators of our success in growing ourbusiness. We also measure changes in selling, general and administrative (“SG&A”)expenses as a percent of revenue, which indicate management’s ability tocontrol costs, as well as changes in research and development as a percent ofrevenue, which demonstrate investment in our technology assets. The measureslisted above are not a comprehensive list of all factors considered by us inassessing our financial condition and operating performance, and we may considerother individual measures as required by trends and discrete events arising ina specific period, but they are the key indicators that we generally weigh mostheavily from 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. The gaming sector was negatively impacted by lower consumerspending and limited resources available to fund capital projects. Thereplacement cycle for gaming machines in North America continues to besluggish, but we are cautiously optimistic that gaming operators’ replacementgame buying demand will begin to improve in calendar 2010. In fiscal year 2010,we have or will be releasing new cabinets and a more advanced operating systemwhich will drive better quality games. During the three months ended December 31,2009 and 2008, we sold 3,342 and 4,889 new gaming devices in the United Statesand Canada, respectively, and during the six months ended December 31,2009 and 2008, we sold 5,760 and 10,088 new gaming devices in the United Statesand Canada, respectively. The adverse affects of the sluggish demand for gamesales on our revenues is partially offset by the performance of gamingoperations, our systems business, and our continued expansion intointernational markets during the period. International revenues were$39.8 million and $32.5 million for the three months ended December 31,2009 and 2008, respectively, and $75.3 million and $66.6 million for the sixmonths ended December 31, 2009 and 2008, respectively.

 

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Despitethe challenging economic conditions, we have experienced continued strength inGaming Operations and Systems revenues during the period. Gaming Operationsrevenues were $68.6 million and $66.4 million during the three monthsended December 31, 2009 and 2008, respectively, and $139.9 million and$134.2 million for the six months ended December 31, 2009 and 2008,respectively. Revenues were higher than in the prior periods due primarily tothe continued performance of existing and new premium game units and expansionin our centrally determined business. Gaming operations margins improved due tobetter management of our capital, more strategic placements and supply chainefficiencies. In addition, we experienced significant growth in the installedbase of our centrally determined systems which increased by approximately 5,338units over December 31, 2008 due primarily to increased placements,especially in the Class II and centrally determined markets. We recentlyreleased or are about to release some new products including our newspinning-wheel game, Cash WheelTM, including Hot Shots Cash WheelTM, our all newDigital Tower Series platform, which includes 77777 JackpotTM, FireballTM,Cash Spin, the first title using our U-SpinTM feature, and our Jumbo andDualVisionTM cabinets. We continue to focus our efforts on the introduction ofnew and innovative games and cabinets both for our video and stepper platforms.

 

Systemsrevenues were $57.6 million and $55.9 million for the three monthsended December 31, 2009 and 2008, respectively, and $111.6 million and$108.2 million for the six months ended December 31, 2009 and 2008,respectively. Maintenance revenue increased 20% in the three months ended December 31,2009, and 15% in the six months ended December 31, 2009, when compared tothe same periods in the prior year, as a result of an increased install base ofcustomers on our systems. For systems, the new SDS® Version 11, which runs on both Unix andWindows off the same code base, our iVIEW Display ManagerTM, and our PowerBonusing products are generating positive interest. During fiscal 2010, wereleased Version 11.0 systems products, added new international contracts, andin October 2009, a large resort and casino in southern California signedan agreement with the Company to provide up to 5,000 iVIEW Display Managercontrollers. Over the last few years, we continued our focus on the basics ofenterprise software development, delivery, customer support and services discipline,on improving core products, providing quality upgrade options for ourcustomers, and increasing customer satisfaction levels through better serviceand support which are all serving us well in these difficult economic times.

 

Therehave been several recent developments fueled by the economic situation that webelieve will benefit us in the long term. Domestically, we are focused on newopportunities including the actual or potential expansion of gaming in Ohio,Illinois, Kansas, Iowa, Maryland, Massachusetts, and New Hampshire. The breadthand timing of such opportunities remains uncertain due to the legislativeprocess in these jurisdictions, as well as the difficult credit environmentfacing our customers and the risk of continued economic uncertainty. We arealso engaged in expanding our position in Mexico as it moves to Class IIIgaming, as well as opportunities in the Italian and Australian markets.Further, as we continue to grow and become a strong player in Asia,opportunities are anticipated to arise in that region which would enable us toexpand internationally.

 

Netcash provided by operating activities was $50.4 million and$73.5 million during the six months ended December 31, 2009 and 2008,respectively. Cash flow from operations decreased 31% for the six months ended December 31,2009, when compared to the same period last year. Each fiscal period hadsimilar operating results, but the current fiscal period’s cash flow fromoperations was negatively impacted primarily by increases in accounts and notesreceivable, when compared to the same period last year. Since December 31,2008, we have also reduced our debt by $89.4 million, including payingdown the revolving line of credit to zero.

 

Forthe three months ended December 31, 2009, revenues from the Rainbow Casinodecreased to $8.5 million from $9.6 million in the same period lastyear, and for the six months ended December 31, 2009, revenue decreased to$17.7 million from $19.7 million in the same period last year. These decreasesreflect the impact of competition from a new casino that opened in late October 2008,other nearby expansions, and the current challenging economic environment.

