Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended December 31, 2008**

 

**OR**

 

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

 

**For thetransition period from              to              **

 

**CommissionFile Number 0-4281**

 

**BALLY TECHNOLOGIES, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

**6601 S. Bermuda Rd.**

**Las Vegas, Nevada  89119**

(Address of principal executiveoffices)

 

**(702)584-7700**

(Registrant’s telephone number,including area code)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

x  Yes    o  No

 

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

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

 

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

 

o  Yes    x  No

 

The number of shares of Common Stock, $0.10 par value, outstanding asof February 2, 2009, according to the records of the registrant’sregistrar and transfer agent was 54,588,000 which do not include 2,285,000shares held in treasury.

 

 

 

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Table of Contents

** **

**INDEX**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                     | ** ** |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                                           |       |
| Item 1.           | Financial Statements                                                                                                           |       |
|              |                                                                                                                           |       |
|              | Unaudited Condensed Consolidated Balance  Sheets as of December 31, 2008 and June 30, 2008                           |       |
|              |                                                                                                                           |       |
|              | Unaudited  Condensed Consolidated Statements of Operations for the Three and Six Months  Ended December 31, 2008 and 2007 |       |
|              |                                                                                                                           |       |
|              | Unaudited  Condensed Consolidated Statements of Cash Flows for the Six Months Ended  December 31, 2008 and 2007           |       |
|              |                                                                                                                           |       |
|              | Notes to  Unaudited Condensed Consolidated Financial Statements                                                                |       |
|              |                                                                                                                           |       |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    |       |
|              |                                                                                                                           |       |
| Item 3.           | Quantitative and Qualitative Disclosures  About Market Risk                                                                    |       |
|              |                                                                                                                           |       |
| Item 4.           | Controls and Procedures                                                                                                        |       |
|              |                                                                                                                           |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                          | ** ** |
| ** **        | ** **                                                                                                                     | ** ** |
| Item 1.           | Legal Proceedings                                                                                                              |       |
|              |                                                                                                                           |       |
| Item 1A.          | Risk Factors                                                                                                                   |       |
|              |                                                                                                                           |       |
| Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                   |       |
|              |                                                                                                                           |       |
| Item 4.           | Submission of Matters to a Vote of Security  Holders                                                                           |       |
|              |                                                                                                                           |       |
| Item 6.           | Exhibits                                                                                                                       |       |
|              |                                                                                                                           |       |
| **SIGNATURES**    |                                                                                                                           |       |

 

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**PART I**

**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                       | ** ** | **December 31,  2008**                             | ** ** | **June ****30,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(in 000s, except share amounts)** | ** ** |
| ASSETS                                                                                                                                           |       |                                                    |       |                        |       |
| Current assets:                                                                                                                                  |       |                                                    |       |                        |       |
| Cash and cash equivalents                                                                                                                        |       | $                                                       | 63,209     |                        | $          | 66,570 |   |
| Restricted cash                                                                                                                                  |       | 16,009                                                  |       | 13,111                      |       |
| Accounts and notes receivable, net of  allowances for doubtful accounts of $11,100 and $12,055                                                   |       | 196,841                                                 |       | 215,762                     |       |
| Inventories                                                                                                                                      |       | 63,773                                                  |       | 94,238                      |       |
| Income tax receivable                                                                                                                            |       | 13,737                                                  |       | 8,534                       |       |
| Deferred income tax assets                                                                                                                       |       | 68,816                                                  |       | 68,816                      |       |
| Deferred cost of revenue                                                                                                                         |       | 50,459                                                  |       | 58,983                      |       |
| Other current assets                                                                                                                             |       | 23,860                                                  |       | 21,673                      |       |
| Total current assets                                                                                                                             |       | 496,704                                                 |       | 547,687                     |       |
|                                                                                                                                             |       |                                                    |       |                        |       |
| Restricted long-term investments                                                                                                                 |       | 11,021                                                  |       | 10,469                      |       |
| Long-term receivables                                                                                                                            |       | 12,923                                                  |       | 10,653                      |       |
| Property, plant and equipment, net of  accumulated depreciation of $61,770 and $59,217                                                           |       | 75,979                                                  |       | 71,107                      |       |
| Leased gaming equipment, net of accumulated  depreciation of $105,967 and $93,839                                                                |       | 98,113                                                  |       | 101,280                     |       |
| Goodwill                                                                                                                                         |       | 161,981                                                 |       | 162,727                     |       |
| Intangible assets, net                                                                                                                           |       | 35,670                                                  |       | 36,249                      |       |
| Deferred income tax assets                                                                                                                       |       | 10,764                                                  |       | 10,734                      |       |
| Long-term deferred cost of revenue                                                                                                               |       | 33,639                                                  |       | 35,211                      |       |
| Other assets, net                                                                                                                                |       | 16,267                                                  |       | 9,007                       |       |
| Total assets                                                                                                                                     |       | $                                                       | 953,061    |                        | $          | 995,124 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                        |       |                                                    |       |                        |       |
| Current liabilities:                                                                                                                             |       |                                                    |       |                        |       |
| Accounts payable                                                                                                                                 |       | $                                                       | 29,876     |                        | $          | 44,888 |   |
| Accrued liabilities                                                                                                                              |       | 48,845                                                  |       | 63,328                      |       |
| Customer deposits                                                                                                                                |       | 19,136                                                  |       | 29,496                      |       |
| Jackpot liabilities                                                                                                                              |       | 16,302                                                  |       | 13,614                      |       |
| Deferred revenue                                                                                                                                 |       | 100,547                                                 |       | 129,909                     |       |
| Current maturities of long-term debt and  capital leases                                                                                         |       | 39,459                                                  |       | 13,163                      |       |
| Total current liabilities                                                                                                                        |       | 254,165                                                 |       | 294,398                     |       |
|                                                                                                                                             |       |                                                    |       |                        |       |
| Long-term debt and capital leases, net of  current maturities                                                                                    |       | 241,250                                                 |       | 291,341                     |       |
| Long-term deferred revenue                                                                                                                       |       | 54,711                                                  |       | 55,691                      |       |
| Other income tax liability                                                                                                                       |       | 19,023                                                  |       | 18,750                      |       |
| Other liabilities                                                                                                                                |       | 8,074                                                   |       | 9,837                       |       |
| Total liabilities                                                                                                                                |       | 577,223                                                 |       | 670,017                     |       |
| Minority interest                                                                                                                                |       | 963                                                     |       | 1,782                       |       |
| Commitments and contingencies (Note 8)                                                                                                           |       |                                                    |       |                        |       |
| Stockholders’ equity:                                                                                                                       |       |                                                    |       |                        |       |
| Special stock, 10,000,000 shares  authorized: Series E, $100 liquidation value; 115 shares issued and  outstanding                          |       | 12                                                      |       | 12                          |       |
| Common stock, $.10 par value; 100,000,000  shares authorized; 56,808,000 and 56,318,000 shares issued and 54,548,000 and  55,144,000 outstanding |       | 5,675                                                   |       | 5,626                       |       |
| Treasury stock at cost, 2,260,000 and  1,174,000 shares                                                                                          |       | (52,768                                                 | )          | (25,041                     | )          |
| Additional paid-in capital                                                                                                                       |       | 318,766                                                 |       | 302,146                     |       |
| Accumulated other comprehensive income                                                                                                           |       | 8                                                       |       | 1,268                       |       |
| Retained earnings                                                                                                                                |       | 103,182                                                 |       | 39,314                      |       |
| Total stockholders’ equity                                                                                                                  |       | 374,875                                                 |       | 323,325                     |       |
| Total liabilities and stockholders’ equity                                                                                                  |       | $                                                       | 953,061    |                        | $          | 995,124 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. ANDSUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 

 
|                                              |   | **Three Months Ended  December 31,**              |       | **Six Months Ended  December 31,** |       |
|---------------------------------------------------|--------|------------------------------------------------------------------|------------|---------------------------------------------------|------------|
|                                              |   | **2008**                                                         | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                              |   | **(in 000s, except per share amounts)** |       |
| Revenues:                                         |   |                                                             |       |                                              |       |   |   |   |   |
| Gaming equipment and systems                      |   | $                                                                | 157,241    |                                              | $          | 164,730 |   | $ | 316,815 |   | $ | 288,262 |   |
| Gaming operations                                 |   | 66,407                                                           |       | 54,178                                            |       | 134,183 |   | 108,256 |   |
| Casino operations                                 |   | 9,646                                                            |       | 11,744                                            |       | 19,694 |   | 23,164 |   |
|                                              |   | 233,294                                                          |       | 230,652                                           |       | 470,692 |   | 419,682 |   |
| Costs and expenses:                               |   |                                                             |       |                                              |       |   |   |   |   |
| Cost of gaming equipment and systems (1)          |   | 64,221                                                           |       | 76,139                                            |       | 139,813 |   | 130,802 |   |
| Cost of gaming operations                         |   | 20,999                                                           |       | 22,757                                            |       | 41,559 |   | 40,816 |   |
| Direct cost of casino operations                  |   | 4,320                                                            |       | 4,719                                             |       | 8,675 |   | 9,431 |   |
| Selling, general and administrative               |   | 59,516                                                           |       | 60,992                                            |       | 117,953 |   | 113,263 |   |
| Research and development costs                    |   | 19,331                                                           |       | 14,647                                            |       | 39,202 |   | 27,956 |   |
| Depreciation and amortization                     |   | 5,458                                                            |       | 4,596                                             |       | 10,564 |   | 9,450 |   |
|                                              |   | 173,845                                                          |       | 183,850                                           |       | 357,766 |   | 331,718 |   |
| Operating income                                  |   | 59,449                                                           |       | 46,802                                            |       | 112,926 |   | 87,964 |   |
|                                              |   |                                                             |       |                                              |       |   |   |   |   |
| Other income (expense):                           |   |                                                             |       |                                              |       |   |   |   |   |
| Interest income                                   |   | 947                                                              |       | 1,027                                             |       | 2,103 |   | 2,004 |   |
| Interest expense                                  |   | (6,188                                                           | )          | (7,270                                            | )          | (11,281 | ) | (14,507 | ) |
| Other, net                                        |   | (1,664                                                           | )          | 116                                               |       | (4,230 | ) | 993 |   |
|                                              |   |                                                             |       |                                              |       |   |   |   |   |
| Income before income taxes and minority  interest |   | 52,544                                                           |       | 40,675                                            |       | 99,518 |   | 76,454 |   |
| Income tax expense                                |   | (18,670                                                          | )          | (15,235                                           | )          | (35,807 | ) | (28,344 | ) |
| Minority interest                                 |   | (310                                                             | )          | (1,024                                            | )          | 157 |   | (2,412 | ) |
|                                              |   |                                                             |       |                                              |       |   |   |   |   |
| Net income                                        |   | $                                                                | 33,564     |                                              | $          | 24,416 |   | $ | 63,868 |   | $ | 45,698 |   |
|                                              |   |                                                             |       |                                              |       |   |   |   |   |
| Basic and diluted earnings per share:             |   |                                                             |       |                                              |       |   |   |   |   |
| Basic earnings per share                          |   | $                                                                | 0.62       |                                              | $          | 0.45 |   | $ | 1.17 |   | $ | 0.84 |   |
| Diluted earnings per share                        |   | $                                                                | 0.59       |                                              | $          | 0.42 |   | $ | 1.11 |   | $ | 0.79 |   |
|                                              |   |                                                             |       |                                              |       |   |   |   |   |
| Weighted average shares outstanding:              |   |                                                             |       |                                              |       |   |   |   |   |
| Basic                                             |   | 54,419                                                           |       | 54,382                                            |       | 54,745 |   | 54,213 |   |
| Diluted                                           |   | 56,731                                                           |       | 58,524                                            |       | 57,428 |   | 57,970 |   |

 

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(1) Costof gaming equipment and systems exclude amortization related to certainintangibles, including core technology and license rights, which are includedin depreciation and amortization.