 

Managementcontinuously monitors and reviews its SG&A expenses in comparison torevenues. SG&A expenses increased as a percentage of revenue to 26% and 25%during the three and six months ended December 31, 2009, respectively,when compared to 25% and 24% during the same periods in the prior year,respectively, due primarily to a $3.0 million insurance reimbursement recognized inthe same period last year. The reimbursement was from claims for the 2005 U.S.Gulf Coast hurricanes, 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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**Resultsof Operations**

 

Ourresults of operations are summarized below:

 
| ** **                                                | ** ** | **Overall Consolidated Operating Results** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **Three Months Ended December 31,**   | ** ** | **Six Months Ended December 31,** | ** ** |
| ** **                                                | ** ** | **2009**                                   | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** | **2009** | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** |
| ** **                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                  |       | $                                          | 213.5      |   | 100 | % | $ | 233.3 |   | 100 | % | $ | 410.0 |   | 100 | % | $ | 470.7 |   | 100 | % |
| Selling, general and administrative                       |       | 55.6                                       |       | 26 | % | 58.0 |   | 25 | % | 102.5 |   | 25 | % | 115.2 |   | 24 | % |
| Research and development costs                            |       | 19.5                                       |       | 9 | % | 19.3 |   | 8 | % | 39.0 |   | 10 | % | 39.2 |   | 8 | % |
| Depreciation and amortization                             |       | 5.7                                        |       | 3 | % | 5.5 |   | 2 | % | 11.5 |   | 3 | % | 10.6 |   | 2 | % |
| Operating income                                          |       | 54.4                                       |       | 25 | % | 59.4 |   | 25 | % | 105.3 |   | 26 | % | 112.9 |   | 24 | % |
| Net income attributable to Bally  Technologies, Inc. |       | $                                          | 33.3       |   | 16 | % | $ | 33.6 |   | 14 | % | $ | 63.9 |   | 16 | % | $ | 63.9 |   | 14 | % |

 

***Bally Gaming Equipment and Systems***

 

Weare one of the leading providers of technology to the gaming industry. TheBally Gaming and Systems segment consists of three primary sub-groups: GamingEquipment, which includes the sale of gaming devices and related equipment,parts and conversion kits; Gaming Operations, which includes the operation ofwide-area progressive, video lottery and centrally determined systems and therental of gaming devices and content; and Systems, which includes the sale andsupport of computerized monitoring systems and related recurring hardware andsoftware maintenance revenue.

 

Thesummary financial results and operating statistics for Bally Gaming Equipmentand Systems are as follows:

 
| ** **                             | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                                | ** ** | **%**                                                 | ** ** | **2008** | ** ** | **%** | ** ** | **2009** | ** ** | **%** | ** ** | **2008** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **(dollars in millions)**                     | ** ** |
| Revenues:                              |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment                       |       | $                                                       | 78.8       |                                                  | 38         | % | $ | 101.3 |   | 45 | % | $ | 140.8 |   | 36 | % | $ | 208.6 |   | 46 | % |
| Gaming Operations                      |       | 68.6                                                    |       | 34                                                    | %          | 66.4 |   | 30 | % | 139.9 |   | 36 | % | 134.2 |   | 30 | % |
| Systems                                |       | 57.6                                                    |       | 28                                                    | %          | 55.9 |   | 25 | % | 111.6 |   | 28 | % | 108.2 |   | 24 | % |
| Total revenues                         |       | $                                                       | 205.0      |                                                  | 100        | % | $ | 223.6 |   | 100 | % | $ | 392.3 |   | 100 | % | $ | 451.0 |   | 100 | % |
|                                   |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross Margin:                          |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment (1)                   |       | $                                                       | 41.4       |                                                  | 53         | % | $ | 49.9 |   | 49 | % | $ | 70.9 |   | 50 | % | $ | 97.3 |   | 47 | % |
| Gaming Operations                      |       | 47.7                                                    |       | 70                                                    | %          | 45.4 |   | 68 | % | 99.9 |   | 71 | % | 92.6 |   | 69 | % |
| Systems (1)(2)                         |       | 41.1                                                    |       | 72                                                    | %          | 41.6 |   | 74 | % | 77.3 |   | 69 | % | 77.0 |   | 71 | % |
| Total gross margin                     |       | $                                                       | 130.2      |                                                  | 64         | % | $ | 136.9 |   | 61 | % | $ | 248.1 |   | 63 | % | $ | 266.9 |   | 59 | % |
|                                   |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative(2) |       | $                                                       | 48.4       |                                                  | 24         | % | $ | 50.2 |   | 22 | % | $ | 90.0 |   | 23 | % | $ | 97.1 |   | 22 | % |
| Research and development costs         |       | 19.5                                                    |       | 10                                                    | %          | 19.3 |   | 9 | % | 39.0 |   | 10 | % | 39.2 |   | 9 | % |
| Depreciation and amortization          |       | 4.7                                                     |       | 2                                                     | %          | 4.7 |   | 2 | % | 9.5 |   | 2 | % | 8.8 |   | 2 | % |
| Operating income                       |       | $                                                       | 57.6       |                                                  | 28         | % | $ | 62.7 |   | 28 | % | $ | 109.6 |   | 28 | % | $ | 121.8 |   | 27 | % |

 

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

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

 

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| ** **                                              | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Operating Statistics                                    |       |                                                |       |                                              |       |   |   |   |   |
| New gaming devices                                      |       | 4,997                                               |       | 6,099                                             |       | 8,933 |   | 12,697 |   |
| Original Equipment Manufacturer (“OEM”) units |       | —                                              |       | 40                                                |       | — |   | 505 |   |
| New unit Average Selling Price (“ASP”)        |       | $                                                   | 14,289     |                                              | $          | 14,531 |   | $ | 14,213 |   | $ | 14,288 |   |
|                                                         |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **As of December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| End of period installed base:          |       |                                  |       |   |   |
| Gaming monitoring units installed base |       | 365,000                               |       | 331,000 |   |
| Systems managed cashless games         |       | 313,000                               |       | 292,000 |   |
|                                   |       |                                  |       |   |   |
| Wide-area progressive                  |       | 957                                   |       | 992 |   |
| Local-area progressive                 |       | 24                                    |       | 227 |   |
| Total linked progressive systems       |       | 981                                   |       | 1,219 |   |
|                                   |       |                                  |       |   |   |
| Rental and daily-fee games             |       | 12,448                                |       | 12,222 |   |
| Lottery systems                        |       | 7,809                                 |       | 8,003 |   |
| Centrally determined systems           |       | 49,874                                |       | 44,536 |   |

 

**Three Months Ended December 31, 2009 Compared to Three MonthsEnded December 31, 2008**

 

Totalrevenues for our Bally Gaming Equipment and Systems segment decreased $18.6million, or 8%, in the three months ended December 31, 2009, when comparedto the same period last year, as a result of the following:

 

*Gaming Equipment Revenue**.*Gaming Equipment revenue decreased $22.5 million, or 22%, toapproximately $78.8 million primarily as a result of an 18% decrease in newgaming device sales to 4,997 units in the three months ended December 31,2009, when compared to 6,099 units in the same period last year. New gamingdevice sales decreased due to a continued sluggish North America replacementmarket and fewer new casino openings and expansions during this quarter ascompared to the same period last year. ASP decreased to $14,289 in the threemonths ended December 31, 2009 compared to $14,531 in the same period lastyear. The 2% decrease in ASP was driven by the mix of new products sold in thecomparative periods.

 

*Gaming Equipment Gross Margin*. GamingEquipment gross margin increased to 53% in the three months ended December 31,2009 from 49%, in the same period last year, primarily as a result of improvedpurchasing and manufacturing efficiencies. In addition, royalty expensedecreased $1.9 million in the three months ended December 31, 2009 whencompared to the same period last year, due to a reduction in fees associatedwith unit sales and game conversions with third party titles.

 

*Gaming Operations Revenue**.*Gaming Operations revenue increased $2.2 million, or 3%, toapproximately $68.6 million in the three months ended December 31, 2009,when compared to the same period last year, primarily as a result of anincrease in participation, rental and license revenue, offset by a decrease inwide-area progressive revenue. The improvement in participation and rental revenuewas primarily due to an increase in premium revenue units and from ourinstalled base of devices connected to our centrally determined systems (Class II,Video Lottery and iVIEW network) that increased 12% from 44,536 units as of December 31,2008 to 49,874 units as of December 31, 2009. The improvement in licenserevenue was predominately from Washington.

 

*Gaming Operations Gross Margin*. Gross margin increased to70% in the three months ended December 31, 2009 from 68%, in the sameperiod last year, primarily as a result of the increases in participation,rental and license revenue which had little associated variable costs. Inaddition, there was a decrease in progressive jackpot expense and royaltyexpense during the same period.

 

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*Systems Revenue**.*Systems revenue increased$1.7 million, or 3%, to approximately $57.6 million in the three months ended December 31,2009 when compared to the same period last year primarily as a result of highermaintenance revenue in the current period. Maintenance revenue increased $2.4million, or 20%, in the three months ended December 31, 2009, whencompared to the same period last year, as a result of the increased installbase of customers on our systems.

 

*Systems Gross Margin.*Systems gross margindecreased to 72% in the three months ended December 31, 2009 from 74%, inthe same period last year, primarily as a result of a change in the mix ofproducts sold in the comparative periods.

 

*Selling, General and Administrative Expenses.*Selling, general and administrativeexpenses decreased $1.8 million, or 4%, in the three months ended December 31,2009, when compared to the same period last year, due primarily to a decreasein consulting and legal fees offset by an increase in insurance expense due toa $3.0 million insurance reimbursement recognized in the same period last year.The reimbursement was from claims for the 2005 U.S. Gulf Coast hurricanes whichdestroyed or temporarily shut down our gaming operations in the region when ourrental and daily fee games were destroyed in third party locations.  Consulting fees decreased due to acompanywide initiative to reduce external consulting and convert individuals tofull time positions only where necessary. Legal fees decreased due to areduction in services provided during the same period.

 

*Research and Development Costs*. Research and development costs increased$0.2 million, or 1%, in the three months ended December 31, 2009,when compared to the same period last year. The Company remains focused on itstechnology assets due to the competitive landscape that requires a continualinvestment in future generations of gaming products and systems.

 

*Depreciation and Amortization Expense*. Depreciation andamortization expense was $4.7 million in both the three months ended December 31,2009 and 2008.

 

**Six Months Ended December 31, 2009 Compared to Six Months Ended December 31,2008**

 

Totalrevenues for our Bally Gaming Equipment and Systems segment decreased $58.7million, or 13%, in the six months ended December 31, 2009, when comparedto the same period last year, as a result of the following:

 

*Gaming Equipment Revenue**.*Gaming Equipment revenue decreased by $67.8 million, or 32%, toapproximately $140.8 million primarily as a result of a 30% decrease in newgaming device sales to 8,933 units in the six months ended December 31,2009, when compared to 12,697 units in the same period last year. New gamingdevice sales decreased due to a continued sluggish North America replacementmarket and fewer new casino openings and expansions during this period ascompared to the same period in the prior year. In addition, during the sixmonths ended December 31, 2008, we sold 505 OEM units. ASP decreased lessthan 1% to $14,213 in the six months ended December 31, 2009 compared to$14,288 in the same period last year. The decrease in ASP was driven by the mixof new products sold in the comparative periods.