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                               |   | **Six Months Ended  December 31,** |       |
|------------------------------------------------------------------------------------|--------|---------------------------------------------------|------------|
|                                                                               |   | **2008**                                          | ** ** | **2007** | ** ** |
|                                                                               |   | **(in 000s)**                                |       |
| Cash flows from operating activities:                                              |   |                                              |       |   |   |
| Net income                                                                         |   | $                                                 | 63,868     |   | $ | 45,698 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                              |       |   |   |
| Depreciation and amortization                                                      |   | 34,982                                            |       | 29,254 |   |
| Share-based compensation                                                           |   | 7,096                                             |       | 6,585 |   |
| Tax benefit of stock option exercises                                              |   | —                                            |       | 77 |   |
| Excess tax benefit of stock option  exercises                                      |   | (565                                              | )          | (2,849 | ) |
| Income tax receivable                                                              |   | (4,922                                            | )          | (2 | ) |
| Provision for doubtful accounts                                                    |   | 193                                               |       | 2,034 |   |
| Write-off of debt issuance costs                                                   |   | 786                                               |       | — |   |
| Inventory and other asset write-downs                                              |   | 2,810                                             |       | 4,993 |   |
| Other                                                                              |   | 2,709                                             |       | (1,380 | ) |
| Changes in operating assets and  liabilities:                                      |   |                                              |       |   |   |
| Accounts and notes receivable                                                      |   | 19,357                                            |       | (14,430 | ) |
| Inventories                                                                        |   | 10,992                                            |       | (43,204 | ) |
| Other current assets                                                               |   | (2,004                                            | )          | (2,926 | ) |
| Accounts payable                                                                   |   | (15,028                                           | )          | (4,815 | ) |
| Accrued liabilities and jackpot liabilities                                        |   | (27,174                                           | )          | 1,768 |   |
| Deferred revenue and deferred cost of  revenue                                     |   | (20,246                                           | )          | 10,515 |   |
| Net cash provided by operating activities                                          |   | 72,854                                            |       | 31,318 |   |
|                                                                               |   |                                              |       |   |   |
| Cash flows from investing activities:                                              |   |                                              |       |   |   |
| Capital expenditures                                                               |   | (14,016                                           | )          | (8,416 | ) |
| Restricted cash and investments                                                    |   | (2,844                                            | )          | 1,582 |   |
| Additions to other long-term assets                                                |   | (4,095                                            | )          | (6,710 | ) |
| Net cash used in investing activities                                              |   | (20,955                                           | )          | (13,544 | ) |
|                                                                               |   |                                              |       |   |   |
| 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                                    |   | (9,233                                            | )          | (19,372 | ) |
| Purchase of treasury stock                                                         |   | (27,727                                           | )          | (5,999 | ) |
| Excess tax benefit of stock option  exercises                                      |   | 565                                               |       | 2,849 |   |
| Proceeds from exercise of stock options and  employee stock purchases              |   | 8,019                                             |       | 11,388 |   |
| Net cash used in financing activities                                              |   | (53,657                                           | )          | (11,134 | ) |
|                                                                               |   |                                              |       |   |   |
| Effect of exchange rate changes on cash                                            |   | (1,603                                            | )          | 834 |   |
|                                                                               |   |                                              |       |   |   |
| Cash and cash equivalents:                                                         |   |                                              |       |   |   |
| Increase (decrease) for period                                                     |   | (3,361                                            | )          | 7,474 |   |
| Balance, beginning of period                                                       |   | 66,570                                            |       | 40,842 |   |
| Balance, end of period                                                             |   | $                                                 | 63,209     |   | $ | 48,316 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSEDCONSOLIDATED SUPPLEMENTAL CASH FLOW INFORMATION**

 

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

 
|                                                       |       | **Six Months Ended  December 31,** |       |
|------------------------------------------------------------|------------|---------------------------------------------------|------------|
|                                                       | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                                       |       | **(in 000s)**                                |       |
| Cash paid for interest                                     |       | $                                                 | 15,963     |   | $ | 14,421 |   |
| Cash paid for income taxes                                 |       | 38,005                                            |       | 26,641 |   |
|                                                       |       |                                              |       |   |   |
| Non-cash investing and financing  transactions:            |       |                                              |       |   |   |
| Pay-off of debt from refinancing                           |       | $                                                 | 275,000    |   | $ | — |   |
| Transfer of inventory to leased gaming  equipment (1)      |       | 24,132                                            |       | 40,248 |   |
| Reclassify property, plant and equipment to  inventory (1) |       | 6,767                                             |       | 8,184 |   |
| Accrual of capital expenditures                            |       | 1,334                                             |       | 769 |   |

 

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(1)                                  As a result of the inability to separatelyidentify the cash flows associated with the construction of leased gamingequipment, the Company has included all additions to leased gaming equipment asan increase in inventory under cash used in operating activities in theunaudited condensed consolidated statement of cash flows. In addition, cashgenerated from the sale of used gaming equipment classified as leased gamingequipment is also included in cash provided by operating activities in theunaudited condensed consolidated statement of cash flows. The Company has oneprocess to procure raw materials for the assembly of both inventory and leasedgaming equipment. The materials requisition planning process considers thenumber of devices the Company expects to build for sale and for use in itsgaming operations division during a particular period, but it does notseparately earmark purchases for leased gaming equipment. Without such anearmarking process, the Company is unable to determine whether the parts usedto construct leased gaming equipment during a particular period came frominventory 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.**

**FORM 10-Q**

Notesto Unaudited Condensed Consolidated Financial Statements

 

**1.             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Principles of presentation and consolidation*

 

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

 

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

 

All intercompany accounts and transactions have been eliminated inconsolidation.

 

*Recently adopted accounting pronouncements*

 

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

 

On October 1, 2008, the Company adopted FASB Staff Position (“FSP”)140-4 and FASB Interpretation No. (“FIN”) 46(R)-8,*Disclosures by Public Entities (Enterprises) aboutTransfers of Financial Assets and Interests in Variable Interest Entities*.**FSP 140-4 and FIN 46(R)-8 requiresadditional disclosures about an entity’s involvement with variable interestentities and transfers of financial assets. The adoption of FSP 140-4 andFIN 46(R)-8 did not have a material impact on the Company’s consolidatedresults of operations, financial position and cash flows.

 

On July 1, 2008, the Company adopted FASB SFAS No. 157, *Fair Value Measurements,* for all financial assets andliabilities that are recognized or disclosed at fair value in its consolidatedfinancial statements. SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. This statement does notrequire any new fair value measurements, but provides guidance on how tomeasure fair value by providing a fair value hierarchy used to classify thesource of the information.

 

On October 1, 2008, theCompany adopted FSP 157-3,*Determining FairValues of a Financial Asset When the Market for That Asset Is Not Active.*  FSP157-3 clarifies the application of SFAS No. 157 to financial instrumentsin an inactive market.  The adoption of FSP 157-3 did not have amaterial impact on the Company’s consolidated results of operations, financialposition and cash flows.

 

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

 

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

 

*Fair value of financial instruments*

 

The fair valueof a financial instrument is the amount at which the instrument could beexchanged in a current transaction between willing parties, other than in aforced sale or liquidation. The carrying amounts reflected in the accompanyingunaudited condensed consolidated balance sheets for cash equivalents, accountsand notes receivable, investment to fund jackpot liabilities, accounts payable,jackpot liabilities and variable rate long-term debt approximate theirrespective fair values.

 

SFAS No. 157 establishes a fair value hierarchy that requires anentity to maximize the use of observable inputs and minimize the use ofunobservable inputs when measuring fair value. A financial instrument’scategorization within the fair value hierarchy is based upon the lowest levelof input that is significant to the fair value measurement. SFAS No. 157establishes three levels of inputs that may be used to measure fair value:

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

 

The Company’s significant financial assets and liabilities measured atfair value on a recurring basis, excluding accrued interest components,consisted of the following types of instruments as of December 31, 2008(Level 1 and 2 inputs are defined above):

 
|                                        |   | **Fair  Value Measurements Using Input Type** |   |
|---------------------------------------------|--------|-----------------------------------------------|--------|
|                                        |   | **(in  000s)**                                |   |
|                                        |   | **Level 1**                                   |   | **Level 2** |   | **Total** |   |
| Liabilities:                                |   |                                          |   |   |   |   |   |
| Derivative financial instrument liabilities |   | $                                             | — |   | $ | 680 |   | $ | — |   |
| Total financial liabilities                 |   | $                                             | — |   | $ | 680 |   | $ | — |   |

 

The Company’s valuationtechniques used to measure the fair values of instruments listed in the tableabove in which the counterparties have high credit ratings, were derived fromthe following: non-binding market consensus prices that are corroborated byobservable market data; quoted market prices for similar instruments; orpricing models, such as discounted cash flow techniques, with all significantinputs derived from or corroborated by observable market data. The Company’sdiscounted cash flow techniques use observable market inputs such asLIBOR-based yield curves.

 

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*Inventories*

 

Inventories are stated at the lower of cost, determined on a first in,first out basis, or market. Cost elements included in work-in-process andfinished goods include raw materials, direct labor and manufacturing overhead.Inventories consist of the following:

 
|            |   | **December 31,  2008** |   | **June 30,  2008** |   |
|-----------------|--------|-----------------------------|--------|-------------------------|--------|
|            |   | **(in 000s)**          |   |
| Raw materials   |   | $                           | 46,460 |                    | $      | 59,423 |   |
| Work-in-process |   | 902                         |   | 709                     |   |
| Finished goods  |   | 16,411                      |   | 34,106                  |   |
| Total           |   | $                           | 63,773 |                    | $      | 94,238 |   |

 

The Company recorded inventory write-downs totaling approximately $-0-million and $2.9 million and $2.8 million and $5.0 million for the three andsix months ended December 31, 2008 and 2007, respectively. These chargesare classified in cost of gaming equipment and systems in the unauditedcondensed consolidated statements of operations.

 

*Hurricane damage insurance recoveries*

 

Inthe second quarter of fiscal 2009, the Company negotiated an insurancesettlement related to the 2005 U.S. Gulf Coast hurricane damages whichdestroyed or temporarily shut down its gaming operations in the region when itsrental and daily fee games were destroyed in third party locations. The Companyreceived a final payment of $3.0 million for business interruption during thethree months ended December 31, 2008, which is included in selling,general and administrative expenses.