 

*Gaming Equipment Gross Margin*. GamingEquipment gross margin increased to 50% in the six months ended December 31,2009 from 47%, in the same period last year, primarily as a result of improvedpurchasing and manufacturing efficiencies. In addition, royalty expensedecreased $3.7 million in the six months ended December 31, 2009 whencompared to the same period last year, due to a reduction in fees associatedwith unit sales and game conversions with third party titles. There was also a$1.4 million decrease in inventory write-downs during the period as a result of improved materialplanning efforts and a concentrated effort to convert or rework slower movinginventory, when compared to the same period last year.

 

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*Gaming Operations Revenue**.*Gaming Operations revenue increased $5.7 million, or 4%, toapproximately $139.9 million in the six months ended December 31, 2009,when compared to the same period last year, primarily as a result of anincrease in participation and license revenue. The improvement in participationrevenue was primarily due to an increase in premium revenue units and from ourinstalled base of devices connected to our centrally determined systems (Class II,Video Lottery and iVIEW network) that increased 12% from 44,536 units as of December 31,2008 to 49,874 units as of December 31, 2009. The improvement in licenserevenue was predominately from Washington.

 

*Gaming Operations Gross Margin*. Gross margin increased to71% in the six months ended December 31, 2009 from 69%, in the same periodlast year, primarily as a result of the increases in participation and licenserevenue which had little associated variable costs.

 

*Systems Revenue**.*Systems revenue increased$3.4 million, or 3%, to approximately $111.6 million in the six months ended December 31,2009, when compared to the same period last year, primarily as a result ofhigher maintenance revenue in the current period. Maintenance revenue increased$3.6 million, or 15%, in the six months ended December 31, 2009, whencompared to the same period last year, as a result of the increased installbase of customers on our systems.

 

*Systems Gross Margin.*Systems gross margin decreasedto 69% in the six months ended December 31, 2009 from 71%, in the sameperiod last year, primarily as a result of an increase in discounts and achange in the mix of products sold in the comparative periods.

 

*Selling,General and Administrative Expenses.*Selling, general and administrative expenses decreased$7.1 million, or 7%, in the six months ended December 31, 2009, whencompared to the same period last year, due primarily to decreases in consultingand legal fees offset by an increase in insurance expense due primarily to a$3.0 million insurance reimbursement recognized in the same period last year.The reimbursement was from claims for the 2005 U.S. Gulf Coast hurricanes whichdestroyed or temporarily shut down our gaming operations in the region when ourrental and daily fee games were destroyed in third party locations.  The decrease in consulting expense was due toa companywide initiative to reduce external consulting and convert individualsto full time positions only where necessary. Legal fees decreased due to areduction in services provided during the same period.

 

*Research and Development Costs*. Research and development costs decreased$0.2 million in the six months ended December 31, 2009, when comparedto the same period last year. The Company remains focused on its technologyassets due to the competitive landscape that requires a continual investment infuture generations of gaming products and systems.

 

*Depreciation and Amortization Expense*. Depreciation andamortization expense increased $0.7 million, or 8%, in the six months ended December 31,2009, when compared to same period last year, primarily as a result ofadditions of core technology assets, property and equipment and leased gamingequipment year over year.

 

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***Casino Operations***

 

OurRainbow Casino is one of five casinos currently operating in the Vicksburg,Mississippi market. Our casino draws customers primarily from within a 75-mileradius surrounding Vicksburg, which includes Jackson, Mississippi. The summaryof our financial results and operating statistics for our Casino Operations isas follows:

 
| ** **                          | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                                | ** ** | **% Rev**                                        | ** ** | **2008** | ** ** | **% Rev** | ** ** | **2009** | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** |
| ** **                          | ** ** | **(dollars in millions)**                     | ** ** |
| Revenue                             |       | $                                                       | 8.5        |                                                  | 100        | % | $ | 9.7 |   | 100 | % | $ | 17.7 |   | 100 | % | $ | 19.7 |   | 100 | % |
|                                |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative |       | $                                                       | 1.8        |                                                  | 21         | % | $ | 2.1 |   | 22 | % | $ | 3.6 |   | 20 | % | $ | 4.2 |   | 21 | % |
| Depreciation and amortization       |       | $                                                       | 0.9        |                                                  | 11         | % | $ | 0.8 |   | 8 | % | $ | 1.9 |   | 11 | % | $ | 1.5 |   | 8 | % |
| Operating income                    |       | $                                                       | 2.1        |                                                  | 25         | % | $ | 2.5 |   | 26 | % | $ | 4.6 |   | 26 | % | $ | 5.4 |   | 27 | % |
|                                |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating statistics:               |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Average number of gaming devices    |       | 807                                                     |       |                                                  |       | 799 |   |   |   | 806 |   |   |   | 808 |   |   |   |
| Average number of table games       |       | 6                                                       |       |                                                  |       | 10 |   |   |   | 6 |   |   |   | 10 |   |   |   |

 

**Three Months Ended December 31, 2009 Compared to Three MonthsEnded December 31, 2008**

 

*Casino Operations.*Revenue decreased by $1.2million, or 12%, for the three months ended December 31, 2009 whencompared to the same period last year due primarily to increased competition and a continuing sluggisheconomy that reduced patronage during the quarter. The Mississippi Rivercounties reported an 8% decline in gaming revenues during the three monthsended December 31, 2009, when compared to the same period last year. Inaddition, there was a 40% reduction in the average number of table games at ourproperty during the three months ended December 31, 2009, when compared tothe same period last year. The reduction in table games had a minimal effect onrevenue because they were seldom open due to lack of demand.

 

*Selling, General and Administrative Expenses*. Selling,general and administrative expenses decreased by $0.3 million, or 14%, for thethree months ended December 31, 2009, when compared to the same periodlast year, due primarily to a decrease in advertising expenditures during theperiod.

 

*Depreciation and Amortization Expense*. Depreciation andamortization expense increased by $0.1 million, or 13%, for the three monthsended December 31, 2009, when compared to the same period last year, dueprimarily to the increase in the number of newer slot machines deployed duringthe period.

 

**SixMonths Ended December 31, 2009 Compared to Six Months Ended December 31,2008**

 

*Casino Operations.*Revenue decreased by $2.0million, or 10%, for the six months ended December 31, 2009 when comparedto the same period last year due primarily to increased competition and a continuing sluggisheconomy that reduced patronage during the period. The Mississippi Rivercounties reported a 9% decline in gaming revenues during the six months ended December 31,2009, when compared to the same period last year. In addition, there was a 40%reduction in the average number of table games at our property during the sixmonths ended December 31, 2009, when compared to the same period lastyear. The reduction in table games had a minimal effect on revenue because theywere seldom opened due to lack of demand.

 

*Selling, General and Administrative Expenses*. Selling,general and administrative expenses decreased by $0.6 million, or 14%, for thesix months ended December 31, 2009, when compared to the same period lastyear, due primarily to a decrease in payroll and related expenses andadvertising expenditures during the period.

 

*Depreciation and Amortization Expense*. Depreciation andamortization expense increased by $0.4 million, or 27%, for the six monthsended December 31, 2009, when compared to the same period last year, dueprimarily to the increase in the number of newer slot machines deployed duringthe period.

 

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***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 December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                                | ** ** | **2008**                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                  | ** ** | **(dollars in millions)**                     | ** ** |
| General and administrative                                  |       | $                                                       | 5.3        |                                                  | $          | 5.8 |   | $ | 8.9 |   | $ | 14.0 |   |
| Depreciation and amortization                               |       | 0.0                                                     |       | 0.0                                                   |       | 0.0 |   | 0.3 |   |
| Operating loss                                              |       | $                                                       | 5.3        |                                                  | $          | 5.8 |   | $ | 8.9 |   | $ | 14.3 |   |
|                                                        |       |                                                    |       |                                                  |       |   |   |   |   |
| Other income (expense)                                      |       |                                                    |       |                                                  |       |   |   |   |   |
| Interest income                                             |       | $                                                       | 0.6        |                                                  | $          | 0.9 |   | $ | 1.3 |   | $ | 2.1 |   |
| Interest expense                                            |       | (3.2                                                    | )          | (6.2                                                  | )          | (6.5 | ) | (11.3 | ) |
| Other, net                                                  |       | (1.1                                                    | )          | (1.6                                                  | )          | (1.0 | ) | (4.2 | ) |
| Total other expense                                         |       | $                                                       | (3.7       | )                                                     | $          | (6.9 | ) | $ | (6.2 | ) | $ | (13.4 | ) |
|                                                        |       |                                                    |       |                                                  |       |   |   |   |   |
| Income tax expense                                          |       | $                                                       | (17.1      | )                                                     | $          | (18.7 | ) | $ | (34.1 | ) | $ | (35.8 | ) |
| Net income (loss) attributable to noncontrolling  interests |       | $                                                       | 0.4        |                                                  | $          | 0.3 |   | $ | 1.1 |   | $ | (0.2 | ) |

 

**Three Months Ended December 31, 2009 Compared to Three MonthsEnded December 31, 2008**

 

*General and Administrative Expenses.*General and administrativeexpenses decreased $0.5 million, or 9%, in the three months ended December 31,2009, when compared to the same period last year, primarily as a result of adecrease in accounting fees of $1.5 million offset by an increase in legal feesof $0.9 million during the same period.

 

*Other Income (Expense).*Other expense decreased $3.2 million, or 46%, inthe three months ended December 31, 2009, when compared to the same periodlast year. Other expense decreased primarily due to a decrease in interestexpense and a decrease in losses incurred on foreign currency transactions as aresult of the weakening U.S. dollar during the same period. Interest expensedecreased $3.0 million primarily due to a reduction in both the principalbalance and the interest rate on the term loan which decreased from 7.30% inthree months ended December 31, 2008 to 4.64% in the same period thisyear. In December 2008, we entered into a floating-to-fixed interest rateswap to fix the interest rate at 1.89% plus an applicable margin (2.75% at December 31,2009) until the term loan’s maturity in September 2012.

 

*Income Tax Expense.*The effective income tax rate for the three monthsended December 31, 2009 and 2008 was 33.7% and 35.5%, respectively. At theend of each interim period, we make our best estimate of the effective tax rateexpected to be applicable for the full fiscal year and the impact of discreteitems, if any, and adjust the quarterly rate, as necessary.

 

*Net income (loss) attributable to noncontrolling interests.*Net incomeattributable to noncontrolling interests increased in the three months ended December 31,2009, when compared to the same period last year, due primarily to an increasein net earnings from certain noncontrolling interests.

 

**Six Months Ended December 31, 2009 Compared to Six Months Ended December 31,2008**

 

*General and Administrative Expenses.*General and administrativeexpenses decreased $5.1 million, or 36%, in the six months ended December 31,2009, when compared to the same period last year, primarily as a result of adecrease in accounting fees of $4.3 million and a decrease in legal fees of$0.8 million during the same period.