 

*Recently issued accounting pronouncements notyet adopted*

 

In November 2008, the FASB issued Emerging Issues Task Force (“EITF”)Issue No. 08-7,*Accounting forDefensive Intangible Assets*. EITF No. 08-7 clarifies theaccounting for certain separately identifiable intangible assets which anacquirer does not intend to actively use. EITF No. 08-7 requires anacquirer in a business combination to account for a defensive intangible assetas a separate unit of accounting which should be amortized to expense over theperiod the asset diminishes in value. EITF No. 08-7 is effective forfiscal years beginning after December 15, 2008, with early adoptionprohibited.       The Company expects toadopt EITF No. 08-7 in fiscal 2010.

 

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

 

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

 

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

 

**2.             EARNINGSPER SHARE**

 

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

 

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

 
|                                                                          |   | **Three Months Ended  December 31,**              |   | **Six Months Ended  December 31,** |   |
|-------------------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                          |   | **2008**                                                         |   | **2007**                                          |   | **2008** |   | **2007** |   |
|                                                                          |   | **(in 000s, except per share amounts)** |   |
| Net income                                                                    |   | $                                                                | 33,564 |                                              | $      | 24,416 |   | $ | 63,868 |   | $ | 45,698 |   |
| After tax interest expense on convertible  debt                               |   | 62                                                               |   | 82                                                |   | 131 |   | 168 |   |
| Diluted earnings                                                              |   | $                                                                | 33,626 |                                              | $      | 24,498 |   | $ | 63,999 |   | $ | 45,866 |   |
|                                                                          |   |                                                             |   |                                              |   |   |   |   |   |
| Weighted average common shares outstanding                                    |   | 54,419                                                           |   | 54,382                                            |   | 54,745 |   | 54,213 |   |
| Dilutive effect of:                                                           |   |                                                             |   |                                              |   |   |   |   |   |
| Stock options, Restricted Stock Units  (“RSU”) and restricted stock |   | 2,038                                                            |   | 3,833                                             |   | 2,436 |   | 3,458 |   |
| Warrants                                                                      |   | —                                                           |   | 40                                                |   | 11 |   | 28 |   |
| Convertible debt (1)                                                          |   | 274                                                              |   | 269                                               |   | 236 |   | 271 |   |
| Weighted average diluted shares outstanding                                   |   | 56,731                                                           |   | 58,524                                            |   | 57,428 |   | 57,970 |   |
|                                                                          |   |                                                             |   |                                              |   |   |   |   |   |
| Basic earnings per share                                                      |   | $                                                                | 0.62   |                                              | $      | 0.45 |   | $ | 1.17 |   | $ | 0.84 |   |
| Diluted earnings per share                                                    |   | $                                                                | 0.59   |                                              | $      | 0.42 |   | $ | 1.11 |   | $ | 0.79 |   |

 

----

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

 

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

 
|                                    |   | **Three Months Ended  December 31,** |   | **Six Months Ended  December 31,** |   |
|-----------------------------------------|--------|-----------------------------------------------------|--------|---------------------------------------------------|--------|
|                                    |   | **2008**                                            |   | **2007**                                          |   | **2008** |   | **2007** |   |
|                                    |   | **(in 000s)**                                  |   |
| Stock options, RSU and restricted stock |   | 2,523                                               |   | —                                            |   | 869 |   | — |   |
| Warrants                                |   | 100                                                 |   | —                                            |   | — |   | — |   |
|                                    |   | 2,623                                               |   | —                                            |   | 869 |   | — |   |

 

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**3.             GOODWILLAND INTANGIBLE ASSETS**

 

Intangibleassets consist of the following:

 
|              |   |                            |   | **December 31, 2008** |   | **June 30, 2008**   |   |
|-------------------|--------|---------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|              |   | **Useful  Life  (Years)**       |   | **Gross  Carrying  Amount**     |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
|              |   | **(dollars in 000s)** |   |
| Computer software |   | 3 - 9                 |   | $                               | 26,546 |                          | $      | (16,447 | ) | $ | 10,099 |   | $ | 25,207 |   | $ | (14,506 | ) | $ | 10,701 |   |
| License rights    |   | 3 - 5                 |   | 2,095                           |   | (1,684                        | )      | 411 |   | 2,199 |   | (1,630 | ) | 569 |   |
| Trademarks        |   | 5                               |   | 2,203                           |   | (2,015                        | )      | 188 |   | 2,203 |   | (1,792 | ) | 411 |   |
| Core technology   |   | 5 - 8                 |   | 22,763                          |   | (4,705                        | )      | 18,058 |   | 19,595 |   | (2,949 | ) | 16,646 |   |
| Contracts         |   | 10                              |   | 10,043                          |   | (4,861                        | )      | 5,182 |   | 10,043 |   | (4,359 | ) | 5,684 |   |
| Other intangibles |   | 3 - 7                 |   | 7,173                           |   | (5,441                        | )      | 1,732 |   | 7,676 |   | (5,438 | ) | 2,238 |   |
| Total             |   |                            |   | $                               | 70,823 |                          | $      | (35,153 | ) | $ | 35,670 |   | $ | 66,923 |   | $ | (30,674 | ) | $ | 36,249 |   |

 

Forthe three months ended December 31, 2008 and 2007, total amortizationexpense related to intangible assets was $2.3 million and$1.5 million, respectively, which included computer software amortizationexpense of $1.0 million and $0.8 million, respectively. For the sixmonths ended December 31, 2008 and 2007, total amortization expenserelated to intangible assets was $4.5 million and $3.1 million,respectively, which included computer software amortization expense of$2.0million and $1.5 million, respectively. Future amortization ofintangible assets is scheduled as follows:

 
| **Year Ended June 30,**     | ** ** | **(in 000s)** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| 2009 (remaining six months of fiscal year) |       | $                  | 5,202      |   |
| 2010                                       |       | 9,661              |       |
| 2011                                       |       | 7,725              |       |
| 2012                                       |       | 5,656              |       |
| 2013                                       |       | 5,005              |       |
| Thereafter                                 |       | 2,421              |       |
| Total                                      |       | $                  | 35,670     |   |

 

Allgoodwill is associated with the Gaming Equipment and Systems segment. Thechanges in the carrying amount of goodwill for the six months ended December 31,2008, are as follows:

 
| ** **                              | ** ** | **(in 000s)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| Balance at June 30, 2008           |       | $                  | 162,727    |   |
| Foreign currency translation adjustment |       | (746               | )          |
| Balance at December 31, 2008       |       | $                  | 161,981    |   |

 

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

 

Long-termdebt and capital leases consist of the following:

 
|                                                        |   | **December 31,  2008** |    | **June 30,    2008** |   |
|-------------------------------------------------------------|--------|-----------------------------|---------|---------------------------|--------|
|                                                        |   | **(in 000s)**          |    |
| Revolving credit facility                                   |   | $                           | 50,000  |                      | $      | — |   |
| Term loan facility                                          |   | 218,750                     |    | 289,553                   |   |
| Capital lease obligations                                   |   | 6,294                       |    | 9,262                     |   |
| Related party debt (see Note 5)                             |   | 5,600                       |    | 5,600                     |   |
| Other, generally unsecured                                  |   | 65                          |    | 89                        |   |
| Long-term debt and capital leases                           |   | 280,709                     |    | 304,504                   |   |
| Less current maturities                                     |   | (39,459                     | )       | (13,163                   | )      |
| Long-term debt and capital leases, less  current maturities |   | $                           | 241,250 |                      | $      | 291,341 |   |

 

OnSeptember 29, 2008, the Company entered into a new $225.0 million termloan and a new $75.0 million revolving credit facility (collectively, the “CreditFacility”). The Company also has the option to request an increase in the sizeof the term loan and/or revolving credit facility by up to $50.0 million in theaggregate provided that certain conditions are met.  The proceeds from theCredit Facility were used to repay existing bank term loans totaling $289.6million and to pay for transaction fees and expenses totaling $10.7 millionwhich are being amortized to interest expense over the term of the CreditFacility.

 

Asof December 31, 2008, there was approximately $25.0 million of undrawnavailability under the revolving credit facility. Availability under therevolving credit facility is reduced to the extent of outstanding letters ofcredit. As of December 31, 2008, there were outstanding letters of creditfor approximately $65,000.

 

Theinterest rate on the Credit Facility is set at LIBOR plus 3.25% through March 2009(7.30% at December 31, 2008) and thereafter, is subject to a leveragebased pricing grid. If the Company’s leverage ratio, as defined under theCredit Facility, is greater than 1.5, the interest rate will be LIBOR plus amargin of 3.25%; if the leverage ratio is between 1.0 and 1.5, the interestrate will be LIBOR plus a margin of 3.00%; and if the leverage ratio is below1.0, the interest rate will be LIBOR plus a margin of 2.75%. In December 2008,the Company entered into a floating-to-fixed interest rate swap, asdiscussed below, to fix the interest rate of the term loan at 1.89% plus theapplicable margin for the remaining term.

 

Theterm loan requires quarterly principal reductions of $6.25 million during thefirst year, $8.75 million during the second year and $11.25 million during eachof the third and fourth years, with a balloon payment due in September 2012.The Credit Facility matures in September 2012. The Credit Facility iscollateralized by substantially all of the Company’s domestic property and isguaranteed by each of the Company’s domestic subsidiaries, other than theentity that holds the Company’s interest in its Rainbow Casino, and is securedby a pledge agreement. The Credit Facility contains a number of maintenance andother covenants that, among other things, restrict the ability of the Companyand certain of its subsidiaries to dispose of assets, incur additionalindebtedness or issue preferred stock, pay dividends or make otherdistributions, enter into certain acquisitions, repurchase equity interests orsubordinated indebtedness, issue or sell equity interests of the Company’ssubsidiaries, engage in mergers or acquisitions or certain transactions withsubsidiaries and affiliates, and that otherwise restrict corporate activities.The Company was in compliance with these covenants as of December 31,2008.

 

Thefinancial covenants under the Credit Facility consist of a leverage ratio and afixed charges coverage ratio. The leverage ratio is computed as total debtoutstanding at the end of the quarter divided by the trailingtwelve months Earnings Before Interest, Taxes, Depreciation andAmortization (“EBITDA”), excluding certain cash and non-cash charges. TheCompany’s leverage ratio as of December 31, 2008 was 0.93 versus a maximumallowable of 2.50 through March 31, 2009. From April 1, 2009 to March 31, 2010, the Company’smaximum leverage ratio is 2.25; from April 1, 2010 and thereafter, themaximum leverage ratio is 2.00 until maturity of the Credit Facility. The fixedcharges coverage ratio is computed as EBITDA, adjusted for both the trailingtwelve months capital expenditures and cash taxes paid, divided by the trailingtwelve months interest charges plus all payments of principal made during theprevious twelve months. The fixed charges coverage ratio as of December 31,2008 was 3.56 versus the covenant minimum of 2.00.

 

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

 

TheCompany’s related party debt, which totaled $5.6 million as of December 31,2008 and June 30, 2008, consists primarily of the debt owed to the formerprincipals of Sierra Design Group (“SDG”). See Note 5, Related PartyTransactions.