 

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*Other Income (Expense).*Other expense decreased $7.2 million, or 54%, inthe six months ended December 31, 2009, when compared to the same periodlast year. Other expense decreased primarily due to a decrease in interestexpense, the write-off of previously capitalized debt issuance costs of $0.8million in the prior period upon the financing of the Company’s new term loanand revolving credit facility, and a decrease in losses incurred on foreigncurrency transactions as a result of the weakening U.S. dollar. Interestexpense decreased $4.8 million primarily due to a reduction in both theprincipal balance and the interest rate on the term loan which decreased from7.30% in six months ended December 31, 2008 to 4.64% in the same periodthis year. In December 2008, we entered into a floating-to-fixed interestrate swap to fix the interest rate at 1.89% plus an applicable margin (2.75% asof December 31, 2009) until the term’s maturity in September 2012.

 

*Income Tax Expense.*The effective income tax rate for the six months endedDecember 31, 2009 and 2008 was 34.5% and 36.0%, respectively. At the endof each interim period, we make our best estimate of the effective tax rateexpected to be applicable for the full fiscal year and the impact of discreteitems, if any, and adjust the quarterly rate, as necessary.

 

*Net income (loss) attributable to noncontrolling interests.*Net incomeattributable to noncontrolling interests increased in the six months ended December 31,2009, when compared to the same period last year, due primarily to an increasein net earnings from certain noncontrolling interests.

 

**Financial Condition and Liquidity**

 

***Working Capital***

 
| ** **                                          | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **Increase (decrease)** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|-------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **2009**              | ** ** | **2009**          | ** ** | **Amount**                   | ** ** | **%** | ** ** |
| ** **                                          | ** ** | **(in 000s)**    | ** ** |
| Cash and cash equivalents                           |       | $                     | 71,315     |              | $          | 64,598                       |       | $ | 6,717 |   | 10 | % |
|                                                |       |                  |       |              |       |                         |       |   |   |
| Total long-term debt,  including current maturities |       | $                     | 191,297    |              | $          | 209,087                      |       | $ | (17,790 | ) | (9 | )% |
|                                                |       |                  |       |              |       |                         |       |   |   |
| Total current assets                                |       | $                     | 441,802    |              | $          | 423,639                      |       | $ | 18,163 |   | 4 | % |
| Total current liabilities                           |       | 161,088               |       | 178,050           |       | (16,962                      | )          | (10 | )% |
| Net working capital                                 |       | $                     | 280,714    |              | $          | 245,589                      |       | $ | 35,125 |   | 14 | % |

 

As of December 31, 2009 and June 30, 2009,we had $71.3 million and $64.6 million, respectively, in consolidated cash andcash equivalents, which included approximately $4.1 million and $3.1 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 December 31, 2009 and June 30, 2009, these accounts hadan aggregate value of approximately $7.6 million and $9.1 million,respectively, which are classified as restricted cash in our unauditedcondensed consolidated balance sheets. In addition, we purchase U.S. TreasuryStrip Securities for the benefit of jackpot winners who elect to receivewinnings in annual or weekly installment payments. These securities areincluded in restricted long-term investments in the accompanying unauditedcondensed consolidated balance sheets, and totaled $12.3 million and $12.1million as of December 31, 2009 and June 30, 2009, respectively.

 

Ournet working capital increased $35.1 million in the six months ended December 31,2009, when compared to the same period last year, and was primarily affected bya $6.7 million increase in cash and cash equivalents (see *Cash FlowSummary)*and by the following components:

 

·                  An increase of $38.1 million in currentaccounts and notes receivable due primarily to certain new systems contractsand international sales during the period and an increase of $4.1 million innotes receivable for the current portion of customer loans made to customers;

 

·                  A decrease of $12.3 million in prepaidand refundable income tax due to tax refunds and the use of prior yearoverpayments for current year estimated taxes;

 

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·                  A decrease of $12.2 million in accountspayable, accrued liabilities and jackpot liabilities due primarily to decreasein accounting and legal fees and inventory expenditures during the same period.

 

·                  A decrease of $9.3 millionin inventories due primarily to a decline in expenditures due to improvedprocesses in managing inventory, including the continuous improvement ofpurchasing and inventory controls;

 

·                  A decrease of $6.0 million in currentdeferred revenue, offset by a $3.9 million decrease in current deferredcost of revenue, due to the recognition of previously deferred sales andrelated costs in accordance with our revenue recognition policy; and

 

·                  An increase of $2.2 million in currentmaturities of long-term debt due primarily to the increase in quarterlyprincipal payments from $6.25 million to $8.75 million beginning in December 2009that increases to $11.25 million in December 2010, which was offset bydecrease of $2.8 million in related party debt which was paid in full in December 2009.

 

OnSeptember 29, 2008, we entered into a $225.0 million term loan and a$75.0 million revolving credit facility (collectively, the “CreditFacility”). We also have the option to request an increase in the size of theterm loan and/or revolving Credit Facility by up to $50.0 million in theaggregate provided that certain conditions are met. The proceeds from theCredit Facility and cash on hand of $14.6 million were used to repay thethen existing bank term loans totaling $289.6 million. The Company usedcash-on-hand to pay for transaction fees and expenses totaling$10.7 million which are being amortized over the term of the CreditFacility.

 

Asof December 31, 2009, there was approximately $75.0 million ofundrawn availability under the revolving credit facility. Availability underthe revolving credit facility is reduced to the extent of outstanding lettersof credit.

 

Theinterest rate on the term loan is subject to a leverage based pricing grid. Ifour leverage ratio, as defined under the term loan, is greater than 1.5, theinterest rate will be LIBOR plus a margin of 3.25%; if the leverage ratio isbetween 1.0 and 1.5, the interest rate will be LIBOR plus a margin of 3.00%;and if the leverage ratio is below 1.0, the interest rate will be LIBOR plus amargin of 2.75%. In December 2008, we entered into a floating-to-fixedinterest rate swap to fix the floating LIBOR based debt under the term loan tofixed rate debt at an interest rate of 1.89% plus an applicable margin (2.75%,as of December 31, 2009) for the remaining term.

 

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

 

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

 

Thefinancial covenants under the Credit Facility consist of a leverage ratio and afixed charges coverage ratio. The leverage ratio is computed as total debtoutstanding at the end of the quarter divided by the trailing twelve monthsEarnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”),excluding certain cash and non-cash charges. The fixed charges coverage ratiois computed as EBITDA, adjusted for both the trailing twelve months capitalexpenditures, share repurchases and cash taxes paid, divided by the trailingtwelve months interest charges plus all payments of principal made during theprevious twelve months. We were in compliance with all of the covenants underthe Credit Facility as of December 31, 2009.

 

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

 

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***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 and related recurring hardware and software maintenancerevenue. Cash flows from Casino Operations are derived from the operation ofthe Rainbow Casino. We utilize our cash to acquire materials for themanufacture of goods for resale, to pay payroll, interest, taxes and selling,general and administrative expenses and to fund research and developmentactivities.

 

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 $50.4 million in the sixmonths ended December 31, 2009 as compared to $73.5 million in the sameperiod last year, a $23.1 million decrease primarily due to the impactfrom a $12.1 million net decrease in changes in operating assets andliabilities and a $8.5 million increase in excess tax benefit of stock optionexercises during the same period. The net decrease in changes in operatingassets and liabilities was primarily due to an increase in accounts and notesreceivable during the same period.

 

Cashutilized for investing activities is primarily for additions to property, plantand equipment for purchases of furniture, fixtures, office and gaming equipment,improvements in leaseholds and the manufacture of goods for lease or rental,financing arrangements with customers and investments in technology assets.During the six months ended December 31, 2009, we made capitalexpenditures of $6.5 million. In addition, we purchased $2.0 millionin intangible assets and loaned $15.8 million to customers during the sameperiod.

 

Cashutilized for financing activities is primarily for the payment of principalpayments on our debt, distributions to noncontrolling interests, as well as forthe purchase of shares of our common stock. We made payments of $17.8 millionon our notes payable during the six months ended December 31, 2009. Wealso purchased 793,869 shares of our common stock for $31.0 million under our sharerepurchase plan.

 

Cashprovided by financing activities is primarily from proceeds from the exerciseof stock options and purchases of stock by employees under our Employee StockPurchase Plan (“ESPP”) and excess tax benefits of stock option exercises.During the six months ended December 31, 2009, employees exercised optionsfor 1,362,764 shares of common stock for $18.5 million and purchased24,935 shares of common stock for $0.9 million under our ESPP.

 

**Critical Accounting Policies**

 

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

 

**Recently adopted accounting pronouncements — Revenuerecognition**

 

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

 

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

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

 

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

 

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

 

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

 
| ** **                   | ** ** | **Three Months Ended  December 31, 2009** | ** ** | **Six Months Ended  December 31, 2009**                         | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **As  Reported**                                         | ** ** | **Pro  Forma Basis as  if the Previous  Accounting  Guidance Were in  Effect** | ** ** | **As  Reported** | ** ** | **Pro  Forma Basis as  if the Previous  Accounting  Guidance Were in  Effect** | ** ** |
| ** **                   | ** ** | **(in 000s)**                                       | ** ** |
| Revenues:                    | ** ** | ** **                                               | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gaming Equipment             |       | $                                                        | 78,791     |                                                                           | $          | 73,314 |   | $ | 140,794 |   | $ | 133,649 |   |
| Systems                      |       | 57,604                                                   |       | 56,754                                                                         |       | 111,622 |   | 110,772 |   |
| Gaming equipment and systems |       | $                                                        | 136,395    |                                                                           | $          | 130,068 |   | $ | 252,416 |   | $ | 244,421 |   |

 

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

 

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

 

**Other Recently Issued Accounting Pronouncements**

 

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

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

*Interest Rate Risk*

 

As of December 31, 2009, we had total debtoutstanding of approximately $191.3 million, consisting primarily of$191,250,000 outstanding under our term loan and $47,000 in other debt. SeeNote 4 to unaudited condensed consolidated financial statements, *Long-Term Debt*. See “Item 3. Quantitative and QualitativeDisclosures About Market Risk” in the 2009 10-K, to which there were nomaterial changes during the period covered by this Quarterly Report on Form 10-Q.

 

*Foreign Currency Exchange Rate Risk*

 

Ourforeign subsidiaries generally use their domestic currency as their functionalcurrency. A 10% fluctuation in the exchange rates of these currencies againstthe U.S. dollar would result in a corresponding change in earnings reported inthe consolidated group of approximately $0.2 million.

 

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# **ITEM4.  CONTROLS AND PROCEDURES**

# ** **

**Evaluation of Disclosure Controls and Procedures**

 

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

 

Basedon this evaluation our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of December 31,2009.