 

*Interest Rate SwapAgreement*

 

In December 2008, the Company entered into a floating-to-fixedinterest rate swap agreement with a notional value of $218.8 million anda maturity date of September 26, 2012. This interest rate swap serves tofix the floating LIBOR based debt under the term loan to fixed rate debt at aninterest rate of 1.89% plus the applicable margin described above (3.25% at December 31,2008) to manage the risk exposure to interest rate fluctuations.

 

The Company has documented and designated this interest rate swap as acash flow hedge. Based on the assessment of effectiveness using statisticalregression, 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 other comprehensive income. The interest rate swap has been and isexpected to remain highly effective for the life of the hedge. Effectiveamounts are reclassified to interest expense as the related hedged expense isincurred. Any ineffectiveness is reclassified from accumulated othercomprehensive income to other income (expense). As of December 31, 2008,the Company had no ineffectiveness on its cash flow hedge. Amounts related tothe swap expected to be reclassified from other comprehensive income tointerest expense in the next twelve months total $1.35 million.

 

Additional information on the Company’sinterest rate swap is as follows:

 
| **Interest Rate Swaps**                       | ** ** | **Balance Sheet Location** | ** ** | **Fair Value  (in 000s)** | ** ** | **Location of Offsetting  Balance** | ** **                             |
|---------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------|----------------------------------------|
| Cash flow hedge - $218.8 million LIBOR  based debt |       | Accrued liabilities                  |       | $                                   | 680        |                                          | Accumulated other comprehensive income |   |
|                                                         |            |                                      |            |                                     |            |                                               |                                        |  |

 

**5.             RELATED PARTY TRANSACTIONS**

 

Inconnection with the previous acquisition of SDG, the consideration paidincluded subordinated debt issued to the former principals of SDG. Certain ofthe former principals are now employees of the Company. The following tablepresents the outstanding related party debt and interest rates as of December 31,2008 and June 30, 2008:

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

 

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

 

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

 

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The Company leases a warehouse and office facility from an entity ownedby Mr. Luciano. Rental payments totaled $120,000 and $112,000 for thethree months ended December 31, 2008 and 2007, respectively, and $240,000and $224,000 for the six months ended December 31, 2008 and 2007,respectively.

 

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

 

*Share Repurchase Plan*

 

On January 28,1999, the Company’s Board of Directors approved a share repurchase plan underwhich, subject to price and market conditions, purchases of shares can be madefrom time to time in the open market or in privately negotiated transactionsusing available cash. On February 14, 2008, the Company’s Board ofDirectors increased the amount of common stock authorized to be repurchased to$75 million. On August 12, 2008, the Company’s Board of Directors resetthe limit under its existing share repurchase plan to $100 million.

 

During the sixmonths ended December 31, 2008, the Company repurchased 1,066,000 sharesof common stock for $27.0 million under the share repurchase plan. As of December 31,2008, $73.0 million was authorized to be repurchased in future periods.

 

*Share-Based Award Plans*

 

Stock optionactivity as of and for the six months ended December 31, 2008 issummarized below:

 
| ** **                                        | ** ** | ** **         | ** ** | **Weighted Average** | ** ** | ** **                       | ** ** |
|---------------------------------------------------|------------|--------------------|------------|---------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **Shares**         | ** ** | **Exercise  Price**       | ** ** | **Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                                        | ** ** | **(in 000s)** | ** ** | **(per share)**      | ** ** | **(years)**                      | ** ** | **(in 000s)** | ** ** |
| Balance outstanding as of June 30,  2008     |       | 7,087              |       | $                         | 17.61      |                             |       |   | $ | 115,883 |   |
| Granted                                           |       | 434                |       | 21.79                     |       |                             |       |   |   |
| Exercised                                         |       | (394               | )          | 18.44                     |       |                             |       |   |   |
| Forfeited or expired                              |       | (46                | )          | 21.51                     |       |                             |       |   |   |
| Balance outstanding as of December 31,  2008 |       | 7,081              |       | $                         | 17.80      |                             | 6.13       |   | $ | 50,706 |   |
| Exercisable as of December 31, 2008          |       | 4,674              |       | $                         | 16.67      |                             | 5.76       |   | $ | 35,964 |   |

 

Restrictedstock and RSU activity as of and for the six months ended December 31,2008 is summarized below:

 
| ** **                                        | ** ** | **Restricted  Stock** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **RSUs**           | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|---------------------------------------------------------|------------|--------------------|------------|---------------------------------------------------------|------------|
| ** **                                        | ** ** | **(in 000s)**    | ** ** | **(per share)**                                    | ** ** | **(in 000s)** | ** ** | **(in 000s)**                                      | ** ** |
| Balance outstanding as of June 30,  2008     |       | 385                   |       | $                                                       | 26.64      |               | 556        |                                                    | $          | 17.07 |   |
| Granted                                           |       | 57                    |       | 23.64                                                   |       | 67                 |       | 23.04                                                   |       |
| Vested                                            |       | (85                   | )          | 16.35                                                   |       | —             |       | —                                                  |       |
| Forfeited or expired                              |       | —                |       | —                                                  |       | —             |       | —                                                  |       |
| Balance outstanding as of December 31,  2008 |       | 357                   |       | $                                                       | 28.61      |               | 623        |                                                    | $          | 17.71 |   |
| Vested as of December 31, 2008               |       | —                |       | —                                                  |       | 534                |       | $                                                       | 16.04      |   |

 

*Share-Based Compensation*

 

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

 

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| ** **                                           | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(in 000s)**                                  | ** ** |
| Selling, general and administrative                  |       | $                                                   | 2,874      |                                              | $          | 2,375 |   | $ | 5,769 |   | $ | 5,625 |   |
| Research and development                             |       | 633                                                 |       | 447                                               |       | 1,259 |   | 897 |   |
| Cost of gaming equipment and systems and  operations |       | 31                                                  |       | 29                                                |       | 68 |   | 63 |   |
| Share-based compensation expense before tax          |       | 3,538                                               |       | 2,851                                             |       | 7,096 |   | 6,585 |   |
| Income tax benefit                                   |       | 1,239                                               |       | 998                                               |       | 2,484 |   | 2,305 |   |
| Net share-based compensation expense                 |       | $                                                   | 2,299      |                                              | $          | 1,853 |   | $ | 4,612 |   | $ | 4,280 |   |

 

Asof December 31, 2008, there was $16.8 million of total unrecognizedcompensation expense related to the unvested portion of stock options whichwill be recognized over the subsequent 1.80 years. In addition, as of December 31,2008, there was $8.5 million of total unrecognized compensation expenserelated to the unvested portion of restricted stock and RSUs which will berecognized over the subsequent 1.88 years.

 

**7.             INCOME TAXES**

 

The provisionfor income taxes for interim periods is based on the current estimate of theannual effective tax rate expected to be applicable for the full fiscal yearand the impact of discrete items, if any, and is adjusted as necessary forquarterly events. The effective income tax rate was approximately 36% and 37%for both the three and six months ended December 31, 2008 and 2007,respectively. The lower rate in fiscal 2009 reflected the retroactivereinstatement of the research and development tax credit which previously expiredon December 31, 2007.

 

The Internal Revenue Service (“IRS”) commenced examination of theCompany’s United States federal income tax returns for 2003 through 2005 in thefourth quarter of 2006.  Throughout the examination, the IRS has proposed,and management has agreed to, certain adjustments related to the open tax yearsthat 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”) in which the IRS proposed several adjustmentsthat, if the IRS were to prevail in full, would require additional income taxprovisions of approximately $5.4 million, plus interest, for the tax yearsthrough 2005. The Company expects to file a formal protest defending itsposition which, if successful, would result in a reduction to unrecognized taxbenefits and a corresponding reduction of income tax provisions ofapproximately $4.8 million.

 

Consequently, it is reasonably possible that within the next twelve monthsthe Company will resolve some of the matters in the RAR which may increase ordecrease unrecognized tax benefits for the open tax years.

 

As of December 31, 2008, the Company has $22.5 millionrelated to uncertain tax positions, $18.5 million of which, if recognized,would impact the effective tax rate.

 

**8.             COMMITMENTS AND CONTINGENCIES**

 

***Litigation***

 

In December 2004, International Game Technology (“IGT”) filed apatent infringement lawsuit against the Company in the United States DistrictCourt for the District of Nevada. The complaint asserted that the Company’swheel-based games, such as Monte CarloTM, Lucky WheelTM and Cash For LifeTM, itsgames with a reel in the top box, such as Bonus FrenzyTM, and its iVIEWTMproducts infringed on patents held by IGT, and sought injunctive relief anddamages in unspecified amounts. As part of its defense, the Company assertedcounterclaims seeking damages and other relief against IGT, including claimsthat IGT’s patents were invalid, unenforceable and not infringed, as well asseveral claims that IGT engaged in anti-competitive conduct in violation ofstate and federal antitrust laws. In October 2008, the court granted theCompany’s motions for summary judgment, ruling that IGT’s two “wheel” patentsand a touch-screen player-tracking patent were invalid; that even if thepatents were valid, the Company’s wheel-based games at issue would notinfringe; and that certain of the Company’s 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. Patent andTrademark Office and denied IGT’s motions to dismiss those claims, leaving themfor trial. However, the court postponed the trial until after IGT has appealedthe court’s summary judgments on the Company’s antitrust allegations againstIGT.

 

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InMay 2006, IGT filed a patent infringement lawsuit against the Company inthe United States District Court for the District of Delaware. The complaintasserts that the Company’s Bally Power BonusingTM products infringe patents heldby IGT, and seeks injunctive relief and damages in unspecified amounts. Thecourt took IGT’s motion for a preliminary injunction off-calendar and has set aMay 2009 trial date. Of the nine patents and 200 claims originally filedin the case by IGT, all but three patents and eight claims have been dismissed.The Company believes IGT’s remaining claims are also without merit and isvigorously defending the lawsuit.

 

InSeptember 2006, the Company filed a patent infringement lawsuit againstIGT in the United States District Court for the District of Nevada. Thecomplaint asserted that certain of IGT’s bonus wheel games infringe a patentheld by the Company, and sought injunctive relief and damages. IGT filed ananswer generally denying the claims and moved for summary judgment. In September 2008,the court granted IGT’s motions for summary judgment, declaring the wheelpatent obvious and therefore invalid. This case is on appeal.