 

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

 

**Changes in Internal Control Over Financial Reportingduring the Quarter Ended December 31, 2009**

 

Althoughwe update our internal controls as necessary to accommodate any modificationsto our business processes and accounting procedures as part of our normaloperations, there were no changes in our internal control over financialreporting that occurred in the three months ended December 31, 2009 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II**

 

# **ITEM1.**          LEGAL PROCEEDINGS

# ** **

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

 

**ITEM 1A.       RISK FACTORS**

 

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

 

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

 

Our Board of Directorsapproved a share repurchase plan under which, subject to price and marketconditions, purchases of shares can be made from time to time in the openmarket or in privately negotiated transactions using available cash. On December 2,2009, the Board of Directors approved a new share repurchase plan to purchaseup to $100 million of common stock effective January 1,2010. The new plan replaced the Company’s existing $100 million sharerepurchase plan under which Bally had repurchased approximately $69.3 millionof common stock from August 12, 2008 through December 31, 2009.

 

Our quarterly sharerepurchases under the previous plan, excluding treasury shares acquired innon-cash transactions related to forfeited stock awards and shares exchangedfor options exercised, were as follows:

 
| **Period**                                              | ** ** | **Total  Number  of Shares  (or Units)  Purchased** | ** ** | **Average Price  Paid Per  Share  (Per Unit)** | ** ** | **Total Number of  Shares  (or Units) Purchased  as Part of Publicly  Announced   Plans or Programs** | ** ** | **Maximum Number  (or Approximate Dollar  Value)  of Shares (or Units)  That May Be Purchased  Under the Plans or Programs** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 1 - October 31, 2009        |       |                                                          |       |                                                          |       |                                                                                                                                                    |       | $                                                                                                                                                                                             | 46,483,028 |   |
|                                                    |       | 204,308                                                       |       | $                                                             | 36.71      |                                                                                                                                                    | 204,308    |                                                                                                                                                                                          | $          | 38,983,047 |   |
| November 1 -  November 30, 2009          |       | 113,000                                                       |       | $                                                             | 42.44      |                                                                                                                                                    | 113,000    |                                                                                                                                                                                          | $          | 34,187,845 |   |
| December 1 — December 31, 2009 |       | 84,410                                                        |       | $                                                             | 41.75      |                                                                                                                                                    | 84,410     |                                                                                                                                                                                          | $          | 100,000,000 |   |
| Total                                                   |       | 401,718                                                       |       | $                                                             | 39.38      |                                                                                                                                                    | 401,718    |                                                                                                                                                                                          |       |   |

 

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**ITEM 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The following matters weresubmitted to a vote of our stockholders during the Annual Meeting ofStockholders held on December 2, 2009:

 

1.               The election of onedirector for a term of three years:

** **
| **Director**  | ** ** | **Shares For** | ** ** | **Shares Withheld** | ** ** |
|---------------|------------|---------------------|------------|--------------------------|------------|
| ** **    | ** ** | ** **          | ** ** | ** **               | ** ** |
| David Robbins |       | 35,296,699          |       | 14,549,510               |       |

 

2.               To approve the Company’s2010 Long Term Incentive Plan, which amends and restates the Company’s Amendedand Restated 2001 Long Term Incentive Plan to, among other things, allow forthe grant of cash incentive bonuses and permit the grant of awards that arestructured to comply with Section 162(m) of the Internal Revenue Codeof 1986, as amended:

 
| **Shares For** | ** ** | **Shares Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|---------------------|------------|-------------------------|------------|-------------|------------|--------------------------|------------|
| ** **          | ** ** | ** **              | ** ** | ** **  | ** ** | ** **               | ** ** |
| 33,191,568          |       | 16,625,064              |       | 29,577      |       | —                   |       |

 

3.               Ratification ofDeloitte & Touche LLP as our independent registered public accountingfirm for the fiscal year ending June 30, 2010:

 
| **Shares For** | ** ** | **Shares Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|---------------------|------------|-------------------------|------------|-------------|------------|--------------------------|------------|
| ** **          | ** ** | ** **              | ** ** | ** **  | ** ** | ** **               | ** ** |
| 48,804,961          |       | 1,029,594               |       | 11,654      |       | —                   |       |

 

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

 
| **Exhibits** | ** ** | **Description**                                                                                                                                                 |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                            |
| 10.1*        |       | Bally Technologies, Inc. 2010 Long Term Incentive Plan.                                                                                                         |
|         |       |                                                                                                                                                            |
| 31.1         |       | Certification of Chief Executive Officer, pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                             |
|         |       |                                                                                                                                                            |
| 31.2         |       | Certification of Chief Financial Officer, pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                             |
|         |       |                                                                                                                                                            |
| 32.1         |       | Certification of Chief Executive Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002. |
|         |       |                                                                                                                                                            |
| 32.2         |       | Certification of Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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*              Denotesmanagement contract or compensatory plan or arrangement.

 

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**SIGNATURES**

 

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

 
| BALLY TECHNOLOGIES, INC. |                                                            | Date: February 2, 2010 |
|-------------------------------|-----------------------------------------------------------------|------------------------|
|                          |                                                            |                   |
|                          |                                                            |                   |
| By                            | /s/Richard Haddrill                                             |                   |   |
|                          | Richard Haddrill                                                |                   |   |
|                          | President and Chief Executive Officer                           |                   |   |
|                          | (Principal Executive Officer)                                   |                   |   |
|                          |                                                            |                   |
|                          |                                                            |                   |
| By                            | /s/Robert C. Caller                                             |                   |   |
|                          | Robert C. Caller                                                |                   |   |
|                          | Executive Vice President, Chief Financial Officer and Treasurer |                   |   |
|                          | (Principal Financial Officer)                                   |                   |   |

 

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