 

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

 

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

 

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

 
| ** **                   | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(in 000s)**                                  | ** ** |
| Revenues:                    |       |                                                |       |                                              |       |   |   |   |   |
| Gaming Equipment and Systems |       | $                                                   | 223,648    |                                              | $          | 218,908 |   | $ | 450,998 |   | $ | 396,518 |   |
| Casino Operations            |       | 9,646                                               |       | 11,744                                            |       | 19,694 |   | 23,164 |   |
| Total revenues               |       | $                                                   | 233,294    |                                              | $          | 230,652 |   | $ | 470,692 |   | $ | 419,682 |   |
|                         |       |                                                |       |                                              |       |   |   |   |   |
| Inter-segment revenues:      |       |                                                |       |                                              |       |   |   |   |   |
| Gaming Equipment and Systems |       | $                                                   | 463        |                                              | $          | 149 |   | $ | 1,020 |   | $ | 434 |   |
| Casino Operations            |       | —                                              |       | —                                            |       | — |   | — |   |
| Total inter-segment revenues |       | $                                                   | 463        |                                              | $          | 149 |   | $ | 1,020 |   | $ | 434 |   |
|                         |       |                                                |       |                                              |       |   |   |   |   |
| Operating income (loss):     |       |                                                |       |                                              |       |   |   |   |   |
| Gaming Equipment and Systems |       | $                                                   | 62,697     |                                              | $          | 51,190 |   | $ | 121,802 |   | $ | 97,892 |   |
| Casino Operations            |       | 2,467                                               |       | 4,200                                             |       | 5,354 |   | 8,042 |   |
| Corporate                    |       | (5,715                                              | )          | (8,588                                            | )          | (14,230 | ) | (17,970 | ) |
| Total operating income       |       | $                                                   | 59,449     |                                              | $          | 46,802 |   | $ | 112,926 |   | $ | 87,964 |   |

 

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TheCompany has operations based primarily in the United States with a significantsales and distribution office based in Europe. The table below presentsinformation as to the Company’s revenues and operating income by geographicregion:

 
| ** **               | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **               | ** ** | **(in 000s)**                                  | ** ** |
| Revenues:                |       |                                                |       |                                              |       |   |   |   |   |
| United States and Canada |       | $                                                   | 200,844    |                                              | $          | 202,321 |   | $ | 404,084 |   | $ | 364,689 |   |
| Europe                   |       | 7,929                                               |       | 9,457                                             |       | 16,057 |   | 19,749 |   |
| Other foreign            |       | 24,521                                              |       | 18,874                                            |       | 50,551 |   | 35,244 |   |
| Total revenues           |       | $                                                   | 233,294    |                                              | $          | 230,652 |   | $ | 470,692 |   | $ | 419,682 |   |
|                     |       |                                                |       |                                              |       |   |   |   |   |
| Operating income:        |       |                                                |       |                                              |       |   |   |   |   |
| United States and Canada |       | $                                                   | 52,551     |                                              | $          | 43,643 |   | $ | 98,401 |   | $ | 77,951 |   |
| Europe                   |       | 1,778                                               |       | 2,678                                             |       | 4,214 |   | 6,621 |   |
| Other foreign            |       | 5,120                                               |       | 481                                               |       | 10,311 |   | 3,392 |   |
| Total operating income   |       | $                                                   | 59,449     |                                              | $          | 46,802 |   | $ | 112,926 |   | $ | 87,964 |   |

 

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

 

We begin this Management’s Discussion and Analysis of FinancialCondition and Results of Operations with an overview of our key operatingbusiness divisions as of December 31, 2008. This overview is followed by adetailed analysis of our results of operations and our financial condition asof and for the three and six months ended December 31, 2008 and 2007. Referencesto “we,” “our,” “us,” or the “Company” refer to Bally Technologies, Inc.and its subsidiaries.

 

**Forward Looking Statements**

 

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

 

Although we believe the expectations reflected in any forward lookingstatements are reasonable, readers are cautioned that forward lookingstatements involve known and unknown risks and uncertainties, are notguarantees of future performance and that actual results, performance orachievements may differ materially from any future results, performance orachievements expressed or implied by such forward looking statements. Thesedifferences can arise as a result of the risks described in Item 1A, RiskFactors included in our Annual Report on Form 10-K for the fiscal yearended June 30, 2008 (the “2008 10-K”), as modified in the Quarterly Reporton Form 10-Q for the three months ended September 30, 2008, as well as otherfactors 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.

 

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

 

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**Our Business**

 

Weare a diversified, worldwide gaming company that designs, manufactures,distributes and operates gaming devices and computerized monitoring and accountingsystems for gaming devices. In addition to selling our gaming devices, we alsooffer our customers a wide range of rental options. Our primary technologiesinclude gaming devices for land-based, riverboat and Native American casinos,video lottery and central determination markets and specialized system-basedhardware and software products. Our specialized system-based hardware andsoftware products provide casinos with a wide range of marketing, datamanagement, accounting, security and other software applications and tools tomore effectively manage their operations. We also own and operate the RainbowCasino, a dockside riverboat casino in Vicksburg, Mississippi.

 

Wederive our revenue from the following four sources:

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Thefollowing are the primary systems we license to our customers:

 

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

 

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

 

·**                 ***iVIEWTM Player-CommunicationNetwork:*  Our iVIEW network leverages a small,horizontal liquid-crystal display screen and accompanying hardware and softwarethat resides in the gaming devices and serves as a communication tool to endplayers. Our iVIEW network is also designed to work with our Bally PowerBonusingTM suite of products and other new technologies under development.  The network is being expanded to includedpicture in picture images in the main and secondary game screens through theuse of Display ManagerTM.

 

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

 

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

 

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

 

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

 

***Casino Operations***

 

TheRainbow Casino, located in Vicksburg, Mississippi, began operations in July 1994.It is one of five casinos operating in the Vicksburg, Mississippi market duringthe period. The facility includes a 33,000 square-foot casino with 808 gamingdevices and 10 table games, a 224-seat buffet-style restaurant, and a 20,000square-foot conference center. The Casino also includes the 89-room RainbowHotel, which is owned and operated by a third party. Rainbow is marketed as a “locals”casino and draws mid-level gaming customers principally from within a 75-mileradius of Vicksburg. Our promotions are focused primarily on direct mail andspecial promotional events.

 

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

 

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

 

**Resultsof Operations**

 

Our results of operations include the accounts of Bally Technologies, Inc.,and its subsidiaries. We report our revenue and income in two reportablesegments: the Bally Gaming Equipment and Systems segment, which includes ourGaming Equipment, Gaming Operations and Systems divisions, and our CasinoOperations segment. Revenue from our Bally Gaming Equipment and Systems segmentrepresented approximately 96% and 95% of our total revenues for the threemonths ended December 31, 2008 and 2007, respectively, and 96% and 94% ofour total revenues for the six months ended December 31, 2008 and 2007,respectively.

 

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***Bally GamingEquipment and Systems***

 

The summaryfinancial results and operating statistics for our Bally Gaming Equipment andSystems segment for the three months and six months ended December 31, 2008and 2007 were as follows:

 
| ** **                          | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                                | ** ** | **% Rev**                                        | ** ** | **2007** | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** | **2007** | ** ** | **% Rev** | ** ** |
| ** **                          | ** ** | **(dollars in millions)**                     | ** ** |
| Revenues:                           |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment                    |       | $                                                       | 101.3      |                                                  | 45         | % | $ | 108.4 |   | 49 | % | $ | 208.6 |   | 46 | % | $ | 192.7 |   | 49 | % |
| Gaming Operations                   |       | 66.4                                                    |       | 30                                                    | %          | 54.2 |   | 25 | % | 134.2 |   | 30 | % | 108.3 |   | 27 | % |
| Systems                             |       | 55.9                                                    |       | 25                                                    | %          | 56.3 |   | 26 | % | 108.2 |   | 24 | % | 95.5 |   | 24 | % |
| Total revenues                      |       | $                                                       | 223.6      |                                                  | 100        | % | $ | 218.9 |   | 100 | % | $ | 451.0 |   | 100 | % | $ | 396.5 |   | 100 | % |
|                                |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross Margin:                       |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gaming Equipment (1)                |       | $                                                       | 49.9       |                                                  | 49         | % | $ | 47.7 |   | 44 | % | $ | 97.3 |   | 47 | % | $ | 86.6 |   | 45 | % |
| Gaming Operations                   |       | 45.4                                                    |       | 68                                                    | %          | 31.4 |   | 58 | % | 92.6 |   | 69 | % | 67.4 |   | 62 | % |
| Systems (1)                         |       | 43.1                                                    |       | 77                                                    | %          | 40.9 |   | 73 | % | 79.7 |   | 74 | % | 70.9 |   | 74 | % |
| Total gross margin                  |       | $                                                       | 138.4      |                                                  | 62         | % | $ | 120.0 |   | 55 | % | $ | 269.6 |   | 60 | % | $ | 224.9 |   | 57 | % |
|                                |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative |       | $                                                       | 51.7       |                                                  | 23         | % | $ | 50.6 |   | 23 | % | $ | 99.8 |   | 22 | % | $ | 91.6 |   | 23 | % |
| Research and development costs      |       | 19.3                                                    |       | 9                                                     | %          | 14.7 |   | 7 | % | 39.2 |   | 9 | % | 28.0 |   | 7 | % |
| Depreciation and amortization       |       | 4.7                                                     |       | 2                                                     | %          | 3.5 |   | 2 | % | 8.8 |   | 2 | % | 7.4 |   | 2 | % |
| Operating income                    |       | $                                                       | 62.7       |                                                  | 28         | % | $ | 51.2 |   | 23 | % | $ | 121.8 |   | 27 | % | $ | 97.9 |   | 25 | % |

 

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

 
| ** **                                               | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating Statistics                                     |       |                                                |       |                                              |       |   |   |   |   |
| New gaming devices                                       |       | 6,099                                               |       | 7,144                                             |       | 12,697 |   | 12,295 |   |
| Original Equipment Manufacturer (“OEM”)  units |       | 40                                                  |       | —                                            |       | 505 |   | — |   |
| New unit Average Selling Price (“ASP”)         |       | $                                                   | 14,531     |                                              | $          | 13,147 |   | $ | 14,288 |   | $ | 13,201 |   |
|                                                          |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 
| ** **                               | ** ** | **As of December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| End of period installed base:            |       |                                  |       |   |   |
| Gaming monitoring units installed base   |       | 331,000                               |       | 305,000 |   |
| Casino management systems installed base |       | 628                                   |       | 570 |   |
| Systems managed cashless games           |       | 292,000                               |       | 270,000 |   |
|                                     |       |                                  |       |   |   |
| Wide-area progressive                    |       | 992                                   |       | 973 |   |
| Local-area progressive                   |       | 227                                   |       | 352 |   |
| Total linked progressive systems         |       | 1,219                                 |       | 1,325 |   |
|                                     |       |                                  |       |   |   |
| Rental and daily-fee games               |       | 12,222                                |       | 9,290 |   |
| Lottery systems                          |       | 8,003                                 |       | 7,851 |   |
| Centrally determined systems             |       | 44,536                                |       | 42,773 | (1) |

 

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(1)          Daily fee revenue fromapproximately 7,400 units included in centrally determined systems end ofperiod installed base total as of December 31, 2007 was deferred, and wasnot included in gaming operations revenue until the second quarter of 2008 whenthe completion of certain contractual commitments necessary to recognizerevenue under the Company’s revenue-recognition policy occurred.

 

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**Three Months Ended December 31, 2008Compared to Three Months Ended December 31, 2007**

 

Total revenues for our Bally Gaming Equipment and Systems segmentincreased $4.7 million, or 2%, in the three months ended December 31,2008, when compared to the same period last year, as a result of the following:

 

*Gaming Equipment Revenue.*Gaming Equipment revenue decreased by $7.1 million, or 7%, to approximately$101.3 million primarily as a result of a 15% decrease in new gaming devicesales to 6,099 units in the three months ended December 31, 2008, whencompared to 7,144 units in the same period last year.  The decrease in new gaming device sales wasoffset by an 11% increase in the ASP, excluding OEM units, of new gamingdevices as the result of better pricing and product mix, including the sale ofcertain premium priced units.  Inaddition to the decrease in new gaming device sales, used game revenue andsales of parts decreased $2.5 million during the three months ended December 31,2008, when compared to the same period last year.

 

*GamingEquipment Gross Margin*. Gaming Equipment gross marginincreased to 49% in the three months ended December 31, 2008 from 44%, inthe same period last year, primarily as a result of the increased ASP and lowermaterial and production costs of our products. Royalty expense decreased $1.1 million in the three months ended December 31,2008 when compared to the same period last year, due to a reduction in feesassociated with unit sales and game conversions with third party titles.  In addition, there were no significantinventory write-downs during the periodas a result of improved material planning efforts and a concentrated effort toconvert or rework slower moving inventory, as compared to $3.0 million in the same period last year.

 

*Gaming Operations Revenue.*Gaming Operations revenue increased $12.2 million, or 23%, to approximately$66.4 million in the three months ended December 31, 2008, when comparedto the same period last year, primarily as a result of an increase in rentalfees from additional installations in the State of Washington and therecognition of previously deferred rental revenue of $1.4 million.  Participation, rental and license revenueincreased due to a 32% increase in our installed base of rental and daily fee gameswhich increased from 9,290 units as of December 31, 2007 to 12,222 unitsas of December 31, 2008.  Theincrease was primarily due to the popularity of our newer premium products andconversion of older Class II devices (classified as centrally determinedsystems) to Class III rental and daily-fee games.

 

*Gaming Operations Gross Margin*.Gross margin increased to 68% in the three months ended December 31, 2008from 58%, in the same period last year, primarily as a result of thesignificant increases in both rental and participation revenue and lowercosts.  Cost of gaming operationsdecreased $1.8 million, or 8%, in the three months ended December 31, 2008primarily due to decreases in expenditures for parts, signs and meters androyalty expense during the period. Royalty expense decreased due to the removal and fewer new placements ofcertain third party titles during the same period.

 

*Systems Revenue.*Systemsrevenue decreased $0.4 million, or 1%, to approximately $55.9 million in thethree months ended December 31, 2008 when compared to the same period lastyear.  Systems maintenance revenue was$12.3 million, representing a 21% increase, in the three months ended December 31,2008 when compared to $10.1 million in the same period last year.

 

*Systems Gross Margin.*Systemsgross margin increased to 77% in the three months ended December 31, 2008from 73%, in the same period last year, primarily as a result of the lowerlevel of hardware sales in the current quarter, when compared to the sameperiod last year.  Hardware sales have ahigher cost than software, service and maintenance revenue generated by us.

 

*Selling, General and AdministrativeExpenses. *Selling, general and administrative expensesincreased $1.1 million, or 2%, in the three months ended December 31,2008, when compared to the same period last year. Salaries and related expensesincreased $6.7 million, or 18%, in the three months ended December 31,2008, when compared to the same period last year, due primarily to increases instaffing to meet growing demands of the business brought about by the increasein Gaming Equipment and Systems segment revenue.

 

Theincrease in salaries and related expenses was offset by a $3.0 millioninsurance reimbursement from claims for the 2005 U.S. Gulf Coast hurricaneswhich destroyed or temporarily shut down our gaming operations in the regionwhen our rental and daily fee games were destroyed in third party locations.  In addition, bad debt expense decreased$1.4 million during the three months ended December 31, 2008, whencompared to the same period last year, due to a reduction in net write-offsduring the period.

 

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*Research and Development Costs*.Research and development costsincreased $4.6 million, or 31%, in the three months ended December 31,2008, when compared to the same period last year, as a result of the increasein projects coupled with an increase in staffing, primarily in our IndiaDevelopment Centers.  We remain focusedon our technology assets due to the competitive landscape that requires acontinual investment in future generations of gaming products and systems.

 

*Depreciation and Amortization Expense*.Depreciation and amortization expense increased $1.2 million, or 34%, in thethree months ended December 31, 2008, when compared to same period lastyear, primarily as a result of certain intangible assets which began amortizingduring the current period.

 

**Six Months Ended December 31, 2008Compared to Six Months Ended December 31, 2007**

 

Total revenues for our Bally Gaming Equipment and Systems segmentincreased $54.5 million, or 14%, in the six months ended December 31,2008, when compared to the same period last year, as a result of the following:

 

*Gaming Equipment Revenue.*Gaming Equipment revenue increased by $15.9 million, or 8%, toapproximately $208.6 million primarily as a result of a 3% increase in newgaming device sales to 12,697 units in the six months ended December 31,2008, when compared to 12,295 units in the same period last year and the saleof 505 OEM units during the current period. In addition, there was an 8% increase in the ASP, excluding OEM units,of new gaming devices as the result of product mix, including the sale ofcertain premium units, and an increase in international sales with a higher ASPduring the same period.  Used gamerevenue and sales of parts decreased $7.5 million during the six months ended December 31,2008 when compared to the same period last year.

 

*GamingEquipment Gross Margin*. Gaming Equipment gross marginincreased to 47% in the six months ended December 31, 2008 from 45%, inthe same period last year, primarily as a result of the increased ASP of ourproducts and lower material and production costs of our products.  Royalty expense decreased $1.1 million in thesix months ended December 31, 2008, when compared to the same period lastyear, due to a reduction in fees associated with unit sales and game conversionswith third party titles.  In addition,there were $2.8 million in inventory write-downs during the period as comparedto $5.0 million in the same period last year. The reduction in inventory write-downs was the result of improved material planning efforts and a concentratedeffort to convert or rework slower moving inventory during the period.

 

*Gaming Operations Revenue.*Gaming Operations revenue increased $25.9 million, or 24%, to approximately$134.2 million in the six months ended December 31, 2008, when compared tothe same period last year, primarily as a result of an increase in rental feesdue to additional installations in the State of Washington and an increase inother Native American markets due to a shift to daily fee games during the periodand the recognition of previously deferred rental revenue of $1.4 million.  Participation, rental and license revenueincreased due to our installed base of rental and daily fee games whichincreased 32% from 9,290 units as of December 31, 2007 to 12,222 units asof December 31, 2008.  The increasewas primarily due to the popularity of our newer premium products andconversion of older Class II devices (classified as centrally determinedsystems) to Class III rental and daily-fee games.

 

*Gaming Operations Gross Margin*.Gross margin increased to 69% in the six months ended December 31, 2008from 62%, in the same period last year, primarily as a result of thesignificant increases in both rental and participation revenue which had littleassociated variable costs.  Cost ofgaming operations increased $0.7 million, or 2%, in the six months ended December 31,2008 primarily due to depreciation expense included in cost of gamingoperations which was higher due to the increase in gaming operations unitsplaced and infrastructure installed in customer locations under rental andparticipation arrangements.  The increasein depreciation expense was offset by decreases in expenditures for parts,signs and meters and royalty expense during the same period.  Royalty expense decreased due to the removaland fewer new placements of certain third party titles during the sameperiod.  In addition, jackpot expenseassociated with our wide-area progressives decreased $1.1 million during thesix months ended December 31, 2008 when compared to the same period lastyear.

 

*Systems Revenue.*Systemsrevenue increased $12.7 million, or 13%, to approximately $108.2 million in thesix months ended December 31, 2008 when compared to the same period lastyear primarily as a result of continued acceptance of our products, includingour iVIEW player-communication devices and Bally Power Bonusing software, andan increase in the number of go-lives with new customers and incremental salesto existing customers during the period. Systems maintenance revenue was $24.5 million representing an increaseof $4.7 million, or 24%, in the six months ended December 31, 2008 whencompared to $19.8 million in the same period last year.

 

*Systems Gross Margin.*Systemsgross margin was 74% in both the six months ended December 31, 2008 and inthe same period last year.

 

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*Selling, General and AdministrativeExpenses. *Selling, general and administrative expensesincreased $8.2 million, or 9%, in the six months ended December 31,2008, when compared to the same period last year. Salaries and related expensesincreased $15.3 million, or 22%, in the six months ended December 31,2008, when compared to the same period last year, due primarily to increases instaffing to meet growing demands of the business.

 

Theincrease in salaries and related expenses was offset by a $3.0 millioninsurance reimbursement from previous claims for the 2005 U.S. Gulf Coasthurricanes.  In addition, temporary laborand related outside services expenditures decreased $2.2 million and bad debtexpense decreased $1.8 million during the same period.  The decrease in bad debt expense was due to areduction in net write-offs during the period.

 

*Research and Development Costs*.Research and development costsincreased $11.2 million, or 40%, in the six months ended December 31,2008, when compared to the same period last year, as a result of the increasein projects coupled with an increase in staffing, primarily in our IndiaDevelopment Centers.  We remain focusedon our technology assets due to the competitive landscape that requires acontinual investment in future generations of gaming products and systems.

 

*Depreciation and Amortization Expense*.Depreciation and amortization expense increased $1.4 million, or 19%, in thesix months ended December 31, 2008, when compared to same period lastyear, primarily as a result of certain intangible assets which began amortizingduring the current period.

 

***Casino Operations***

 

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

 
| ** **                          | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                                | ** ** | **% Rev**                                        | ** ** | **2007** | ** ** | **% Rev** | ** ** | **2008** | ** ** | **% Rev** | ** ** | **2007** | ** ** | **% Rev** | ** ** |
| ** **                          | ** ** | **(dollars in millions)**                     | ** ** |
| Revenue                             |       | $                                                       | 9.7        |                                                  | 100        | % | $ | 11.8 |   | 100 | % | $ | 19.7 |   | 100 | % | $ | 23.2 |   | 100 | % |
|                                |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative |       | $                                                       | 2.1        |                                                  | 22         | % | $ | 2.2 |   | 18 | % | $ | 4.2 |   | 21 | % | $ | 4.4 |   | 19 | % |
| Depreciation and amortization       |       | $                                                       | 0.8        |                                                  | 8          | % | $ | 0.6 |   | 6 | % | $ | 1.5 |   | 8 | % | $ | 1.3 |   | 6 | % |
| Operating income                    |       | $                                                       | 2.5        |                                                  | 26         | % | $ | 4.2 |   | 36 | % | $ | 5.4 |   | 27 | % | $ | 8.0 |   | 35 | % |
|                                |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating statistics:               |       |                                                    |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Average number of gaming devices    |       | 799                                                     |       |                                                  |       | 835 |   |   |   | 808 |   |   |   | 834 |   |   |   |
| Average number of table games       |       | 10                                                      |       |                                                  |       | 10 |   |   |   | 10 |   |   |   | 10 |   |   |   |

 

**Three Months Ended December 31, 2008Compared to Three Months Ended December 31, 2007**

 

*Casino Operations. *Revenue decreased by18% for the three months ended December 31, 2008 when compared to the sameperiod last year due primarily toincreased competition from the opening of a new casino adjacent to our propertyin October 2008, the expansion of a nearby casino and an increase inpromotional offers from other competitors in the Vicksburg market.  In addition, a 9% decline in gaming revenueswas reported for the Mississippi River counties which also negatively affectedthe casino during the quarter.

 

*Selling, General and Administrative Expenses*.Selling, general and administrative expenses decreased by $0.1 million, or 5%,for the three months ended December 31, 2008 when compared to the sameperiod last year due primarily to a decrease in salaries and related expensesduring the period.

 

*Depreciation and Amortization Expense*.Depreciation and amortization expense increased $0.2 million for the threemonths ended December 31, 2008, when compared to the same period lastyear, as a result of new slot machines deployed during the period.

 

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**Six Months Ended December 31, 2008 Compared to Six Months Ended December 31,2007**

 

*Casino Operations. *Revenue decreased by15% for the six months ended December 31, 2008 when compared to the sameperiod last year due primarily toincreased competition in the area and a slowdown in the economy.  Revenue declined due to the opening of a newcasino adjacent to our property in October 2008, the expansion of a nearbycasino and an increase in promotional offers from other competitors in theVicksburg market.  In addition, risingfuel prices and a 9% decline in gaming revenues was reported for theMississippi River counties which negatively affected the casino during theperiod.

 

*Selling, General and Administrative Expenses*.Selling, general and administrative expenses decreased by $0.2 million, or 5%,for the six months ended December 31, 2008 when compared to the sameperiod last year due primarily to a decrease in advertising and promotionalexpenditures during the period.

 

*Depreciation and Amortization Expense*.Depreciation and amortization expense increased $0.2 million for the six monthsended December 31, 2008, when compared to the same period last year, as aresult of new slot machines deployed during the period.

 

***Parent Company***

 

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

 
| ** **                    | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                                | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                    | ** ** | **(dollars in millions)**                     | ** ** |
| General and administrative    |       | $                                                       | 5.8        |                                                  | $          | 8.2 |   | $ | 14.0 |   | $ | 17.3 |   |
| Depreciation and amortization |       | 0.0                                                     |       | 0.4                                                   |       | 0.3 |   | 0.7 |   |
| Operating loss                |       | $                                                       | 5.8        |                                                  | $          | 8.6 |   | $ | 14.3 |   | $ | 18.0 |   |
|                          |       |                                                    |       |                                                  |       |   |   |   |   |
| Other income (expense)        |       |                                                    |       |                                                  |       |   |   |   |   |
| Interest income               |       | $                                                       | 0.9        |                                                  | $          | 1.0 |   | $ | 2.1 |   | $ | 2.0 |   |
| Interest expense              |       | (6.2                                                    | )          | (7.3                                                  | )          | (11.3 | ) | (14.5 | ) |
| Other, net                    |       | (1.6                                                    | )          | 0.1                                                   |       | (4.2 | ) | 1.0 |   |
| Total other expense           |       | $                                                       | (6.9       | )                                                     | $          | (6.2 | ) | $ | (13.4 | ) | $ | (11.5 | ) |
|                          |       |                                                    |       |                                                  |       |   |   |   |   |
| Income tax expense            |       | $                                                       | (18.7      | )                                                     | $          | (15.2 | ) | $ | (35.8 | ) | $ | (28.3 | ) |
| Minority interest             |       | $                                                       | (0.3       | )                                                     | $          | (1.0 | ) | $ | 0.2 |   | $ | (2.4 | ) |

 

**Three Months Ended December 31, 2008Compared to Three Months Ended December 31, 2007**

 

*General and Administrative Expenses.*Generaland administrative expenses decreased $2.4 million, or 29%, in the three monthsended December 31, 2008, when compared to the same period last year,primarily as a result of a decrease in accounting and professional fees of $2.6million during the same period.

 

*Other Income (Expense).*Other expense increased $0.7 million, or11%, in the three months ended December 31, 2008, when compared to thesame period last year.  The increase in otherexpense was primarily due to an increase in losses incurred on foreign currencytransactions as a result of the strengthening U.S. dollar.  Interest expense decreased $1.1 million dueto a reduction in both the principal balance and the interest rate on the termloan which decreased from 8.60% in three months ended December 31, 2007 to7.30% in the same period this year.  In December 2008,we entered into a floating-to-fixed interest rate swap to fix theinterest rate at 1.89% plus an applicable margin (3.25%, as of December 31,2008) until the term loan’s maturity in September 2012.

 

*Income Tax Expense.*  Theeffective income tax rate for the three months ended December 31, 2008 was36% compared to 37% for the same period last year. The effective incometax rate for the three months ended December 31, 2008 reflected theretroactive reinstatement of a research and development tax credit ofapproximately $2.3 million.   Further, weare undergoing an examination with the Internal Revenue Service (“IRS”) of ourUnited States federal income tax returns for 2003 through 2005 and resolvedcertain items in the three months ended December 31, 2008, which resultedin an adjustment to the income tax provision which largely offset the researchand development tax credit.  At the end of each interim period, we makeour best estimate of the effective tax rate expected to be applicable for thefull fiscal year and the impact of discrete items, if any, and adjust thequarterly rate, as necessary.

 

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*Minority Interest.*Minority interest expense decreased in the three months ended December 31,2008, when compared to the same period last year, due primarily to a reductionin earnings from certain variable interest entities and the Rainbow Casinoduring the quarter.

 

**Six Months Ended December 31, 2008Compared to Six Months Ended December 31, 2007**

 

*General and Administrative Expenses.*Generaland administrative expenses decreased $3.3 million, or 19%, in the six monthsended December 31, 2008, when compared to the same period last year,primarily as a result of a decrease in accounting and professional fees of $2.8million during the same period.

 

*Other Income (Expense).*Other expense increased $1.9 million, or17%, in the six months ended December 31, 2008, when compared to the sameperiod last year. Other expense increased primarily due to the write-off ofpreviously capitalized debt issuance costs of $0.8 million upon the financingof our new term loan and revolving credit facility and an increase in lossesincurred on foreign currency transactions as a result of the strengthening U.S.dollar.  Interest expense decreased $3.2million primarily due to a reduction in both the principal balance and theinterest rate on the term loan which decreased from 8.60% in six months ended December 31,2007 to 7.30% in the same period this year.

 

*Income Tax Expense.*  Theeffective income tax rate for the six months ended December 31, 2008 was38% compared to 37% for the same period last year. The effective incometax rate for the six months ended December 31, 2008 reflected theretroactive reinstatement of a research and development tax credit and theresolution of certain matters with the IRS discussed above.

 

*Minority Interest.*Minority interest expense decreased in the six months ended December 31,2008, when compared to the same period last year, due primarily to a reductionin earnings from Rainbow Casino and certain variable interest entities due to ahigher than average jackpot liability expense recognized during the period.

 

**Financial Condition and Liquidity**

 

Selected balance sheet accounts are as follows:

 
| ** **                              | ** ** | **December 31,** | ** ** | **June 30,** | ** ** | **Increase (decrease)** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **2008**              | ** ** | **2008**          | ** ** | **Amount**                   | ** ** | **%** | ** ** |
| ** **                              | ** ** | **(in 000s)**    | ** ** |
| Cash and cash equivalents               |       | $                     | 63,209     |              | $          | 66,570                       |       | $ | (3,361 | ) | (5 | )% |
|                                    |       |                  |       |              |       |                         |       |   |   |
| Total long-term debt and capital leases |       | $                     | 280,709    |              | $          | 304,504                      |       | $ | (23,795 | ) | (8 | )% |
|                                    |       |                  |       |              |       |                         |       |   |   |
| Total current assets                    |       | $                     | 496,704    |              | $          | 547,687                      |       | $ | (50,983 | ) | (9 | )% |
| Total current liabilities               |       | 254,165               |       | 294,398           |       | (40,233                      | )          | (14 | )% |
| Net working capital                     |       | $                     | 242,539    |              | $          | 253,289                      |       | $ | (10,750 | ) | (4 | )% |

 

As of December 31, 2008 and June 30, 2008,we had $63.2 million and $66.6 million, respectively, in consolidated cash andcash equivalents which included approximately $4.7 million and $3.5 million,respectively, of cash utilized in our Casino Operations segment that is held invaults, cages or change banks. Pursuant to various state gaming regulations,certain cash accounts are maintained to ensure availability of funds to paywide-area progressive jackpot awards in installments rather than in onelump-sum. At December 31, 2008 and June 30, 2008, these accounts hadan aggregate value of approximately $16.0 million and $13.1 million,respectively, which are classified as restricted cash in our unauditedcondensed consolidated balance sheets. In addition, we purchase U.S. Treasury Strip Securities for the benefitof jackpot winners who elect to receive winnings in annual or weeklyinstallment payments. These securities are included in restricted long-terminvestments in the accompanying unaudited condensed consolidated balancesheets, and totaled $11.0 million and $10.5 million as of December 31,2008 and June 30, 2008, respectively.

 

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Ournet working capital decreased $10.7 million for the six months ended December 31,2008. Cash and cash equivalents decreased by $3.4 million during theperiod.  The decrease in working capitalwas the result of a $30.5 million decrease in inventory, an $18.9 milliondecrease in net accounts and notes receivable which was offset by a $29.4million decrease in deferred revenue, a $10.4 million decrease in customerdeposits and a $30.2 million decrease in accounts payable and accruedliabilities.

 

OnSeptember 29, 2008, we entered into a new $225.0 million term loan and anew $75.0 million revolving credit facility (collectively, the “Credit Facility”).  We also have the option to request anincrease in the size of the term loan and/or Credit Facility by up to $50.0million in the aggregate provided that certain conditions are met.  Theproceeds from the Credit Facility were used to repay existing bank term loanstotaling $289.6 million and to pay for transaction fees and expenses totaling$10.7 million which are being amortized over the term of the Credit Facility.

 

Asof December 31, 2008, there was approximately $25.0 million of undrawnavailability under the revolving credit facility.  Availability under the revolving creditfacility is reduced to the extent of outstanding letters of credit.  As of December 31, 2008, there wereoutstanding letters of credit for approximately $65,000.

 

Theinterest rate on the Credit Facility is set at LIBOR plus 3.25% through March 2009(7.30% at December 31, 2008) and thereafter is subject to a leverage basedpricing grid. If our leverage ratio, as defined under the Credit Facility, isgreater than 1.5, the interest rate will be LIBOR plus a margin of 3.25%; ifthe leverage ratio is between 1.0 and 1.5, the interest rate will be LIBOR plusa margin of 3.00%; and if the leverage ratio is below 1.0, the interest ratewill be LIBOR plus a margin of 2.75%.  InDecember 2008, we entered into a floating-to-fixed interest rateswap to fix the floating LIBOR based debt under the term loan to fixed ratedebt at an interest rate of 1.89% plus an applicable margin (3.25%, as of December 31,2008).  See Note 4 to the unaudited condensed consolidatedfinancial statements, *Long-Term Debt and CapitalLeases*.

 

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

 

TheCredit Facility contains a number of maintenance and other covenants that,among other things, restrict our ability and certain of our subsidiaries todispose of 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 our subsidiaries, engage in mergers or acquisitions or certaintransactions with subsidiaries and affiliates, and that otherwise restrictcorporate activities. We were in compliance with these covenants as of December 31,2008.

 

Thefinancial covenants under the Credit Facility consist of a leverage ratio and afixed charges coverage ratio. The leverage ratio is computed as total debtoutstanding at the end of the quarter divided by the trailingtwelve months Earnings Before Interest, Taxes, Depreciation andAmortization (“EBITDA”), excluding certain cash and non-cash charges. Ourleverage ratio as of December 31, 2008 was 0.93 versus a maximum allowableof 2.50 through March 31, 2009. From April 1, 2009 to March 31, 2010, our maximum leverageratio is 2.25; from April 1, 2010 and thereafter, the maximum leverageratio is 2.00 until maturity of the Credit Facility. The fixed charges coverageratio is computed as EBITDA, adjusted for both the trailing twelve monthscapital expenditures and cash taxes paid, divided by the trailing twelve monthsinterest charges plus all payments of principal made during the previous twelvemonths. The fixed charges coverage ratio as of December 31, 2008 was 3.56versus the covenant minimum of 2.00.

 

Managementbelieves that cash flows from current operating activities will provide us withsufficient capital resources and liquidity to operate our business for at leastthe next 12 months.

 

AtDecember 31, 2008, we had no material commitments for capitalexpenditures.

 

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* *

***Cash Flow Summary***

 

Cash flows from operating activities are derived primarily from our twobusiness segments, the Bally Gaming Equipment and Systems segment and theRainbow Casino operating segment.  TheBally Gaming Equipment and Systems segment consists of three primary cash flowsources: Gaming Equipment, which includes the sale of gaming devices andrelated equipment, parts and conversion kits; Gaming Operations, which includesthe operation of linked progressive systems, video lottery and centrallydetermined systems and the rental of gaming devices and content; and Systems,which includes the sale and support of computerized monitoring systems. Cashflows from Casino Operations are derived from the operation of the RainbowCasino.   We utilize our cash to acquirematerials for the manufacture of goods for resale, to pay payroll, interest,taxes and selling, general and administrative expenses and to fund research anddevelopment activities.

 

Cash flows provided by operating activities were $72.9 million in thesix months ended December 31, 2008 as compared to $31.3 million in thesame period last year, a 133% improvement, due primarily to increased operatingprofit during the period.  During the sixmonths ended December 31, 2008, net revenue for the Bally Gaming Equipmentand Systems segment increased $54.5 million and cost of gaming equipment andsystems and cost of gaming operations increased $9.0 million and $0.7 million,respectively, as compared to the same period last year.  The improvement in gross profit was offset byincreased expenditures for research and development and cash paid for incometaxes during the same period.

 

In addition, during the second quarter of fiscal 2009, we negotiatedand received a final insurance settlement of $3.0 million related to 2005 U.S.Gulf Coast hurricane damages which destroyed or temporarily shut down ourgaming operations in the region when our rental and daily fee games weredestroyed in third party locations.

 

Cash utilized for investing activities is primarilyfor additions to property, plant and equipment for purchases of furniture,fixtures, office and gaming equipment, improvements in leaseholds and themanufacture of goods for lease or rental, as well as investments in technologyassets.   During the six months ended December 31,2008, we made capital expenditures of $14.0 million. In addition, during thesecond quarter of fiscal 2009, we purchased certain intangible assets,primarily CoolSigndigital signagetechnology, for approximately $3.2 million. The technology is for networked or standalone digital displays that workwith our iVIEW display manager allowing casinos to show messages on the mainscreen of electronic casino games, on top of games, in overhead displays and inpicture-in-picture scenarios.

 

Cash utilized for financing activities is primarily for the payment ofcapitalized debt fees and principal payments on our debt, as well as for thepurchase of treasury shares.  On September 29,2008, we entered into the Credit Facility. The proceeds from the Credit Facility were used to repay existing bankterm loans totaling $289.6 million and to pay for transaction fees and expensestotaling $10.7 million which are being amortized over the term of the CreditFacility.  In addition, during the sixmonths ended December 31, 2008, we purchased 1,066,016 shares of ourcommon stock for $27.0 million under our share repurchase plan.

 

Cash provided by financing activities is primarilyfrom borrowings under our revolving credit facility and proceeds from theexercise of stock options and purchases of stock by employees under ourEmployee Stock Purchase Plan (“ESPP”). During the six months ended December 31, 2008, employees exercisedoptions for 393,946 shares of common stock for $7.3 million and purchased39,305 shares of common stock for $0.7 million under our ESPP.

 

**Critical Accounting Policies**

 

A description of our critical accounting policies can be found in Item7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations in the 2008 10-K. There were no material changes to those policiesduring the six months ended December 31, 2008.

 

**Recently Issued Accounting Pronouncements**

 

Fora description of recently issued accounting pronouncements, see Note 1 to theunaudited condensed consolidated financial statements, *Summary ofSignificant Accounting Policies.*

 

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

 

*Interest Rate Risk*

 

As of December 31, 2008, we had total debtoutstanding of approximately $280.7 million, consisting primarily of $218.7million outstanding under our term loan, $50.0 million borrowed under ourrevolving credit facility, $5.6 million in related party debt, (see Note 5 tounaudited condensed consolidated financial statements, *RelatedParty Transactions*) and $6.4 million in capital lease obligationsand other debt. The interest rate for the revolving credit facility isvariable, based on LIBOR for six months after closing of the transaction andthereafter is subject to a leveraged based pricing grid.  The interest rate on the term loan is fixedas a result of the floating-to-fixed interest rate swap entered into in December 2008.  See Note 4 to unaudited condensedconsolidated financial statements, *Long-Term Debt and CapitalLeases*. The related party debt is variable and is based on LIBOR. Ifthe LIBOR rates were to increase or decrease by 100 basis points, with allother factors remaining constant, earnings would decrease or increase byapproximately $0.6 million annually, on a pre-tax basis.

 

*Foreign Currency Exchange Rate Risk*

 

Our foreign subsidiaries generally use their domestic currency as theirfunctional currency. A 10% fluctuation in the exchange rates of thesecurrencies against the U.S. dollar would result in a corresponding change inearnings reported in the consolidated group of approximately $0.2 million.

 

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# **ITEM4.             CONTROLSAND PROCEDURES**

# ** **

**Disclosure Controls and Procedures**

 

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

 

Basedon this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that, as of December 31, 2008, our disclosure controls andprocedures were not effective due to the existing material weaknesses in ourinternal control over financial reporting previously identified and discussedin the 2008 10-K and below under “Management’s Report on Internal ControlOver Financial Reporting —Material Weakness in Internal Control Over FinancialReporting Previously Reported.”

 

Whilemanagement has concluded that we have a material weakness related to internalcontrol over financial reporting, we have devoted a significant amount of timeand resources to the analysis of the financial statements presented in thisQuarterly Report on Form 10-Q for the fiscal period ended December 31,2008.  Accordingly, management believesthat the financial statements included in this report fairly present in allmaterial respects, our financial condition, results of operations and cashflows.

 

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

 

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

 

**Material Weakness in InternalControl Over Financial Reporting Previously Reported**

 

Thespecific material weakness identified by management as of June 30, 2008 anddescribed in the 2008 10-K is described as follows:

 

***Ineffective controls related to theoperating effectiveness of revenue recognition.***

 

Asof June 30, 2008, we had a material weakness related to the operatingeffectiveness of revenue recognition controls as the newly implemented controlshad not been operating for a sufficient period of time to be consideredeffective. Specific controls that we believe were not effective as of June 30,2008, include: (i) the effectiveness of our policies and guidelines pertainingto the identification and communication by our sales organization of all termsof customer arrangements relevant to revenue recognition, (ii) theeffectiveness of controls over reviews of changes to standardized contractlanguage and timely communication of non-standard contract terms as it relatesto revenue recognition, (iii) the effectiveness of controls over theaccumulation of vendor specific objective evidence of fair value forundelivered software elements and identification of elements for which suchanalysis is required, and (iv) the effectiveness of our review of customerparts orders associated with systems sales prior to shipment for terms orconditions that may impact revenue recognition.

 

**Changes in Internal Control OverFinancial Reporting during the Quarter Ended December 31, 2008**

 

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

 

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**PART II**

 

# **ITEM1.**          LEGAL PROCEEDINGS

# ** **

Fora description of our legal proceedings, see Note 8 to the unaudited condensedconsolidated financial statements, *Commitments andContingencies,* which is incorporated by reference in response tothis item.

 

**ITEM 1A.       RISK FACTORS**

 

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

 

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

 

OnJanuary 28, 1999, our Board of Directors approved a share repurchase plan underwhich, subject to price and market conditions, purchases of shares can be madefrom time to time in the open market or in privately negotiated transactionsusing available cash. On August 12, 2008, our Board of Directors reset theexisting share repurchase plan to purchase up to $100 million of commonstock.  Our quarterly share repurchasesunder this plan 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,  2008        |       | 392,750                                                       |       | $                                                             | 25.46      |                                                                                                                                                    | 392,750    |                                                                                                                                                                                          | $          | 89,017,373 |   |
| November 1 -  November 30,  2008          |       | 347,168                                                       |       | $                                                             | 17.43      |                                                                                                                                                    | 347,168    |                                                                                                                                                                                          | $          | 79,017,382 |   |
| December 1 — December 31,  2008 |       | —                                                        |       | $                                                             | —     |                                                                                                                                                    | —     |                                                                                                                                                                                          | $          | 72,965,196 |   |
| Total                                                    |       | 739,918                                                       |       | $                                                             | 21.69      |                                                                                                                                                    | 739,918    |                                                                                                                                                                                          | $          | 72,965,196 |   |

 

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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 10, 2008:

 

1.               The election of two directors for terms of threeyears each:

** **
| **Director** | ** ** | **Shares For** | ** ** | **Shares Withheld** | ** ** |
|--------------|------------|---------------------|------------|--------------------------|------------|
| ** **   | ** ** | ** **          | ** ** | ** **               | ** ** |
| Robert Guido |       | 44,031,566          |       | 4,618,688                |       |
|         |       |                |       |                     |       |
| Kevin Verner |       | 45,724,922          |       | 2,925,332                |       |

 

2.               Ratificationof Deloitte & Touche LLP as our independent registered publicaccounting firm for the fiscal year ending June 30, 2009:

 
| **Shares For** | ** ** | **Shares Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|---------------------|------------|-------------------------|------------|-------------|------------|--------------------------|------------|
| ** **          | ** ** | ** **              | ** ** | ** **  | ** ** | ** **               | ** ** |
| 47,653,799          |       | 918,683                 |       | 77,772      |       | —                   |       |

 

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

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

 

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**SIGNATURES**

 

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

 
| BALLY TECHNOLOGIES, INC. | Date: February 6, 2009                                      |
|-------------------------------|------------------------------------------------------------------|
|                          |                                                             |
|                          |                                                             |
| By                            | /s/Richard Haddrill                                              |   |
|                          | Richard Haddrill                                                 |   |
|                          | President and Chief Executive Officer                            |   |
|                          | (Principal Executive Officer)                                    |   |
|                          |                                                             |   |
|                          |                                                             |   |
| By                            | /s/Robert C. Caller                                              |   |
|                          | Robert C. Caller                                                 |   |
|                          | Executive Vice President, Chief Financial  Officer and Treasurer |
|                          | (Principal Financial Officer)                                    |   |
|                               |                                                                  |  |  |

 

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